Know Your Customer (KYC): Three Steps to Effective Compliance

KYC stands for Know Your Customer.

Know Your Customer (KYC) processes are a crucial function for assessing customer risk and a legal necessity for adhering to anti-money laundering (AML) regulations. Knowing a customer's identity, financial activity, and risk level is essential for effective Know Your Counterpart.

"KYC" refers to a financial institution's (or a company's) efforts to:

• Determine the customers' identity.

• Understand the nature of the customer's operations (the primary purpose is to ensure that the customer's finances are coming from a reputable source).

• Assess the money laundering risks connected with the consumer in order to keep track of their activity.

1) Program for Customer Identification (CIP)

A risk assessment, both at the institutional level and at the level of processes for each account, is an essential component of a successful CIP. While the CIP provides advice, it is up to each institution to decide the precise amount of risk and the appropriate policy for that level of risk.

The CIP clearly defines the minimal prerequisites for opening an individual bank account:

• Name

• Year of birth

• Address

• Number of identification

While collecting this information upon account opening is sufficient, the institution must "within a reasonable period" verify the account holder's identity. Documents, non-documentary procedures (such as verifying the information given by the customer with consumer reporting agencies, public databases, and other due diligence processes), or a mix of both are used to verify identification.

2) Due Diligence for Customers

Due diligence is divided into three levels:

• Simplified Due Diligence ("SDD") is used when the risk of money laundering or terrorist financing is low and a comprehensive due diligence investigation is not required. Low-value accounts or accounts, for example.

• Basic Customer Due Diligence ("CDD") is information gathered for all customers in order to verify their identification and assess the risks they pose.

• Enhanced Due Diligence (EDD) is the collection of additional data for higher-risk clients in order to have a better knowledge of their activities and reduce related risks.

3) Ongoing surveillance

It's not enough to check your client once; you need to have a procedure in place to keep track on them on a regular basis. The continuing monitoring function oversees financial activities and accounts based on risk criteria established as part of a customer's risk profile.