Know Your Customer: What You Need to Know

Knowing your customer is crucial for any business, and it's not just about collecting data - it's about understanding their needs, preferences, and behaviors. This means going beyond demographics and transactional history to build a rich picture of who they are and what they want.

According to the Fair Credit Reporting Act, businesses must obtain customers' consent before collecting and using their personal information. This consent can be obtained through opt-in forms, clear language in contracts, or explicit permission.

A good customer profile should include information about their lifestyle, interests, and pain points, which can be gathered through surveys, social media listening, and customer feedback. This information can help businesses tailor their marketing efforts and product offerings to meet their customers' needs.

For example, a company that sells outdoor gear might create a customer profile that includes information about their hiking habits, favorite trails, and equipment preferences. This information can help the company develop targeted marketing campaigns and product recommendations that resonate with their customers.

Know Your Customer (KYC) is a critical function to assess customer risk and comply with Anti-Money Laundering (AML) laws. Effective KYC involves knowing a customer's identity, their financial activities, and the risk they pose.

KYC is a fundamental practice to protect your organization from fraud and losses resulting from illegal funds and transactions. If you're a financial institution, you could face possible fines, sanctions, and reputational damage if you help enable money laundering or terrorist financing.

The primary goal of KYC is to satisfy that the source of the customer's funds is legitimate. This involves understanding the nature of the customer's activities.

To create and run an effective KYC program, you'll need the following elements:

In the U.S., there are three main components of KYC: the customer identification program (CIP), customer due diligence (CDD), and regular monitoring of the customer's account and activities.

The KYC process is a crucial part of verifying customers, and it involves several key components. In the US, all financial institutions must ensure their customers go through the CIP, CDD, and EDD as part of the merchant onboarding process.

The KYC process consists of four key components: the Customer Identification Program (CIP), Customer Due Diligence (CDD), Enhanced Due Diligence (EDD), and Ongoing Monitoring. These components provide an essential layer in the construction of a robust and effective customer identification framework.

Sanctions and watchlist checks are also a critical part of the KYC process. This involves searching international, government, or regulator databases to identify individuals who are prohibited from engaging in certain activities or industries. Sanctions lists specify individuals or organizations that have been involved in illegal activities, such as money laundering, terrorism, and human-rights violations.

Here's a breakdown of the types of sanctions and watchlists:

Additionally, the KYC process requires checking PEP lists to verify customers aren't designated as politically exposed persons. A PEP is a person who holds a prominent public function or has close family, personal, or business ties with someone who does.

The KYC process is a must for all compliant financial institutions in the U.S., which means customers must go through the CIP, CDD, and EDD as part of the merchant onboarding process.

The KYC process involves four key components: the Customer Identification Program (CIP), Customer Due Diligence (CDD), Enhanced Due Diligence (EDD), and Ongoing Monitoring, providing a robust and effective customer identification framework.

These components are essential in verifying customers, which can include verifying identity documents, facial recognition, and biometric verification through KYC checks.

Filling out a form is a crucial step in the KYC process. A KYC form typically includes the customer's name, title, address, phone number, and email address.

You'll also need to collect the customer's social security number and proof of identity, such as a passport or driver's license. This information helps businesses verify the customer's identity.

The form may also require a signature and date from the customer. This ensures that the customer has reviewed and agreed to the terms of the business relationship.

Businesses might use an electronic know your customer form to gather KYC documents. This can be done using an electronic identity verification service, such as Lexis Nexis, which collects information about the potential customer.

Here are the typical details you'll need to collect on a KYC form:

A PEP is a person who holds a prominent public function or has close family, personal, or business ties with someone who does.

To identify PEPs, your company needs to search available lists and databases. This is a crucial part of the KYC process.

Just because a customer is listed as a PEP, it doesn't mean they're untrustworthy or likely to be engaged in illegal activity. However, their position and potential influence increase the risk of involvement in crimes like corruption, bribery, and money laundering.

