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Introduction

Know Your Customer (KYC) and Anti-Money Laundering (AML)

Know Your Customer (KYC) and Anti-Money Laundering (AML) are crucial practices in the financial industry aimed at preventing illicit activities and safeguarding the integrity of the financial system. KYC refers to the process through which financial institutions verify the identity of their customers. This involves collecting and validating information such as name, address, date of birth, and other relevant details. The goal is to ensure that institutions have a comprehensive understanding of their customers, enabling them to assess the associated risks and provide appropriate services. KYC measures are essential for establishing trust, reducing fraud, and complying with regulatory requirements.

On the other hand, AML is a set of procedures and regulations designed to detect and prevent money laundering activities. Money laundering involves the process of concealing the origins of illegally obtained funds to make them appear legitimate. AML measures include the implementation of robust monitoring systems, transaction reporting, and customer due diligence. By scrutinising financial transactions, institutions can identify and report suspicious activities, thereby disrupting the flow of illicit funds.

Both KYC and AML are closely interlinked, forming a comprehensive framework for particularly financial institutions to combat financial crimes. The KYC process provides the necessary foundation by ensuring accurate customer identification, while AML measures act as a defence against the misuse of financial systems for illegal purposes. Adhering to KYC and AML regulations not only helps institutions maintain compliance with legal requirements but also contributes to the overall stability and security of the global financial ecosystem.

In addition, KYC processes are increasingly adopted for use cases and industries that are not covered by AML regulations in an effort to combat various forms of fraud for the provision of digital services and products such as by large online platforms.

How KYC works today

Today, organisations use dedicated KYC solutions like identity verification services that employ video identification. These tools play a pivotal role in enhancing the security and efficiency of customer onboarding processes for businesses across various industries and are mostly known by the broad society in the context of banking and financial services (e.g. for opening bank accounts).

Identity verification services leverage advanced technologies to authenticate the identity of individuals during account creation or transaction initiation. These services often involve the collection and analysis of personal information, such as government-issued IDs, biometric data, and facial recognition. By cross- referencing these details against authoritative databases, businesses can establish a high level of confidence in the identity of their customers.

Video identification, as a subset of identity verification, takes the process a step further by incorporating real-time video interactions. This allows businesses to conduct remote identity checks, offering a convenient and secure alternative to in-person verification. During video identification, customers are typically required to display their ID documents to the camera, and facial recognition technology is employed to match the individual with the document.

These KYC solutions offer several benefits. Firstly, they enhance security by reducing the risk of identity theft and fraud. Secondly, they streamline onboarding processes, enabling businesses to quickly and efficiently verify customer identities, thereby improving the overall user experience. Additionally, KYC solutions assist organisations in meeting regulatory compliance requirements (e.g. AML), as many jurisdictions mandate robust identity verification measures to combat financial crimes.

While KYC solutions, including video identification, provide significant advantages, it’s crucial for businesses to balance the need for thorough identity checks with user convenience. Striking this balance ensures a seamless onboarding experience while maintaining the highest standards of security and compliance in today’s digital landscape.

How KYC will change over the next years

Over the coming years, KYC will dramatically change, particularly due to emerging regulations like Europe’s eIDAS2 regulations as well as corresponding changes to existing AML regulations. As a result, there will be two main paradigms for digital identity verification:

Traditional KYC

This type of KYC corresponds to the solutions outlined in the last section.

Wallet-based KYC

The introduction of digital identity wallets - such as the so-called “EUDI” wallets in Europe based on the eIDAS2 regulation - will enable individuals to have a collect, store, manage and share their identity information with easy-to-use applications for all kinds of use cases, incl. AML regulated KYC. In other words, this paradigm will create an alternative way for performing KYC checks that are faster, cheaper and offer a better user experience than traditional approaches.

Conclusion: Implications for EBSI Onepass

Importantly, the wallet-based approach relies on new regulations - like eIDAS2 and AMLR in Europe - to become a viable and a regulatory compliant alternative to traditional KYC approaches. Considering the eIDAS2 regulation is expected to be written into law by the European Parliament in Q1 2024 (February) with an 18 months courtesy period for implementers and the fact that identity wallets will not be used by every single citizens, both KYC approaches must be implemented and offered to customers by organisations for user onboarding. Moreover, considering the timeline of the EBSI Onepass project, which will conclude before the eIDAS2 regulation will require the adoption of EUDI wallets in production, one should consider both approaches for this pilot project.

More concretely, we propose to cater to the needs for KYC verification in the course of this pilot in two ways:

  • Traditional KYC solutions We attempt to include at least one existing KYC solution provider to offer user onboarding flows for individuals who do not (yet) digital identity wallets. Here, walt.id will include existing IDV partners to provide user onboarding flows, particularly including video identification.
  • eIDAS2 Alignment

Today, the eIDAS2 regulation has not yet been formally passed into law. In addition, technical specifications that accompany the regulation, like the so-called Architecture Reference Framework (ARF) and implementing acts are not public in a final version. While most technologies and technical requirements

are sufficiently defined to build pilot solutions - for example the use of W3C Verifiable Credentials, IETF SD- JWTs, ISO/IEC 18013-5 mdocs, OID4VCI and OID4VP - there needs to be continuous alignment with changes and updates to the ARF and implementing acts during the pilot phase. Walt.id will ensure that the provided technology architecture is continuously aligned with eIDAS2 requirements as they are becoming public.