Know Your Customer (KYC) is a process of customer identification and verification undertaken by a financial institution (FI) before provision of financial services. It is the first stage of customer due diligence (CDD) under which a company conducts identity verification, background checks and risk management for a potential customer. KYC aims to minimise risks and prevent Financial Institutions from engaging with companies involved in money laundering, terrorism or other illegal activities. This process is fundamental to protecting financial services company from fraud and other illegal activities and transactions.
KYC process
KYC refers to the procedures introduced by financial institutions and businesses to:
- identify and verify customer identity,
- analyse the customer background and financial stability based on financial statements
- assess risks associated with customer activities such as money laundering or other malicious transactions
Why is the KYC process important?
Banks and other financial institutions use the Know Your Customer principle to ensure that their customers are who they say they are. Likewise, they must comply with anti-money laundering (AML) and KYC regulations. This mechanism is implemented to effectively prevent money laundering, terrorist financing, drug trafficking, other illegal and corruptive activities.
How to complete the KYC process
Customers provide their credentials for banks and financial institutions to verify identity and their address. The process encompasses ID documents verification, biometric verification, and verification of additional documents (e.g., utility bills as proof of address). When a company opens a new account, the KYC includes verification of legal documents (e.g., ID or passport copies for shareholders, board members, staff and list of partners). Once all the documentation is received, the customer’s background is analysed using international and local databases, blacklists and public internet sources.
KYC policies
KYC policies have become a prerequisite to combat illegal and fraudulent activities on a global scale. The policies help companies to develop a compliant infrastructure that protects both financial institutions and their customers from fraud and financial loss.
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