Know Your Customer

What Is Know Your Customer (KYC)?

KYC is a technique used by banks and other financial organizations to collect identifying information and contact information from current and future customers. Its goal is to avoid fraud, money laundering, other illegal conduct, and bank account misuse. 

In the United States, banks are required by law to utilize KYC in accordance with the USA Patriot Act of 2001. In addition, the Financial Action Task Force (FATF) was founded in 1989 to combat money laundering globally. 

Through Anti-Money Laundering (AML) practices, FAFT establishes standards and makes suggestions to achieve this purpose. To work with the AML guidelines, member countries and jurisdictions enforce various laws, rules, and regulations. KYC and AML work together to help prevent dishonest and illicit financial behavior. 

KYC procedures are frequently implemented before a person becomes a customer. Before opening an account, financial organizations must verify a potential customer's stated identification. Since there are no legislative verification requirements, each bank's approach may differ.

The Process of KYC

KYC processes require the following identifying documents:

• Driver's license or government-issued photo identification

• Passport

• Number of Social Security

• PAN number

• Voter Identification Card

Address verification is also required. Depending on the bank's policies, applicants may be required to produce various forms of documentation proof. Some instances include a utility bill, account statement from a different bank, credit card issuer, or even a lease agreement.

So, after opening an account for a consumer, banks are expected to undertake frequent record updates. This means that they "recertify" their customers with periodic requests for KYC information during the course of their banking relationship. 

They also assign a risk level to each of their customers and monitor their transactions to ensure that they correspond to expected behavior. KYC practices aren't just confined to banks. KYC processes are used in the financial investment business in accordance with Financial Industry Regulatory Authority (FINRA) KYC Rule 2090. 

However, rather than being an AML endeavor, these KYC techniques assist investment firms in better understanding client needs. In the case of cryptocurrency exchanges, individuals are frequently able to open an account well before completing the KYC process. Nevertheless, the functionality of these unverified accounts is limited.  

KYC standards provide a substantial advantage in reducing and eradicating money laundering and financial fraud. While it adds complexity and time to the process, notably for the banking industry and its customers, the benefits are expected to outweigh the inconvenience. On the other hand, standardized methods are likely to help speed the process. 

The use of digital currency to accomplish illegal acts has gained a lot of attention in the cryptocurrency world. Reduced volatility is undoubtedly advantageous to cryptocurrencies and their reputation. Compliance takes time; however, it should always be promoted. Users should not disclose sensitive identifying information without first ensuring that the organization has put in place the required security measures to keep the data safe.