knowyourcustomer

Know Your Customer (KYC) refers to the processes by which financial institutions and other regulated entities verify the identity and assess the risk of their clients. It is a core component of anti-money laundering (AML) and counter-terrorist financing (CTF) regimes, intended to prevent illicit activity such as money laundering, fraud, and the financing of terrorism. KYC procedures are designed to help institutions understand their customers and the nature of their financial activities.

Typical KYC activities include customer identification, collecting information such as name, date of birth, address, and identification numbers; verification of identity through documents like passports or national IDs; and verification of address. Institutions may also assess the customer’s source of funds and expected transactions. Ongoing monitoring of customer activity is common, with risk-based adjustments that apply greater scrutiny to higher-risk clients. Related concepts include customer due diligence (CDD) and enhanced due diligence (EDD), which require deeper checks for higher-risk relationships or products.

Implementation and regulation: KYC requirements are established in national laws and international guidelines. The Financial Action Task Force (FATF) sets widely adopted standards, with jurisdictions implementing these through laws administered by agencies such as the U.S. Financial Crimes Enforcement Network (FinCEN) and the Patriot Act, the UK's Financial Conduct Authority (FCA), and the European Union’s AML directives. Compliance typically includes ongoing monitoring, recordkeeping, and reporting of suspicious activity.

Scope and impact: While most prominent in banking, KYC measures are also used by insurers, investment firms, casinos, payment processors, and cryptocurrency exchanges. Proper implementation supports regulatory compliance and risk management, but it also raises privacy and data-security considerations regarding the handling of personal information.