Know Your Customer or KYC refers are the measures corporations must put in to confirm the identities of clients before as well as at some stage in their relationship. It is basically the process of verifying the identity of customer/client to prevent financial crimes.
Most banking, credit, and insurance organisations require that clients supply correct and specific personal information used to set up their identities. This information is also used by corporations to determine the compliance threat assessments required by their agency and make sure that clients are no longer involved in financial crimes (such as money laundering or corruption) or have been placed on sanctions lists.
Who needs KYC regulations?
All reporting entities like banks and financial service companies must introduce consumer KYC measures underneath the suggestions set out by the international regulatory bodies. However, it is not entirely organisations within the financial industries that enforce KYC policies.
While anti-money laundering AML and CTF protocols are undeniably most applicable to businesses running within the financial sector, verifying clients is of comparable significance to companies in different sectors, which includes charities and consultancies.
What are the three main aspects of KYC?
The three elements of KYC include:
- Customer Identification Program (CIP): The purchaser is who they say they are
- Customer Due Diligence (CDD): Assess the customer’s degree of risk, which includes reviewing the advisable owners of a company
- Continuous monitoring: Check customer transaction patterns and report suspicious exercises on an ongoing groundwork
Customer Identification Program (CIP)
To comply with a Customer Identification Program, a financial organisation asks the purchaser for identifying information. Every financial organization conducts its personal CIP system based totally on its threat profile, so a client might also be requested for different information depending on the institution.
This information should be included for an individual:
- A driver’s license
- A passport
This information should be included for a corporation:
- Certified articles of incorporation
- Government-issued commercial enterprise license
- Partnership agreement
- Trust instrument
For either an enterprise or an individual, in addition verification might include:
- Financial references
- Information from a consumer reporting enterprise or public database
- A financial statement
Customer Due Diligence (CDD)
Customer due diligence requires financial institutions to conduct targeted risk assessments. Financial establishments observe the possible sorts of transactions a client will make to notice anomalous (or suspicious) behavior. Based on this, the organisation can assign the client a risk ranking that will determine how much and how frequently the account is monitored. Institutions must discover and confirm the identity of any individual who owns 25% or greater of a legal entity, and an individual who controls the legal entity.
Continuous monitoring refers to the fact that financial organisations should monitor their client’s transactions on an ongoing basis for suspicious or unusual activity. This aspect embraces a dynamic, risk-driven approach to KYC. When suspicious or unusual activities are detected, the financial organization is obligated to post a Suspicious Activities Report (SAR) to FinCEN and other applicable law enforcement agencies.