KYC: What is it and how does it evade financial frauds

“Know Your Customer” (KYC) is now a required procedure for banks that want to receive a new customer. This helps fight against criminal tax activities. To complete this procedure, electronic identification methods can be of great help, such as digital signatures.

Surely, you may remember a few years back when banks forced us to visit the branch in person for proving our identity with our ID Card or any other official document. In addition, the bank may have requested additional personal or financial information.

In fact, all this was a requirement of the anti-fraud regulations in force in Europe, not just a whim of banks. This identification process is still in force for those who want to become new customers of any banking institution and it is known as Know Your Customer (KYC). Let us dive into this concept, analysing its usefulness and relation with the digital signature.

Why do we need Know Your Customer

KYC’s main goal is to fight against money laundering crimes and financial fraud. KYC’s main reason is to fight against money laundering crimes and financial fraud. These crimes are increasing everyday during this health crisis we are currently facing. In fact, they belong to what the Europol calls ”coronacrimes”.

This European police force warns that the current state of affairs related to COVID-19 will put pressure on both the financial and banking system so that fraud, money laundering and corruption will continue to increase.

On the other hand, the National Securities Market Commission (CNMV), the main supervisory body at national level in this area, warns that we have to be especially careful with deals from “fly-by-night organizations”, companies that are not registered and offer attractive products that have no guarantees or involve high risk, and that are difficult to understand for laymen.

In addition, the European Securities and Markets Authority (ESMA) states that a growing number of retail investors are entering into markets for which they are not properly prepared and are therefore potential victims.

Legal reaction against financial fraud in Spain and in Europe

Each country has their own way to fight against financial fraud. For Spain, their measures have turned out to be very successful, based on the conclusions drawn by the Financial Action Task Force (FATF).

The FATF has carried out an assessment of the spanish preventive measures to fight against money laundering and terrorism financing. This report states that we are among the world leaders in the field of regulations and technology. To sum up briefly, the Spanish institutional and financial system is described as “attractive and safe”.

Know Your Customer

At European level, there are two legal approaches for fighting fraud, the well-known eIDAS and the Anti-Money Laundering Directive (AMLD).

We are currently going through the 5th AMLD (5AMLD), published by the EU official 2018 Journal with a deadline for member countries to adapt by January 10, 2020.

5AMLD requires identification of bank account holders, in traditional, online and fintech banking. To do so, they refer to eIDAS and e-Trusted services.

The financial fraud solution: Know Your Customer (KYC)

Know Your Customer is a way to really get to know a bank’s customers in order to prevent any kind of fraud. This is a process that includes both existing and new customers, as part of the process known as onboarding.

Throughout the KYC process the client will be asked to provide several documents and evidence of their identity. Based on this information, future movements will be analyzed in case an anomaly occurs.

By using the information collected, the bank can simulate the customer’s behaviour under normal conditions, so that if there is any deviation, this may be a warning sign.

Normally, this identification process is based on official documentation (e.g., ID Card, NIF, passport or NIE for foreign clients, etc). In addition, this required the customer to attend personally to the Bank to verify their identity.

Additional information is often required on KYC’s onboarding forms:

  • Work activity.
  • Company name where you work.
  • Approximate salary.
  • Whether you have a place to live abroad.
  • Reason why you are opening an account.
  • Whether you will regularly transfer money to other countries.
  • Bank transactions you perform most frequently.
  • If you are obliged to pay tax abroad.

What do digital signatures bring to KYC? 

Nowadays, as a result of the new digital tools, physical attendance on site is less required, as we have electronic means of identification that allow us to fully verify a person’s identity in compliance with the current legislation.

One of the most widely used tools for this are electronic signatures, either with or without a digital certificate, together with biometric or other types of evidence, which guarantee that the person who applies for an account is who they really say they are.

Therefore, the digital signature is one of the most important resources for those who do not have time to visit a branch office, who are far away from a branch or who are going through exceptional circumstances, such as the recent lockdown.

To sum up, using digital signatures in KYC is beneficial to all (except for criminals), evading tax fraud, money laundering and terrorism financing, thus building a fairer and safer society. 

Digital signatures have a lot to offer to this identification system, helping to streamline these processes for banks and making it more user-friendly while complying with current legislations.


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