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KYC compliance

A regulatory obligation of financial and non-financial institutions to verify the identity of customers…

KYC Compliance

Know Your Customer (KYC)

Know Your Customer (KYC) is an umbrella term used for identity verification of customers before developing any business relationship with them. KYC laws were initially implemented only on the financial industry and gradually incorporated non-financial businesses as well. It is often called KYP (Know Your Patient), KYB (Know Your Business), KYT (Know Your Transaction) when performed across different industries.

What is KYC compliance?

KYC compliance is a regulatory obligation of financial and non-financial organizations. Obliged entities develop customer identification processes and verify their customers on a regular basis according to the regulatory guidelines. KYC compliance helps businesses prevent penalties, fight fraud, and mitigate financial crimes (money laundering, terrorist financing).

KYC compliance process

Although KYC regimes vary around the globe but below are some common requirements found in all:

  • Develop customer identification processes
  • Identify individual customers through their official identity documents
  • Verify corporate entities through corporation documents along with verification of beneficial owners
  • Maintain risk profiles of customers
  • Take AML compliance measures if required

Significant KYC laws

Most of the time KYC laws are a part of AML regimes and are influenced by the recommendations of FATF. Below is a list of some KYC laws implemented around the globe.

Banking Secrecy Act (BSA) of the USA requires the reporting entities (primarily banks) to take necessary measures for customer verification and to report suspicious activities to FinCEN. Banks are required to adopt customer identification programs according to the provisions of the US Patriot Act.

Anti-money laundering Act (AMLA) of France specifies the customer identity verification laws for financial businesses.

The Money Laundering Act – 2017 (MLA) of the UK defines customer verification regulations for reporting entities.

Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) of Canada sets the KYC requirements and processes for reporting entities.

The AML/CTF Act of Australia implemented by AUSTRAC defines the KYC and AML compliance guidelines for verification of individual and corporate customers.

Who is obliged to comply with KYC regulations?

The KYC compliance laws are implemented on a wide range of businesses from different industries. Below is a list of common entities that are entitled to KYC compliance in most of the regimes around the globe:

  • Financial industry (Banks, insurance companies, brokerage houses, mortgage houses, etc.)
  • Fintech (crypto companies, online payment solutions, digital loan/mortgage providers, etc.)
  • Real estate sector
  • Healthcare industry (hospitals, facilities, POM sellers, online care and drug providers, in-home care providers, etc.)
  • Gaming industry (e-gaming platforms, poker/lottery businesses, etc.)
  • Legal sector
  • Precious metals and art dealers

KYC compliance in the digital era

With an increasing number of businesses entering digital marketplaces, online KYC is spiking in demand. Although not every part of the KYC process could be outsourced but online customer verification solutions share a significant amount of compliance burden. Online KYC screening offers comprehensive customer authentication with high accuracy and speed that matches the needs of digital consumers.

FATF, a global authority for developing AML/CTF policies issued the digital identity systems guide in 2019 and encouraged the use of digital ID during COVID-19 pandemic for customer onboarding and delivery of digital financial services. An increasing number of businesses and banks are now providing online services and onboarding businesses from all over the globe.

Suggested reads:

KYC verification three steps to know your customer
All you need to know about KYC compliance