What is Know Your Customer (KYC)?
Know your customer (KYC) is a term that relates to financial institutions having to know whom they are dealing with via various background checks and processes. They must confirm the identity of individual clients and organizations and ensure that they are not involved in anything illegal.
KYC is often used alongside CDD (Customer Due Diligence).
Why do banks do know your customer checks?
With an effective KYC process in place, financial institutions are protected from doing business with anyone involved in illegal activity such as money laundering or corruption and allows for a better understanding of their customer base.
Regulations have been created or extended by governments and central banks in recent years to improve KYC policies across the financial system. This is not only to help combat the rise in financial crime, but also because of the increase in global networks with enterprise companies and banks often operating across many countries and continents. As such, more money is being moved cross border than ever before, meaning strengthening KYC checks are of paramount importance.
Financial institutions seek to have strong KYC processes not only to stop crime and improve trust but also to avoid heavy fines.
How do banks perform know your customer checks?
Banks and other financial institutions perform KYC checks by asking for information from prospective customers. Names and addresses are often asked for, as are social security or national insurance numbers. Alongside this, a proof of identification may be requested. These are then enhanced with publicly available information such as addresses or details on an electoral register.
More recently, a selfie or video can sometimes be asked for, which is again used to verify the information being received.
At a company level, a financial institution will ask for the names of company directors and business addresses alongside information such as revenue reports.
The collected information is then cross-referenced against lists of names and companies already known to government or law enforcement agencies (such as sanctions lists). This can help identify many things including criminals, the country’s laws that they must abide by, whether they are or have been involved in money laundering, and whether they are a politically exposed person (PEP).
How does someone pass a KYC check?
After completing a KYC check, a client or organization is assigned a risk level, which is a numerical value. This risk-based approach helps a financial institution in deciding how to deal with a client. This is completely dependent on the institution. For example, if a bank is low risk they may turn down an application for opening a bank account, whereas another bank that operates at a higher risk level may accept you.
If an application breaches the risk level, a financial institution may allow for proceeding but will enact enhanced due diligence (EDD) as a more scrutiny of the prospective client is required.
What risk factors are involved in the KYC process?
There are many risk factors involved in the KYC process. These include:
- Companies doing business in a country with high corruption;
- An individual often sending money out of their home country;
- Executives of an organization being politically exposed (PEPs);
- An organization’s clients being primarily based outside their country of registration;
- A business being based in a country with poor AML processes
What is the difference between KYC and CDD?
KYC and CDD are both part of the process of identifying customers. The only difference between KYC and CDD is that KYC checks occur before a financial institution does business with an entity while CDD is a continuous process throughout the business relationship.
