Getting to Know Your Customer (KYC)

Know Your Customer (KYC)“Know Your Customer” (KYC) is a standard in the financial service industry that helps businesses verify the identity, suitability, and associated risks before engaging in any business relationship.

Primarily established as part of a bank’s anti-money laundering (AML) regime, now a range of businesses beyond financial institutions, such as non-financial industries, fintech companies, virtual asset dealers, and even non-profit organizations, maintain KYC protocols. These businesses make use of KYC to confirm the credentials of customers, agents, consultants, or distributors, ensuring they are compliant with anti-bribery laws and are genuine in their claims.

Banks, insurance companies, export creditors, and other financial organizations are increasingly asking their customers to provide comprehensive due diligence information.

 

The Basic Framework of KYC

KYC standards are set primarily to protect businesses from unwittingly being involved in money laundering activities. However, these practices also allow organizations to understand their customers and their financial transactions better, thus helping them manage risks more effectively.

Typically, a comprehensive KYC policy contains four key components:

  • Customer Acceptance Policy
  • Customer Identification Procedures
  • Monitoring of Transactions
  • Risk Management

In today’s stringent regulatory environment, KYC has become an indispensable process across various sectors, not solely in the financial industry. It helps minimize the risk of fraud by detecting dubious traits early in the business-customer relationship.

For the purposes of a KYC policy, a customer/user could be:

Any individual or entity that holds an account or has a business affiliation with the reporting entity
The beneficial owner who the account is maintained on behalf of
Beneficiaries of transactions carried out by professionals such as stockbrokers, chartered accountants, or solicitors, where legal
Any person or entity partaking in a financial transaction that could put the bank at significant reputational or other risks, like wire transfers or issuing a high-value demand draft.