If you identify a customer as a PEP, your company can undertake additional or enhanced due diligence. This is backed by documented audit trails to ensure ongoing KYC compliance.

Typically, governments or other international authorities establish lists of PEPs. Your company can access these lists to verify customers and ensure compliance with regulations.

Here are some examples of international authorities that establish lists of PEPs:

Banks and financial institutions are often the first to reflect new KYC requirements, as they provide a variety of financial services and deal with significant amounts of accounts, money, and transactions. This is because they could be a substantial conduit for money laundering if left vulnerable.

To maintain the trust they've built with customers, banks must deploy digital processes while ensuring robust identity verification. In fact, 62% of U.S. consumers expect to verify their identity when opening an account digitally, and 42% expect to set up biometric identification during the onboarding process.

The minimum requirements to open an individual financial account are clearly delimited in the CIP: name, date of birth, address, and identification number. These requirements are designed to limit money laundering, terrorism funding, corruption, and other illegal activities.

Here are the key KYC requirements for different sectors:

These requirements help ensure effective KYC procedures are in place at account opening, deterring money launderers and other financial criminals from becoming active on your services.

Banks are often the first to reflect new KYC requirements, as they provide a variety of financial services and deal with significant amounts of accounts, money, and transactions.

U.S. consumers have high expectations for identity verification, with 62% expecting to verify their identity when opening an account digitally and 42% expecting to set up biometric identification during the onboarding process.

Technology is improving KYC and AML programs for banks with better identity verification speed, accuracy, and reliability.

Banks can leverage APIs, AI/ML, biometrics, and advanced optical character recognition (OCR) technologies to gather more information and analyze it more intelligently.

Most other financial services also have KYC requirements similar to banks, requiring them to perform KYC and monitor customer transactions to ensure they aren't part of a money laundering scheme.

Financial service organizations need to verify the origin of larger sums and report cash transactions exceeding threshold limits.

Crypto programs are challenging to create due to differing approaches from countries, but the FATF has noted several red flags around KYC, including:

Ensuring effective KYC procedures are in place at account opening helps deter money launderers and other financial criminals from becoming active on your services.

KYB is a critical component of the KYC process, but it's often misunderstood. KYB stands for Know Your Business, and it's designed to perform due diligence around companies and the individuals representing those companies.

KYB is restricted to verifying the identity of businesses, not individual customers. This is in contrast to KYC, which focuses on verifying the identity of individual customers.

To implement a successful KYB program, you'll need to consider the types of accounts offered by your institution, your methods of opening accounts, and the types of identifying information available. You should also consider factors such as your institution's size, location, and customer base.

Here are some key factors to consider when implementing a KYB program:

KYC laws have come a long way, and it's essential to understand the regulations that govern the process.

The Bank Secrecy Act, passed in 1970, requires banks to file five types of reports with the Financial Crimes Enforcement Network and Treasury Department, including Currency Transaction Reports for cash transactions over $10,000.

Banks must also keep a record of all cash purchases valued between $3,000 and $10,000 through a Monetary Instrument Log.

The U.S. Patriot Act of 2001 introduced KYC regulations, making them mandatory for all banks in the United States.

The U.S. has some of the most comprehensive KYC laws in the world.

The Bank Secrecy Act of 1970 was a major milestone in KYC regulations. It requires banks to file five types of reports with the Financial Crimes Enforcement Network and Treasury Department.

One of these reports is the Currency Transaction Report (CTR), which must be filed for cash transactions exceeding $10,000 in one business day.

The U.S. Patriot Act of 2001 took KYC regulations to the next level. It introduced mandatory KYC requirements for all banks in the United States.

The Patriot Act also introduced the Customer Identification Program (CIP) and Customer Due Diligence (CDD), which are stricter KYC rules that financial institutions must comply with.

Here are some key reports required by the Bank Secrecy Act:

CC, or Customer Due Diligence, is a crucial part of the KYC process. It involves verifying the identity of your customer's customers, which can help prevent money laundering risks.

