Know Your Customer guidelines protect financial services providers and their clients from criminal activities such as money laundering and fraud. By using confirmation procedures such as document verification and facial recognition, KYC helps ensure regulatory compliance and reduce the risk of money laundering, fraud and other financial crimes. KYC is relevant to companies in a range of industries, including banking, wealth management and fintech. In this guide, we’ll cover what you need to know about what KYC is, how KYC procedures work and how KYC serves different industries. We’ll also look at KYC solutions and how they can help you know your customer.
What is KYC?
“KYC” stands for “Know Your Customer” or “Know Your Client”. It refers to policies and procedures used in the financial services industry to verify the identity of customers, confirm the authenticity of transactions and assess risk. KYC policies help determine which account applications are approved, which transactions are accepted and which accounts and transactions are flagged as potential risks. KYC procedures include actions such as identification card verification, passport verification, facial recognition checks and other biometric identification methods.
KYC checks may be applied at various points in the customer life cycle. KYC verification initially may be performed when a customer applies to open an account. A KYC check may be run before authorizing a transaction. KYC tests may also be used for account maintenance during key moments in the customer life cycle, such as when considering whether to renew accounts or increase credit lines.
KYC principles may be extended beyond a financial service’s direct customer to include the customer’s clients or their company’s information, such as where a business is located, who owns it and whether it meets regulatory requirements. When verification of a customer’s clients is required, the procedures involved may be referred to as Know Your Customer’s Customer (KYCC). When verification of a company’s information is required, procedures may be referred to as Know Your Business (KYB).
Why Is KYC Important?
KYC serves several important functions. It allows financial service providers to verify the identity of applicants when opening accounts, approving transactions or updating account information. This serves to prevent financial crimes such as money laundering and fraud which may be engaged in by organized crime groups or terrorist organizations. In this way, KYC protects the interests of financial institutions while also serving the interests of consumer protection as well as law enforcement.
The importance of KYC has increased with the growth of eCommerce, digital cybercrime and terrorist use of digital currency. Current anti-money laundering (AML) legislation dates back to the enactment of the 1970 Bank Secrecy Act, which required banks to report suspicious activity reflecting the risk of money laundering or tax evasion. Following the September 11, 2001 attacks on the World Trade Center, stricter AML regulations were enacted under Title III of the USA PATRIOT Act. These measures are enforced by the U.S. Treasury Department through its Financial Crimes Enforcement Network (FinCEN) bureau. They require financial institutions to follow customer identification program (CIP) procedures to verify the identities of customers and customer due diligence (CDD) procedures to assess the risk of customer relationships and transactions.
Who Needs KYC?
KYC regulatory requirements vary by country, type of customer and other variables. In the United States, KYC regulations are mandatory for financial institutions in many industries, including:
- Credit unions
- Mutual funds
- Brokers or dealers in securities
- Futures commission merchants
- Introducing brokers in commodities
- Wealth management firms
- Fintech providers engaging in covered activities
This list is illustrative and not comprehensive. If you’re not sure if KYC applies to your company, consult your legal team.
Even if you’re not legally obligated by KYC regulations, following KYC guidelines can help protect your company and customers. If your business model places you at risk from the types of financial crimes KYC is designed to address, consider whether adopting KYC procedures would benefit your business.