Know your customer (KYC) is a mandatory form of customer verification that allows service providers to know who their customers are and the level of risk they represent. KYC is a function of the UK’s anti-money laundering (AML) laws, specifically the Money Laundering Regulations 2007. While this legislation is intended to help banks, investment brokers and other financial service providers, this legislation applies across a range of companies and sectors. The economic crime and corporate transparency bill which was recently approved in the House of Lords is also expected to have widespread implications for KYC.
KYC and other AML legislation are part of a broader international effort to prevent organised crime and terrorist groups from circulating their money through financial institutions and products. KYC is one of the finance industry’s most effective tools in combating financial crime.
Here’s how it works.
The KYC process
The know-your-customer process is integrated into the process of onboarding a new customer, and extends throughout the relationship. There are three discrete processes that form a company’s KYC strategy.
KYC guidelines state that companies must have robust customer identity verification checks in place at the point of onboarding. This must include the customer submitting a government-approved form of identification such as a passport or driving license that can be checked against relevant databases.
Customer Due Diligence (CDD)
KYC also involves performing due diligence checks on customers. This not only involves identity verification but also identifying the level of risk that they represent. Enhanced due diligence checks may be required if the customer is a politically exposed person or an ultimate beneficial owner of a company or entity. These customers are statistically at a higher financial crime risk.
KYC compliance also involves the ongoing monitoring of financial transactions to identify suspicious and potentially illegal activity. Higher-risk customers like PEPs or UBOs will often be monitored more frequently and rigorously.
Why is KYC important for companies?
A robust KYC strategy is a key part of a company’s AMD compliance. As such, it helps companies to protect their reputation and empowers them to join the fight against financial crimes such as money laundering and terrorist financing.
KYC compliance also prevents the incurring of hefty penalties. Santander, NatWest and HSBC have all been dealt hefty fines for lapses in KYC compliance. Fines are not the only financial incentive companies have to be KYC compliant. It also drastically reduces their risk of being defrauded or otherwise compromised by criminals.
How do companies manage KYC compliance?
KYC and AML compliance are often built into a company’s customer onboarding and relationship management practices. However, there are numerous KYC specialists that offer support for customers that want to minimise their risk of non-compliance. This may involve providing software, tools and remediation or offering a comprehensive KYC as a service solution.
Know Your Customer FAQs
What is a politically exposed person (PEP)?
Politically exposed people, or PEPs, are individuals whose prominent position or influence in public office or other sectors of political power make them at risk of bribery or corruption. Companies will often keep a list of PEPs, their family members and close associates as part of their KYC strategy.
What is an ultimate beneficial owner (UBO)?
An ultimate beneficial owner (UBO) is an individual, body or entity that owns and/or controls a company. They may not even be the legally nominated owner but they must have a controlling interest with over 25% ownership of the company’s shares or over 25% of the voting rights.
UBOs are considered high-risk as they may be used to instigate fraud or other covert criminal acts.
What is KYC as a service?
KYC as a service involves third-party companies carrying out customer identity verification on behalf of a client. This may also involve using in-house data verification tools and analytics to assist clients in the ongoing monitoring of customers’ activity.