Know Your Customer (KYC) refers to regulations in the financial sector that define procedures to identify customers and assess customer risk. KYC includes verifying customer identities, making sure they’re real, confirming they’re not on any prohibited lists, knowing where their money is coming from and where it is going, and assessing their risk factors.
The purpose of KYC is to prevent money laundering, terrorism financing, and other illegal transactions. KYC allows companies to protect themselves by ensuring that they are doing business legally and with legitimate entities. Knowing your customers, especially verifying their identity, is important to every company. Identifying customers helps detect suspicious or potentially fraudulent customers before they get to the bank to make a purchase, saving time and money for businesses.
Know Your Customer regulations can differ by country depending on the laws which enforce the procedures. They usually include anti-money laundering (AML) regulations which are mandatory to financial institutions. But the obligation can also extend to other companies that handle money.
In the US, the Patriot Act makes KYC mandatory for all financial institutions. In this Act, KYC is divided into the Customer Identification Program (CIP) and Customer Due Diligence (CDD). To comply with CIP, companies must ask their customers for identifying information. This information usually includes name, date of birth, address, and identification number. Generally, the customer needs to show some kind of ID document, for example, a driving licence or a passport. The CDD process involves collecting more data about the customer to predict their future financial behaviour. This data is not specified in the Act but it usually includes the source of funds, occupation, and purpose of the account. This procedure helps the company detect activity that is unusual for that customer. Banks are required to report any suspicious activity. If they fail to do so they have to pay substantial fines.
- Know Your Client