Know Your Customer (KYC) Compliance
Know Your Customer (KYC) is a term used to refer to a set of practices, procedures and technologies that companies and financial institutions use to effectively identify their customers, monitor their behavior and evaluate their intentions.
KYC processes are used by businesses to mitigate their risk of being exploited for criminal enterprise or terrorism, and are now an integral part of any business’ Anti Money Laundering framework and strategy. KYC Compliance refers to the issue of effectively fulfilling the KYC processes that various national and international agencies require of businesses operating under their jurisdictions.
KYC Compliance Background
KYC rose to prominence following the September 11 terrorist attacks in the United States, in 2001. Governments around the world scrambled to find ways to enhance their ability to accurately identify and evaluate who was carrying out a wide range of financial transactions, for a vast array of different purposes and products. The first and most famous new piece of post 9-11 legislation was the U.S. Patriot Act, which was followed by many similar pieces of legislation across the world.
Since then, KYC frameworks have evolved into a largely digital-based assortment of procedures designed to accurately identify customers and users of services.
However, while KYC procedures can be designed to work in practice, whether businesses actually implement them efficiently or not is another question altogether, and this is the issue that KYC Compliance seeks to address.
Who needs to know about KYC Compliance?
- Individual entrepreneurs, SMEs and large corporations
- Financial institutions
- Crypto-related businesses or enterprises
- Government regulators
How does KYC Compliance work?
Governments across the world have developed legislation designed to put the onus on registered businesses to verify the identity and monitor the activity of their customers, in particular in the financial industry, but also in telecoms and to varying degrees in many other business areas where transactions are occurring. The intention is to reduce the risk of money laundering, terrorist financing and other criminal activities.
It is common practice for banks to require a verifiable identity, proof of address and other documentation before allowing potential customers to open an account. However, these measures are now increasingly being adopted by other sectors too.
For example, telecommunications companies in many countries now have to effectively verify the identity of their customers before providing them access to, for example, a mobile account.
How do governments ensure that companies offering key services - whether they are financial or related to communications - effectively monitor the identity of their customers? Through passing legislation requiring them to do so, and imposing fines, or in some cases criminal punishment, if these guidelines are not followed.
The recent scandals of Deutsche Bank and N26 demonstrate what can happen when financial institutions take a lax approach to screening their customers - authorities are willing to press for criminal charges, and the line between negligence and complicity is becoming increasingly blurred.
What are some of the most common KYC practices?
Typical procedures of KYC revolve around effectively assessing a potential or current customer’s identity. However, once an identity has been established, more detailed or granular information can also be gathered as part of a KYC process.
This is a list of some of the key pieces of information a KYC framework will attempt to establish:
- Full Name
- Email Address
- Home Address
- Phone Number
- Copy of ID
- ID Number
- ID Expiration Date
Once this information has been established, a more long-term KYC program, for example one implemented by a bank, may also attempt to understand issues relating to their customers’ behavior and activity, such as:
- Nature of business
- Source of deposits
- Nature of transactions
- Tax liability and avoidance risk
- Possible criminal exploitation of account or funds
The Key to KYC is Compliance
A KYC regime is useless if it is not effectively implemented. Governments around the world have enacted varying degrees of legislation and legal responsibility for companies to implement KYC procedures, and in most, failing to adequately implement an approved KYC framework can lead to heavy fines - and worse - if it is found that the failure to implement effective KYC has led to a criminal violation vis-a-vis a business by its customers.
Do you know what KYC Compliance laws might apply to your business, and how to implement them? Tools like KYC-Chain allow you to receive, manage and evaluate customer data as quickly as possible, and to mitigate your risk in the face of a rapidly-changing global financial system. Feel free to get in touch to find out more.