What is KYC?

KYC stands for Know Your Customer, or occasionally Know Your Client.

KYC, or KYC check, is the obligatory procedure of identifying and validating a client’s identity upon creating an account and at regular intervals thereafter.

In other words, banks must verify that their customers are truly who they claim to be.

Banks may refuse to open an account or stop a commercial relationship if the client does not meet minimal KYC criteria

Why is the KYC process necessary?

Typical KYC procedures include all of the steps required to guarantee that their customers are genuine, as well as assess and monitor risk.

These client-onboarding procedures contribute to the prevention and detection of money laundering, terrorism financing, and other forms of illicit corruption.

The KYC procedure involves ID card verification, face verification, document verification (e.g., utility bills as evidence of address), and biometric verification.

Banks must follow KYC and anti-money laundering requirements to reduce fraud. Banks are ultimately responsible for KYC compliance.

Failure to comply may result in severe fines.

In the past, a total of USD 26 billion in fines has been levied in the United States, Europe, the Middle East, and Asia Pacific for noncompliance with AML, KYC, and sanctions.

KYC documents

KYC checks are conducted using an independent and trustworthy source of documents, data, or information. Each client must supply credentials to establish their identity and address.

In May 2018, the U.S. Financial Crimes Enforcement Network (FinCEN) imposed a new requirement for banks to verify the identities of natural people of legal entity customers who own, control, and profit from businesses when they open accounts.

Bottom line: when a corporation establishes a new account, it must furnish Social Security numbers and copies of a photo ID and passports for its employees, board members, and shareholders. 

Customer Due Diligence

One of the first analysis conducted by any financial organisation is to establish whether or not a new client can be trusted. You must ensure that a potential customer is trustworthy; Customer Due Diligence (CDD) is a vital element of efficiently managing your risks and safeguarding yourself against criminals, terrorists, and Politically Exposed Persons (PEPs) who may pose a risk.

KYC and Customer Due Diligence Measures

The KYC policy establishes a mandatory framework for banks and financial organisations to identify their customers. Its origins can be traced back to 2001’s Title III of the Patriot Act, which provided a variety of measures for preventing terrorist activity.

To comply with international legislation against money laundering and terrorist funding, enhanced When enrolling a new customer, you must apply Know Your Customer practices in the first step of any commercial relationship.

Banks typically structure their KYC policies on the following four main elements:

Customer Policy

Customer Identification Procedures (data collection, identification, verification, politically exposed person/sanctions list checks), also known as the Customer Identification Program (CIP)

Risk assessment and management (due diligence as part of the KYC procedure)

Ongoing monitoring and record keeping

This includes authenticating a customer’s identification.