UK’s Data Protection Act 2018 mandates and controls how the personal data of users will be utilized by organizations, businesses, and individuals. It is aligned with the General Data Protection Regulation (GDPR) which imposes stringent rules (data protection principles) on individuals and entities that handle personal data. These principles entail 6 points that ensure User Privacy in KYC (Know Your Customer) for firms. Let’s explain it further in this blog.
KYC is a process of collecting user’s identifiable information via documents that are uploaded via mobile devices or other mechanisms. KYC is necessary because financial institutions and banks need to know exactly who their customers are. This is to ensure that no fraud or criminal has used their system for illicit transactions like terrorism financing.
Growing Concerns about User Privacy in KYC
Since the birth of KYC, User privacy has been a prevalent issue. This is because banks and other FIs require the personal information of every customer like name, date of birth, address, etc. Customers who are sensitive about this information sharing always find it difficult and irritating to share this information.
To answer this concern, authorities have worked on regulating the use of private information of users and aimed to increase control of users over their identities and information.
How is User Privacy challenging in KYC?
Most of the time data is breached by hackers or other cybercriminals. This is to steal sensitive information and gain illicit benefits from it. This benefit can be monetary in terms of ransom money for information or other illicit gains.
Identity Theft is another challenge faced during KYC. If the security measures taken in a KYC system are poor and have loopholes, fraudulent people can penetrate the system and steal the complete identity of a person and misuse it. Another angle to explain this notion is that fraudulent people use the stolen credentials of a genuine customer to conduct transactions that support crime.
Regulatory compliance with KYC and AML regulations is mandatory for banks. On one hand, they are obligated by the law to collect the personal information of customers and maintain a safe and secure database of it. On the other hand, they are expected to maintain a high level of customer confidentiality and privacy while sharing this information. This makes it challenging for both firms and users to maintain a certain level of privacy.
Ethical Considerations in KYC
Many cultures and ethical standards strongly oppose the notion of personal data sharing over the internet to the authorities. Ethical standards vary from jurisdiction to jurisdiction and they discourage the sharing of personal information so openly and blindly trusting the system.
How can these challenges be addressed?
The first and foremost thing is ensuring a fool-proof security system when asking for customer’s data. Users will always prefer the KYC system that is famous for its tamper-proof security. This builds the second element of trustworthiness which is mandatory in upholding Data Privacy Principles and other regulations related to user data protection.
For this purpose, firms can undertake the following steps to ensure a trust-based KYC information-sharing system:
Strong Identity verification procedure must be implemented in KYC to mitigate the data breaches and identity theft.
Identity information collected must be verified and stored securely in a blockchain/ decentralized network. This will ensure that if data security is compromised from one data block, the system management can retain it and protect it from another block.
To stay ahead of the privacy laws updates, firms and KYC solution providers can subscribe to the newsletters of regulatory bodies like FinCEN, FCA, and FATF. this will help them to stay updated and connected to users in a more trustworthy manner by guaranteeing them a higher level of data privacy.
Meeting the ethical standards of jurisdictions, employee training, customer awareness and KYC Solution’s ability to read documents in multiple languages is a must.
Data Protection Act 2018 and User Privacy in KYC
As discussed earlier, the Data Protection Act 2018 of the UK is there to regulate the use of user’s private information. Here is how DPA aims maintaining User Privacy:
The use of information must be fair, lawful, and transparent.
It must be used for specified and explicit purposes only.
It should be relevant and only limited to the requirement of the organization.
The information used must be up to date and not misleading.
The information must be retained only for the required period and not for long.
It should ensure appropriate security, including protection against unlawful or unauthorized access, loss, destruction, or damage.
What is Self-Sovereign Identity and How Does it Empower Users?
Self-Sovereign Identity (SSI) is a breakthrough approach to managing User identities. It advocates full control of users over their identities digitally. It uses Decentralized Identifiers (DIDs) and does not rely on third-party identity management systems for storage and access.
SSI has greatly helped the Users in maintaining their privacy over the internet. Hence, through SSI, users can choose their desired information and get verified in the KYC process.
User Privacy is a pressing concern for regulators. KYC Solutions need to understand their critical role in upholding ethics and regulatory laws. KYC Solutions can help users by guiding them and maintaining a high level of trust through secure identification. This is to protect their identities from money laundering and other criminal acts. For this purpose, their identity verification solutions need to be cutting-edge and fool-proof.
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