By Mariana Almeida Marques
KYC, or Know Your Customer is a much used phrase within the Financial Services industry. It relates to AML and security rules that all banks and financial institutions must follow in order to prevent fraud and protect their customers. In this article, we will explain KYC and how it works in the context of banking.
Know Your Customer represents a set of standards that all financial services and investment companies and insurers must use to verify the identity of their customers. Essentially, KYC applies to any company that holds money. KYC is part of the onboarding process of any new clients and enables banks and other financial institutions to not only prevent fraud and money laundering within their own company, but also to comply with the ever-developing AML regulations.
KYC requires banks and financial institutions to perform CDD (Customer Due Diligence) on every new customer they onboard (every time they open a new “business relationship”). CDD is also necessary for any payment worth €10,000 or more, according to the latest AML rules. Essentially, CDD englobes verifying your customer’s identity through official documents such as passports, bank statements or utility bills. These documents can be used to match important information such as facial recognition, full name, nationality, address and date of birth.
In some situations, banks also need to verify the beneficial owner, either because somebody is acting on behalf of another person or somebody owns at least 25% equity in a company. Equally, if at any point banks suspect any customer or transaction, they are obliged to perform CDD. Banks must also keep updated with changes in their customers’ personal circumstances, whether that be a change in the type of business activity or in the ownership of the business. Note that “customers” can refer to individual persons or organisations.
Banks and financial institutions must perform enhanced Customer Due Diligence if the customer involved is a “politically exposed person”, such as a member of parliament, head of state or government, or a minister and their relatives/associates. They may also perform financial sanction checks to determine if an individual is or has been excluded or prohibited from certain industries or activities.
In short, banks must obtain enough information from their customers to not only verify their identity but also analyse the risks of onboarding them. They can do so by understand where the customers’ funds come from and what type of business activity they plan to do with the bank.
Failure in complying with KYC obligations results in banks having to pay heavy penalties. Some of the most known cases of failing to comply with KYC include financial institutions such as HSBC, which suffered a penalty of $1.92 billion, and BNP Paribas, which had a penalty of $8.9 billion. Most banks face smaller fees, as these depend on the severity of the crime. Banks are not only faced with high fees, but also with serious damages to their reputation. Naturally, no customer wants to put their money in a bank that is known to have accepted money laundering and fraudulent activities.
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