In the EU, the Sixth Anti-Money Laundering Directive suggests that KYCC, or Know Your Customer's Customer, is becoming increasingly necessary. This means that businesses will need to verify the identity of their customer's customers, just as they do with their own customers.

Sanctions and watchlist checks are also a key part of the CC process. These checks involve searching international, government, or regulator databases to identify individuals who are prohibited from engaging in certain activities or industries.

The U.S. Patriot Act of 2001 introduced KYC regulations, which include the Customer Identification Program (CIP) and Customer Due Diligence (CDD). These regulations require financial institutions to comply with stricter KYC rules, including CC.

Here are some examples of international sanctions and watchlists:

These lists are used to identify individuals who are prohibited from engaging in certain activities or industries, and are a key part of the CC process.

Customer due diligence, or CDD, is a crucial element in managing risks and protecting your business. It involves identifying and understanding your customers' activities to assess how risky they are.

To implement CDD, businesses can use either Simplified Due Diligence (SDD) or Enhanced Due Diligence (EDD). SDD is used in low-risk situations, such as customers with lower-value accounts.

EDD, on the other hand, is used for higher-risk clients to gather more information about their business activities. This may include verifying the location of the person and business, examining the business's transactions, and analyzing patterns of activities.

If you suspect a customer is high-risk, take extra time to research the company or individual to verify their legitimacy. This involves looking at additional CDD information, such as:

After completing CDD, assess the risk level of each customer and consider creating risk profiles to track patterns. In your KYC policy, outline different levels or factors of riskiness, such as higher outgoing transactions in an account.

Sanctions and watchlists check is a crucial part of KYC requirements. It involves checking national and international sanctions lists and watchlists to identify individuals or organisations that engage in illegal activities.

Sanctions can be levelled against individuals or organisations for activities such as money laundering, terrorism and terrorist financing, drug trafficking, human-rights violations, arms proliferation, and violation of international treaties.

Typically, governments or other international authorities establish these lists, including Her Majesty’s Treasury in the UK, the FBI and the Office of Foreign Assets Control (OFAC) in the US, and Interpol.

These lists specify individuals, groups or organisations that require close surveillance, usually for legal or political reasons. Sanctions and watchlist checks are specialised searches accessing a number of international, government or regulator databases.

Some examples of international sanctions and watchlists include:

Sanctions and watchlist checks help identify individuals who are prohibited from engaging in certain activities or industries, allowing you to streamline screening and enhance due diligence.

The Customer Identification Program (CIP) requires financial institutions to collect, record, and verify basic identification information from customers before establishing a financial relationship.

There are several methods to verify customer identity, including documents, non-documentary methods, and a combination of both.

For example, the CIP mandates that any individual conducting financial transactions needs to have their identity verified, which can involve comparing the information provided to databases.

The minimum requirements to open an individual financial account are clearly delimited in the CIP: name, date of birth, address, and identification number.

These procedures are at the core of CIP; as with other Anti-Money Laundering (AML) compliance requirements, these policies need to be clarified and codified to provide continued guidance to staff and regulators.

The exact policies depend on the risk-based approach of the institution and may consider factors such as the types of accounts offered by the bank, the bank's methods of opening accounts, and the types of identifying information available.

Here are some common methods used for identity verification:

Electronic KYC (eKYC) is a popular method for verifying customer identity, which can be done electronically or online. eKYC is particularly popular in India, where 99% of adults have a digital identity or Adhaar number administered by the Government.

eKYC offers several benefits, including speed, accuracy, and cost-effectiveness. It can also help improve scalability and reduce the risk of mistakes and errors.

In addition to eKYC, other methods such as worldwide company identity verification are also used to verify the identity of companies and individuals. These methods are essential for ensuring compliance with Know Your Customer (KYC) regulations and preventing financial fraud and money laundering.