Customer Identification Procedures (CIP) and Know Your Customer (KYC) are critical for corporate operations.
Customer Identification Program (CIP) and Know Your Customer (KYC) are critical for corporate operations, especially for companies defined as financial institutions under the Gramm-Leach-Bliley Act (GLBA). KYC entails understanding a customer's identification as well as their business activity. CIP, on the other hand, entails confirming a customer's information.
A Customer Identification Program (CIP) is a United States requirement, where financial institutions need to verify the identity of individuals wishing to conduct financial transactions with them and is a provision of the USA Patriot Act.
As tax professionals, whether a large organization or an independent tax preparer, the KYC and CIP mandates fall in our lap as well, when receiving and using financial documentation for the purpose of effecting the receipt of a tax refund and using bank products.
The main purpose is to determine the level of risk a customer presents to the company. KYC and CIP are carried out by financial institutions in accordance with anti-money laundering regulations. Money laundering for the purpose of financing terrorism is on the rise, and identity fraud has become all too common, with more than 3.2 million cases reported in the United States in 2019. It is critical to have a solid client identification system in place to combat this threat.
How Can You Tell if a Customer is Whom They Claim to Be?
To confirm that a customer is who they say they are, the tax firm should collect and authenticate basic customer information. During the client intake process, customers are initially identified using personal identifiers such as their name, date of birth, address, and valid identification number as a standard practice. The tax bank may also use CIP if it suspects a customer's account activity is fraudulent, and it may verify a customer's identification before approving bank products such as refund advance loans. This prevents losses that result from impersonation.
Essentials of an Effective KYC Policy
KYC verification frequently takes place during the customer's onboarding process in the form of ID verification checks. Customers may also need to provide other documents that confirm their objectives and that they aren’t engaged in money laundering.
KYC has risen to institutions’ attention due to growing awareness of international terrorism financing, shell companies, and organized crime. Clues of illegitimate activity can be found by checking names, addresses, and identity numbers.
Once this data is known, a firm should compare it to institutional and government databases that list individuals known for their connection to organized crime or corruption. Revealing information about them, such as geographic location, line of work, and relationships with other known individuals can suggest whether they have an increased likelihood of engaging in money laundering or other criminal activities.
A potential consumer who has been identified as high-risk is not automatically barred from opening an account. However, their account activity will be compared to that of other clients with comparable profiles on a regular basis, and major deviations from the norm may prompt additional investigation.
Customer Acceptance Policy
Financial institutions should outline the conditions for a customer's approval. Accounts should not be opened anonymously or by third parties. They should also establish risk parameters. This will aid in ascertaining a customer's overall risk. In addition, companies should list all of the documentation required for account opening.
Activity Monitoring
Suspicious activity should be heavily monitored by financial institutions. This can be accomplished by double-checking all transactions to confirm that they are valid. Financial institutions should require objective data, such as the source of funds and end-to-end identification, as well as random frequent checks to see whether a customer's risk profile has changed.
Risk Management
An effective KYC policy should enable the firm to examine and establish the risk profile of a customer. This aids them in determining which risk management techniques to implement. A frequent internal audit of controls should be in place to ensure compliance with KYC requirements.
Customer Identification Procedure
Taxpayers' identification information should be verified within a "reasonable period" by tax firms. Both documentary and non-documentary methods should be included in the CIP. Before classifying customers, financial organizations should gather enough information. This helps them to devise strategies for mitigating risk in the event that it arises in the future. Companies may create organizational identification systems as a result of the increased daily volume of tax returns being processed. These help to avoid delays and keep things running smoothly.
Digital Identification Procedures
An efficient consumer authentication system should allow for cross-channel verification. Verification should be possible and seamless in both digital and face-to-face settings. Furthermore, faceless transactions are extremely vulnerable to fraud. This risk should be mitigated and managed by the system in place.
CIP digitization should result in comprehensive process automation while preserving efficiency. The elimination of paperwork and wet-ink signatures is part of this approach. It should accurately capture permissions and the transaction's purpose.
The existing identity verification criteria should be matched by the digital CIP. Furthermore, the contract between the firm and its customers should be legally binding. This is critical in the event of an incident that results in a loss.
The Future of KYC & CIP
The Covid-19 pandemic has pushed KYC and CIP processes to be digitized. Customers were unable to reach brick and mortar tax firms due to lockdowns. Government requirements should always be followed when incorporating digital consumer identification systems.
Furthermore, they must be robust enough to deter hackers and scammers. Authentication rules should also be in place to prevent illegal use of the system. Institutions that have already implemented digital CIP have a leg up on the competition. This is because a fully digital environment will make it easier for them to fit in. Contact USTPA to learn more about KYC and CIP requirements for tax professionals.