KYC laws and regulations

KYC or know your customer is a standard due diligence process used by companies to assess their customers’ identity, the sources of their client’s funds (if they are legitimate or not) and identify their backgrounds. Identifying and obtaining detailed information about your clients can secure both parties in a business transaction or relationship. KYC is an important element for providing superior service, avoiding association with money laundering, preventing liability and other financial frauds.

Performing KYC can be a burdensome task for the companies, but they create a secure and trustworthy environment to enable financial activities within organizations.

KYC regulatory framework

The list of 92 Recommendations by the Financial Action Task Force (FATF) is the internationally endorsed global security standards against money laundering and terrorist financing. They provide the regulatory framework for various countries to build an effective KYC and anti-money laundering (AML) system to combat financial criminals. Aside from FATF, every country has its own local regulatory bodies that under the guidelines of FATF monitor the processes of the sectors that fall in their jurisdictions.

United States

• FinCEN: The Financial Crimes Enforcement Network (FinCEN) is a regulatory authority of the US Department of the Treasury responsible for monitoring KYC and AML regulations for gathering and analysing information about financial transactions to combat domestic and international financial crime activities.

Non-compliance fine on US Bank NA

FinCen in March 2020 imposed a $450,000 fine in Chief Operational Risk Officer at a US Bank NA (U.S. Bank), for failure to implement adequate measures to prevent BSA & AML violations that took place in the bank in 2018 during his tenure. 

• Bank Secrecy Act (BSA): The 1970’s Bank Secrecy Act (BSA) assists government agencies in detecting and preventing money laundering.
• OFAC: The Office of Foreign Assets Control (OFAC) is responsible for administering and enforcing trade and economic sanctions in accordance with the national security and objectives of the country’s foreign policy.

United Kingdom

• FCA: The Financial Conduct Authority (FCA) has the authority to regulate the UK’s financial sector and implement procedures to fight money laundering and terrorist financing.

Non-compliance fine on Commerzbank London

FCA in June 2020 imposed a fine of £37,805,400 on Commerzbank AG (London Branch) for failing to implement necessary measures to prevent AML between October 2012 and September 2017.

• OPBAS: The Office for Professional Body Anti-Money Laundering Supervision (OPBAS) is an additional regulatory authority established with a single objective of strengthing the regions’ AML supervisory system.

European Union (EU)

• 4th, 5th & 6th AML Directive: The objective of these directives is to counteract money laundering by introducing comprehensive measures and effective cooperation between countries, and criminal liabilities.
• MiFID-II: The updated Markets in Financial Instruments (MiFID-II) Directive is developed to create extreme transparency in financial investment operations.

China

• CBIRC: The China Banking and Insurance Regulatory Commission (CBIRC) is authorised to carry out both supervisory and regulatory functions of business operations in the banking and insurance sector. The agency’s jurisdiction extends across China, except Hong Kong and Macau regions.
• PBC: The People’s Bank of China (PBC) is responsible to develop monetary policies and regulations for financial institutions in mainland China, which are determined by People’s Bank Law and Commercial Bank Law.

Non-compliance fine on Chinese banks

The People’s Bank of China imposed a combined fine o 52mn yuan on China Minsheng Bank, China Everbright Bank and Huatai Securities, for failing to implement adequate measures for customer identification, transaction reporting and record keeping.

Russia

• FFMS: The Federal Financial Monitoring Service (FFMS) or Rosfinmonitoring is the Russian financial regulator responsible for monitoring and implementing state policies to prevent money laundering and terrorist financing. It also evaluates the rising threats to national security and develops measures to combat these threats. 
• Bank of Russia: The Central Bank of the Russian Federation also known as the Bank of Russia, is responsible for protection and stability of ruble (basic monetary unit of Russia), promoting development, ensuring the development and security of the national payment system and developing the financial sector of Russia.

India

• FIU: The Financial Intelligence Unit (FIU) monitors and protects the financial system from the exploit of money laundering, terrorist financing and financial crimes, under the Prevention of Money Laundering Act (PMLA), 2002.
• RBI: The Reserve of India was established by the Reserve Bank of India Act 1934 and its duty to regulate the country’s financial market. Acting as India’s central bank, RBI protects the country’s monetary stability. 

Non-compliance fine by RBI

RBI in 2019 imposed a penalty of 1.75 crores on four public sector banks for not fulfilling KYC compliance requirements during the process of opening of current accounts. The banks included Punjab National Bank, UCO Bank, Allahabad Bank and Corporation Bank.

Australia

• AUSTRAC: The Australian Transaction Reports and Analysis Centre (AUSTRAC) is responsible to prevent money laundering, terrorist financing, tax evasion, organised crime and welfare fraud in Australia, by developing proper regulations and procedures.

Japan

• FSA: The Financial Services Agency (FSA) is the financial regulator responsible for monitoring banking, insurance and securities industries. The duty of FSA is to maintain the stability of the financial system of Japan and impose the necessary AML measure.