4/27/2023
The famous KYC stands for Know Your Customer and is a standard requirement within the financial industry. If you want to know more about it, here is a small guide.
Who should apply KYC?
Know Your Customer policies are mandatory for financial institutions that offer account opening and maintenance. When an institution acquires a customer or when an existing customer applies for a regulated product, KYC is triggered. This applies to:
- Banks
- Credit unions
- Wealth management and brokerage firms
- Private lenders and funding platforms
- Fintechs applications (depending on what they offer)
What are the factors that trigger Know Your Customer?
There are a number of triggers that set off KYC. Among the most common, we find:
- Unusual financial activity
- Change in the customer's occupation
- Addition of other account holders
- Customer-related changes or new information
- Change in the nature of the customer's business
What are the common KYC requirements?
Within Know Your Customer there are 2 essential documents: proof of identity with photo and proof of current address. This is the minimum you must provide when opening an account, applying for a personal loan, taking out car insurance and more.
In the list of documents accepted to verify identity, the most frequent would be:
- PAN card
- Voter's card
- Driver's license
- Ration card with photo
- Bank book with photo
- Public or private company ID card
- ID from the board of education (ISC, CBSE, etc.) or from a college or university
As for the documentation accepted for address verification, the entities accept:
- Passport
- Voter's card
- Driver's license
- Bank statement
- Home purchase deeds
- Credit card statement
- Proof of employer's certificate of residency
- Letter from any recognized authority or public servant
- Rental agreement accompanied with the last 3 months receipts
- Telephone, gas or electricity bill less than 6 months old
The 3 pillars of Know Your Customer
KYC is a legal requirement that is guided by 3 fundamental elements that we will see below.
The Customer Identification Program (CIP)
The Customer Identification Program refers to confirming that the person is who he/she says he/she is. To comply with this, the financial institution asks you for information related to your identity. Each organization has its own procedure based on its risk criteria, so the documentation may vary.
Customer Due Diligence (CDD)
This assessment determines the risk level of the client, including owners of beneficiary companies. This process requires a detailed assessment of potential risks and examination of the types of operations that the person could perform in order to detect any irregular or suspicious behavior.
Based on this, the financial institution can assign the customer a risk rating that will determine how often the customer will be monitored.
Each institution must identify and verify the individual who owns 25% of a legal entity and who controls that company or business. Although it is not a standardized procedure, there are 3 levels:
- Simplified Due Diligence (SDD). It is used when a full CDD is not necessary and for low value accounts. It is also applied if the risk of money laundering or terrorist financing is not a concern.
- Basic Customer Due Diligence (CDD). At this level the financial institution is expected to verify the degree of risk and the identity of the customer.
- Exhaustive Due Diligence (EDD). High-risk and high-cash customers require more comprehensive data collection to gain a better understanding of their activities and potential risks.
Ongoing monitoring
This measure serves to review the customer's transaction pattern and report any unusual activity. This monitoring is intended to be a dynamic component and risk management approach within KYC.
When something irregular is detected, the institution must send a SAR (Suspicious Activity Report) to FinCEN and other authorities.
The importance of Know Your Customer
The law requires financial institutions to know with certainty who they are dealing with when verifying their identity.
The procedures behind KYC allow them to assess risks and prevent situations such as identity theft, fraud, terrorist financing and other crimes. Failure to comply with KYC regulations carries heavy fines.
Know Your Customer requirements were introduced in the 1990s to counter money laundering.
After the 9/11 attacks, the US government tightened these provisions through the Patriot Act. Title III of the Patriot Act requires financial institutions to comply with 2 conditions: CIP and CDD.
Español: Qué significa KYC y para qué se utiliza