Everything you need to know about FICA and KYC and how eKYC can make everything easier.

Doing business, in any capacity, requires trust. A lot of it. You have to trust your customers, you have to trust your employees, your associates and your business partners. 

Without trust, a business cannot function. Businesses need to know that they are safe to tender their services, that their customers are trustworthy enough to hold up their end of the bargain and pay for the goods and services they acquire, otherwise the whole paradigm of “doing business” will collapse—unless you’re a trustless smart contract on the blockchain. But, as blockchain technology develops and becomes mainstream—and as society rearranges itself around it—in the meantime, trust is essential.

Fortunately, in South Africa and many other parts of the world, Know-Your-Customer (KYC) regulations have been put in place in order to foster trust between clients and businesses.

In South Africa, KYC practices were made law with the FICA Act which, for example, requires all South Africans and South African businesses to provide accurate, identifying information when opening a bank account or signing a contract with a mobile service provider.

Though these measures have been in place in South Africa since 2003, in that time, technology—as it does—has moved on exponentially, leaving an ever-widening gap between the current process and using technology to make the process far more streamlined, efficient and automated.

Cleaning house: What is FICA?

FICA makes sure you and your customers stay clean and trustworthy.

Just in case you’ve been living under a rock for the last 16 years, South Africa’s ‘Financial Intelligence Centre Act, 38 of 2001’ (also known as and abbreviated to “FICA”) is a law put into place by the South African parliament as a means to combat money laundering operations that abuse financial systems to hide or disguise monetary proceeds of crime.

“Dirty money” is the main way that crime or terrorist organizations further their illegal activities, and as such it is the responsibility of the government and financial institutions to prevent and investigate the source of such questionable-in-origin currency. 

In order to combat and control such illicit financial activities, FICA was put in place as a means to essentially limit criminals from depositing their ill-gotten gains into our banking system. 

Primarily, FICA imposes strict and clear guidelines for how financial institutions conduct relationships with clients or other businesses. It is a means to ensuring that all individuals or organizations involved are deemed to be trustworthy enough and prevents those that intend to disguise ill-gotten gains from benefiting from the financial system. 

Due to FICA being law, compliance is mandatory at risk of being reprimanded and fined for not conforming to the stipulated regulations.

On the case: Know-Your-Customer (KYC)

KYC means businesses know whom to trust.

Information is crucial to make sure that a business is trustworthy—a lot of the time this would usually fall under “due diligence”, but having regulations like FICA in place to ensure that this process is done isn’t a bad thing at all.

One of the measures included in FICA is the “Know Your Customer” (KYC), which describes a regulatory responsibility for all businesses and financial institutions when dealing with new clients and customers.

KYC requires establishing and verifying the identity of all clients before commencing and conducting business with them, establishing a business relationship or concluding a transaction. Banks, insurance companies or other such institutions must have in-depth information about their potential clients, be it an individual or a business, before conducting business with them.

In effect, KYC is a kind of insurance for businesses, allowing for a better understanding of clients and their financial profiles. Having this information is a means for businesses to protect themselves from unverified individuals that might have illicit purposes or bad debt and from those that cannot or do not intend to hold up their side of the business transaction. It is also a stepping-stone for onboarding new employees or applying for loans, investments and partnerships—situations where trust is key.

Such information usually is in written form where customers or other businesses must submit various forms of proof (like utility bills, ID documents, payslips, etc) to show that they are legitimate.

The information in question could include:

  • Proof of residence and address
  • Proof of identity (i.e identity documents, passports, etc)
  • Proof of employment
  • Proof of education
  • Criminal and financial checks

Once submitted, all these forms and documentation must then be thoroughly vetted, investigated and verified before proceeding, to ensure that they are valid, true and, of course, that they are not forged.

This takes a lot of time and resources to do properly, and therein lies the rub: you need manpower and time to investigate diligently and thoroughly, and that manpower needs to be paid.

Trust in the future: digital KYC (eKYC)

eKYC means that KYC checks can be done much quicker and with less hassle, which means more business.

Since KYC practices have been institutionalized, technology has evolved tremendously.

As we mentioned above, KYC practices have been in place for a while, but that does not mean that the process can’t be improved.

The problem with a manual KYC process is twofold: it means managing a lot of paper and verifying the information can take time. Paper means mess, means a place to store it, means resources to do so, means things constantly being lost or misplaced. Paper trails cost a lot of money to maintain, are slow and cumbersome and are choice hiding places for fraud and corruption.

On the side of those that receive submitted documentation, paper also means collating, organizing and archiving all those forms and pieces of paper, which is often a large job in and of itself. 

Verifying information via manual processes also means there is a high-likelihood of human error, or of something important being missed and increases the risk that false information or forgeries can be overlooked, intentionally or otherwise. Doing a thorough job means a limited workload, which means other jobs need to wait in ever-increasing queues for their chance to be validated.

Enter the realm of electronic KYC (eKYC): digitizing, going paperless and automation can save a lot of time, money and stress. 

Electronic identification that contain biometric information, like India’s Aadhaar system or South Africa’s own Smart ID system, mean that definitive and non-repudiable proof of identity already exist in the digital sphere. Combine such databases with consent-driven submission of other required information, such as proof or residence, etc—and the process of KYC can be revolutionized entirely by technology. 

Electronic processes are less prone to mistakes and can do the work much faster, for much cheaper and with less paper and hassle. This means that more cases can be done at once, with real-time results and that the chance of fraud and forgeries slipping through the cracks can be almost entirely avoided. eKYC also means less paper entirely, which is not only convenient and secure, but is also better for the environment.

Looking forward, allowing access to a central database of information where information can be shared between various governmental bodies and financial institutions means that the boring things in life, like waiting in queues to file tax returns will be a thing of the past. All that vetting that has to be done individually by each different institution you interface with can all be done once and shared; KYC validation can be done within a couple of minutes, rather than weeks. Take Estonia: their e-Estonia initiative means that entire business, which includes KYC processes, can be established, validated and opened in 18 minutes.

As more and more countries go digital, it seems only logical to adapt current processes to embrace the convenience and reliability of the digital age. While existing processes may work, there is no reason why they can’t work better. 

Digital Cabinet is always looking for ways to make businesses more efficient with the use of technology. Our document management, digital forms and workflow platform is actually perfectly suited for eKYC processes.

We want to ensure that your business remains lawfully compliant, secure and profitable by implementing the latest technology at our disposal to do just that.

And, above all, we want to make sure that trust is something that isn’t hard to come by.

You can find out more about Digital Cabinet at www.digitalcabinet.co.za

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