KYC Check

What is Know Your Customer (KYC)?

Know Your Customer (KYC) refers to the policies and procedures put in place by businesses to manage risk and verify the identities of customers, clients and suppliers.

KYC processes are particularly relevant to the financial industry, ensuring compliance with national and international regulations targeting criminal activity such as money laundering, terrorism financing, fraud and corruption.

Therefore, KYC compliance is about customer due diligence.

• Researching company data and investigating senior executives and directors.
• Verifying the individual or company doesn't appear on any sanctions lists or watchlists.
• Checking the individual isn't listed as a politically exposed person (PEP), potentially opening them up to corruption or bribery.

To achieve KYC compliance, banks and other financial services companies need to have in place stringent KYC policies incorporating the following four key elements:

• A customer acceptance policy: The criteria for determining whether a customer or client can be accepted to open an account – or if the level of risk requires additional due diligence.
• Risk management: The criteria for classifying customers as low, medium or high risk.
• A Customer Identification Program: The verification of documents to effectively know your customer.
• Ongoing monitoring: Monitoring of client or customer accounts for any unusual or unexpected financial transactions that might require their risk profile to be reassessed.

Why KYC matters

Around the world, banks and financial institutions are required to comply with a variety of laws and regulations targeting financial crime. For example, in the U.S., KYC regulations within the financial industry are enforced by the Financial Crimes Enforcement Network (FinCEN).

But while the fines can be severe, banks and other financial institutions shouldn't approach their KYC obligations purely as an issue of regulatory compliance. >KYC compliance also benefits the organisation as it relates directly to risk management.

A good KYC policy or process can help financial institutions better understand their customers and their financial practices, making it easier to assess, manage and mitigate risk to the organisation.

KYC checks help to protect the organisation from fraud, money laundering, bribery, human rights violations and other forms of corruption and financial crime.

By conducting thorough KYC checks, you can dramatically reduce the financial, reputational, regulatory and strategic risks to your company from customers and other entities.

Worldwide company identity verification

KYC compliance isn't just about the identity verification of customers, but the verification of companies as well. In today’s global economy, organisations need to be certain that the companies they do business with – and the individuals within them – are indeed what and who they say they are.

A number of KYC technology solutions on the market include both customer verification and worldwide company identity verification. The KYC process and tools your company adopts need to be thorough. But they also need to be quick, so you can verify the companies identity – along with the individual contacts – and satisfy your KYC customer acceptance policy before the business opportunity is missed.

Checking sanctions and watchlists

KYC requirements also involve the checking of national and international sanctions lists and watchlists. 

Individuals or organisations that engage in illegal activities can have sanctions levelled against them. Such activities might include:

• Money laundering
• Terrorism and terrorist financing
• Drug trafficking
• Human-rights violations
• Arms proliferation
• Violation of international treaties

Separate to lists of sanctions, watchlists specify individuals, groups or organisations that require close surveillance, usually for legal or political reasons.

Typically, governments or other international authorities establish these lists. Among the international sanctions and watchlists are Her Majesty’s Treasury in the UK, the FBI and the Office of Foreign Assets Control (OFAC) in the US, and Interpol.

Sanctions and watchlist checks, therefore, are specialised searches accessing a number of international, government or regulator databases to identify individuals who are prohibited from engaging in certain activities or industries.

Checking sanctions and watchlists

KYC requirements also involve the checking of national and international sanctions lists and watchlists. 

Individuals or organisations that engage in illegal activities can have sanctions levelled against them. Such activities might include:

• Money laundering
• Terrorism and terrorist financing
• Drug trafficking
• Human-rights violations
• Arms proliferation
• Violation of international treaties

Separate to lists of sanctions, watchlists specify individuals, groups or organisations that require close surveillance, usually for legal or political reasons.

Typically, governments or other international authorities establish these lists. Among the international sanctions and watchlists are Her Majesty’s Treasury in the UK, the FBI and the Office of Foreign Assets Control (OFAC) in the US, and Interpol.

Sanctions and watchlist checks, therefore, are specialised searches accessing a number of international, government or regulator databases to identify individuals who are prohibited from engaging in certain activities or industries.

Checking PEP lists

Similar to sanctions lists and watchlists, your KYC processes also need to include searches of available lists and databases to verify customers aren't designated as politically exposed persons (PEPs).

A PEP is a person who either holds a prominent public function – such as a government politician or top military official – or has close family, personal or business ties with someone who does.

Just because a customer is listed as a PEP doesn't mean they are untrustworthy or likely to be engaged in any illegal activity. However, compared to other customers, a PEP's position and potential influence increases the risk of involvement in crimes such as corruption, bribery and money laundering.

If you identify that a customer is listed as a PEP, your company can then undertake additional or enhanced due diligence, backed by documented audit trails to ensure ongoing KYC compliance.

KYC Documents

Around the world, banks and financial institutions are required to comply with a variety of laws and regulations targeting financial crime. For example, in the U.S., KYC regulations within the financial industry are enforced by the Financial Crimes Enforcement Network (FinCEN).

But while the fines can be severe, banks and other financial institutions shouldn't approach their KYC obligations purely as an issue of regulatory compliance. KYC compliance also benefits the organisation as it relates directly to risk management.

A good KYC policy or process can help financial institutions better understand their customers and their financial practices, making it easier to assess, manage and mitigate risk to the organisation.

KYC checks help to protect the organisation from fraud, money laundering, bribery, human rights violations and other forms of corruption and financial crime.

By conducting thorough KYC checks, you can dramatically reduce the financial, reputational, regulatory and strategic risks to your company from customers and other entities.

A KYC glossary: Related terms

KYCC

Know Your Customer's Customer. Your customer or client may also have customers or clients, and those relationships could pose money laundering risks. For example, shell companies are often used to shield the identities of those who ultimately benefit from financial transactions. 

Evolving legislation in some jurisdictions, such as the EU's Sixth Anti-Money Laundering Directive, suggests KYCC is likely to become increasingly necessary.

KYB

Know Your Business (KYB). Instead of verifying the identity of individual customers or people, KYB is restricted to performing due diligence around companies – and the individuals representing those companies – with whom you hope to form a business relationship.

eKYC

Electronic Know Your Customer. Refers to digitised KYC processes where customer identity is verified electronically or online. 

eKYC is particularly popular in India, where 99% of adults have a digital identity or Adhaar number administered by the Government.

AML directive

Anti-Money Laundering Directive. Six AMLDs have so far been issued by the European parliament to be implemented by member states through legislation, with the most recent coming into effect in December 2020. However, not all EU member states have implemented the AMLDs. 

In April 2021, the European Commission published a set of new regulatory proposals, including the formation of a centralised AML Authority and the unification of disparate AML and KYC rules throughout the region.

KYC checks

Know Your Customer checks. The KYC process and methodology businesses use to verify customers, which can include the verification of identity documents as well as facial recognition and biometric verification.