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Know Your Customer (KYC): How Does it Work and How Can it Help Your Company

apa itu KYC

The term Know Your Customer (abbreviated as KYC) is familiar to employees of financial institutions. KYC is a process that must be carried out for every new customer registration process. KYC implementation also has a strong legal basis in Indonesia which makes this process an obligation that must be fulfilled in the financial industry. However, have you really understood what KYC is and how it works?

Read this article until the end to understand the ins and outs of KYC.

Definition

KYC stands for Know Your Customer Or often also known as Know Your Client. KYC (Know Your Customer) is a process carried out by banking and non-bank financial institutions to identify and supervise transaction activities carried out by customers. Identification and verification of customers is an obligation so that any information provided by customers is valid and can be accounted for.

The term KYC in Indonesian laws and regulations is known as ‘Know Your Customer’. In Article 1 Paragraph 5 of Indonesian Minister of Finance Regulation Number 30/PMK.010/2010 concerning the Application of KYC Principles for Non-Bank Financial Institutions, it is explained that KYC principles are principles applied by Non-Bank Financial Institutions (LKNB) to determine background and identity Customers, monitor Customer Accounts and transactions, and report Suspicious Financial Transactions and Financial Transactions Made in Cash, including financial transactions related to the Funding of Terrorism Activities.

KYC was first introduced in 1989 by the Financial Action Task Force (FATF) on Money Laundering. In Indonesia, KYC was implemented in 2001, but it was only intended for bank financial institutions. Currently, KYC has begun to be widely implemented by non-bank financial institutions, including financial technology (fintech) companies.

Legal Basis

The application of KYC is mandatory because it has been regulated in Indonesian laws and regulations. Article 2 of Law Number 7 of 1992 concerning Banking (Banking Law) states “Indonesian banking in conducting its business is based on economic democracy by using the precautionary principle.” It is this precautionary principle that has made Indonesian banking financial institutions start implementing Know Your Customer.

Apart from the Banking Law, other legal bases serve as standards for implementing KYC. Law Number 8 of 2010 concerning the Prevention and Eradication of Money Laundering Crimes. KYC through the Center for Financial Transaction Reporting and Analysis (PPATK) is implemented to minimize money laundering which is often carried out through banking and non-bank financial institutions.

The Minister of Finance of the Republic of Indonesia also stipulates that non-bank financial institutions are required to apply KYC principles known as the ‘Know Your Customer’ principle. This rule is explained in the Regulation of the Minister of Finance Number 30/PMK.010/2010 concerning the Application of Know Your Customer Principles for Non-Bank Financial Institutions. Non-bank financial institutions in question can be in the form of insurance companies, pension funds, and financing institutions.

The implementation of KYC is also regulated by the Financial Services Authority (OJK) through POJK Number 12/POJK.01/2017 concerning the Implementation of Anti-Money Laundering and Prevention of Terrorism Financing Programs in the Financial Services Sector. Just like the Regulation of the Minister of Finance, OJK also calls on all forms of institutions in the financial services sector to apply KYC principles. OJK also introduces the principles of Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) in conducting KYC with customers.

Bank Indonesia has also stepped in to regulate the KYC process in banking institutions, even since the introduction of KYC in Indonesia in 2001. Since then, Bank Indonesia has made several regulatory changes regarding this principle.

The first regulation issued was Bank Indonesia Regulation No. 3/10/PBI/2001 concerning the Application of Know Your Customer Principles. Meanwhile, the latest regulation regarding KYC from Bank Indonesia is Bank Indonesia Regulation No. 14/27/PBI/2012 concerning the Implementation of Anti-Money Laundering and Prevention of Terrorism Financing Programs for Commercial Banks.

The point is, Know Your Customer is not just a matter that only involves the government. Regulators for banking, non-bank financial institutions and other institutions engaged in the financial services sector must also oversee the KYC process by issuing separate regulations.

How it Works in the Finance Industry

KYC is the process of identifying and verifying potential customers. The Know Your Customer process begins with requests for complete data on prospective customers by financial institutions. This data is provided in several documents as a requirement for conducting transactions at the financial institution.

The data provided by individual prospective customers will be different from prospective customers in the form of agencies such as companies or organizations.

Prospective individual customers must attach the following data:

  • Prospective customer name
  • National Identity Number (NIK) on the KTP
  • Identity document numbers such as KTP or family card. Foreign customers can use a passport
  • Residential address according to identity documents and other residential addresses
  • Place and date of birth
  • Citizenship
  • Work
  • Gender
  • Marital Status
  • Source and purpose of use of funds.

For prospective corporate customers, the requested data includes:

  • Company name
  • Business license number from the competent authority
  • Business fields
  • Company domicile address
  • Place and date of establishment of the company
  • Company legal form
  • Identity of the Beneficial Owner (actual owner of the funds placed in the bank, controlling customer transactions, authorizing the transaction) if the prospective customer has a Beneficial Owner
  • Source of funds
  • The purpose and objectives of the business relationship or transaction to be carried out by the company’s prospective customers with the bank

In the Know Your Customer process, institutions can perform both Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD). CDD is an identification, verification, and monitoring process carried out by a financial institution to ensure that the transaction is following the profile of a prospective or existing customer.

Meanwhile, EDD involves a more in-depth process, especially for customers who are classified as high risks, such as politically exposed persons (people who have or have had public authority) against the possibility of money laundering and terrorism financing. The KYC procedures with CDD and EDD above are further discussed in Bank Indonesia Regulation No. 14/12/PBI/2021.

Financial institutions need to improve Know Your Customer processes to identify risks and respond more quickly in taking preventive actions against illegal activities in financial transactions.

Benefits for Financial and Banking Institutions

The KYC process certainly brings significant benefits in the financial and banking sector. The following are the benefits that can be obtained through the KYC process:

  • Financial institutions can be familiar with and understand their customers.
  • Regulators such as Bank Indonesia and OJK have the convenience of supervising all financial transaction activities according to their respective domains.
  • Cases of corruption and money laundering which are often carried out through financial institutions can be reduced.
  • If money laundering occurs, the case investigation process can run smoothly by utilizing information collected from customers.

Have you understood what KYC is after reading this article? In short, KYC is a process that financial institutions should not neglect in registering their customers. Along with the times, KYC can be done digitally, so now it is also known as e-KYC.

e-KYC has the same process as your regular Know Your Customer. It’s just that the process is more practical as it can be done remotely via video calls. Want to implement an e-KYC process at your financial institution? Just use eendigo User Validation equipped with API and machine learning technology! This feature is useful in assessing the level of risk to provide optimal security. Contact us now to know more about this state-of-the-art service from eendigo!