KYC means Know Your Customer, or sometimes referred to as Know Your Client. It is a term widely used in the financial sector and is the practice and a set of standards by which banks and other financial institutions verify who their customers are.
This involves requesting information from persons and/or entities in order to verify their identity, and ensure that they are who they claim to be before doing business with them.
Although some may take a view that KYC is sometimes an invasion of privacy, its primary function is to protect both business provider and customer.
There are several reasons for KYC:
- To help prevent fraud
- To combat identity theft
- To prevent money laundering and other criminal activities
- To prevent the funding of terrorism activities
- To comply with laws
- To assess risk
KYC is also used to help companies market suitable products and services to their customers.
Different countries and jurisdictions have specific laws regarding AML (Anti Money Laundering), and differing requirements for KYC in different industries.
There are three main stakeholders who dictate KYC and the scope thereof:
1. The laws of a country or jurisdiction
Countries and jurisdictions within those countries have specific laws which dictate under which circumstances information must be requested and verified, as well as which industries must comply. Reasons for this may include:
- To help prevent or aid in the investigation and prosecution of crime
- To help prevent the financing of terror activities
- To aid in tax collection
- To aid in providing government social services such as healthcare, welfare and education
2. Governing bodies and institutions
Industry bodies may be international or local, and their purpose is to set a common framework of standards for their industries. Businesses that belong to these bodies are required to adhere to the requirements and standards in order to be compliant. These bodies may be independent, or they may be part of a government structure.
Businesses may have their own policies and conditions over and above governmental regulations and industry bodies. The reasons for this may include:
- Protecting and safeguarding their business interests
- Providing better customer services
- Inspiring customer trust
- Mitigating risks
- Marketing suitable products to customers
What businesses must adhere to KYC?
All sorts of businesses must adhere to KYC requirements, with some countries and jurisdictions having laws pertaining to industries that other countries do not. Below are some of the most common industries where KYC may be required:
- Payment processing and facilitating
- Wealth management
- Health insurance and providers
- Private lenders
- Stock trading
- Art dealers
What information is required for KYC?
The information that may be requested will vary from country to country, industry to industry and business to business. Sometimes only basic information will be required, in other situations more detailed information must be supplied. These are just some examples of types of information that could be requested in order to verify a customer, which could be either an individual person or a business entity:
- Full names
- Identity or passport numbers
- Proof of residence
- Voters card
- Drivers license
- Business registration documentation
- Tax numbers and information
- Legal agreements
- Bank statements
- Financial documents
- Biometric information such as fingerprints
- Visual biometric information such as photographs or video
How is the KYC information used?
Again, it depends on the parties and applications, but information will be checked against various local and international databases to determine various things about the person, such as:
- Is the person alive?
- Is the person who they claim to be?
- Is the documentation current and accurate?
- Is the person on any criminal watchlists?
- Is the person on any credit blacklists?
KYC information is used at the onboarding stage of a business arrangement, but is also used for ongoing monitoring to trigger flags which can be an early warning system against fraud or other criminal activities.
What happens if an entity does not meet the KYC requirements?
The bank or other provider may decline to open an account or do business with that entity, close an existing account or terminate a business arrangement.
Who undertakes the KYC process?
There can be multiple players in the KYC process. Large banks, financial institutions and corporate businesses have departments that specifically handle this process. They often do this in conjunction with other service providers.
There are also independent KYC providers that supply this service to different sized businesses, and many specialize in certain industries.
KYC technology is a fast growing and innovative industry which needs to keep up with criminal trends as well as legal requirements around the world. With advances in technology and the digitisation of information, result times have become very fast, often providing a result within minutes which might have taken weeks with manual systems.
Know Your Customer seems very daunting, especially for small or new businesses who find themselves needing to comply with KYC legislation or requirements, especially as a seller of goods online. Payment providers such as payment gateways, payment facilitators and payment processors all require KYC in some form or another. The good news is that these services can be provided by experts, either bundled as part of a payment service, or as a stand alone provider.
Baer’s Crest has excellent AML/KYC policies and procedures in regards to our financial products and services. Talk to us about a secure and responsible payment solution partnership that will suit your business.