Know Your Customer (KYC)
Definition
Know Your Customer (KYC) is a regulatory and compliance process used by banks and financial institutions to verify the identity of their clients and assess their suitability, along with the potential risks of illegal intentions towards the business relationship.
Detailed Explanation
KYC is an essential part of anti-money laundering (AML) practices and is used to prevent and identify potential fraud, money laundering, terrorism financing, and other illegal activities.
The process involves collecting and verifying personal identification data from new and existing customers. This includes documents such as passports, driver's licenses, utility bills, and other forms of identification to establish the customer’s legal identity and residential address.
Financial institutions may also require additional information to understand the nature of the customer’s activities, including the origin of the funds, to assess their risk profile. The level of due diligence varies depending on the customer’s risk categorization; customers presenting higher risk may undergo more stringent checks.
Regular updates and monitoring are part of KYC to ensure all customer data is current and to track any potential changes in activity that might suggest risks not previously identified.
Example
When Maria decides to open a new bank account, she is required to provide her passport, a recent utility bill, and her Social Security number. The bank uses this information to verify her identity and assess if there are any potential risks involved in establishing a banking relationship with her.
Key Articles Related To KYC
Related Terms
- Anti-Money Laundering (AML): Regulations and procedures designed to prevent criminals from disguising illegally obtained funds as legitimate income.
- Compliance: Adherence to laws and regulations that govern business operations to prevent and detect violations by the organization or its staff.
- Due Diligence: The investigation or audit of a potential investment or banking product to confirm all facts, before entering into an agreement or a transaction.
- Risk Profile: An evaluation of an individual's or entity's exposure to risks, which determines the potential financial losses and the strategies to mitigate those risks.
FAQs
Why is KYC important?
KYC is crucial for mitigating the risk of identity theft, fraud, money laundering, and terrorism financing, helping to ensure the financial system's integrity and security.
How often is KYC information updated?
Financial institutions typically review and update KYC information every one to five years, depending on the customer's risk profile and the institution's policy.
What happens if a customer fails to comply with KYC procedures?
If a customer does not provide the required documentation or information for KYC, the bank may refuse to open the account or might terminate existing banking relationships.
Editor: Colin Graves