Designed to prevent money laundering, fraud and other criminal activities, Know Your Customer standards apply to financial institutions in the United States and in many other areas of the world. The Bank Secrecy Act was passed by Congress in 1970 to address issues related to money laundering. The regulations were later amended to include customer identification requirements applicable under the USA PATRIOT Act of 2001.
Maintaining compliance with Know Your Customer (KYC) regulations requires institutions to report certain transactions and suspicious activities to the U.S. Department of the Treasury. In many cases, working with a company that specializes in robust identity authentication is one of the best ways to maintain compliance with Know Your Customer requirements on a continuing basis.
What Is Know Your Customer (KYC)?
The goals of KYC programs are simple:
- Verifying customer identities by evaluating documents, data and other available information
- Accepting legitimate customers and rejecting those who do not meet certain standards
- Preventing money laundering and fraudulent activity
Financial institutions must implement several processes to maintain compliance with Know Your Customer requirements. Some of the most important elements in these processes include the following:
- Customer Identification Programs (CIP)
- Customer Due Diligence (CDD)
- Continuous ongoing monitoring
- Compliance with KYC rules
Failing to comply with Know Your Customer regulations can result in steep fines and potential prison terms. Making sure your organization is in full compliance with KYC is critical to your institution’s continued operations in the financial sector.
Who Must Comply With KYC Requirements?
KYC regulations and the Bank Secrecy Act apply to businesses based in or operating in the United States. Similar regulations, however, may apply to businesses in the global community. While any business that conducts financial activities may be subject to the regulations of KYC, the following industries are generally required to obtain at least one form of identification from their customers:
- Banks, savings and loans and credit unions
- Cryptocurrency providers and platforms
- Real estate companies
- Credit card providers
- Debt collection agencies
- Investment firms and mutual fund providers
- Gaming and casinos
- Other businesses operating in the financial sector
While KYC was first envisioned as an anti-money laundering (AML) measure, it is now used to monitor the movement of money that could fund terrorist or criminal organizations in the United States and around the world. Maintaining compliance not only with Know Your Customer regulations but also with all updates to these requirements can keep your financial operations on the right side of the law now and in the future.
Why Know Your Customer Is So Important
KYC regulations are intended to prevent terrorism, money laundering and other forms of criminal activity. These measures can also protect consumers in the financial marketplace and can reduce the risk of fraudulent orders that could cost you and your customers money. This can increase customer confidence and can reduce the risk of financial losses both for you and for those you serve. Implementing robust Know Your Customer programs can be beneficial for companies and consumers alike.
How KYC Works
Know Your Customer programs typically include several elements that work together to prevent money laundering and the funding of terrorists and to protect consumers and companies:
- Customer Identification Programs: A Customer Identification Program (CIP) incorporates a variety of identification and verification tools to ensure that account holders are who they say they are during initial account creation and in subsequent interactions.
- Customer Due Diligence: The Customer Due Diligence (CDD) Final Rule was enacted to prevent the use of companies for money laundering, criminal activity and the funding of terrorism.
- Continuous monitoring: Monitoring of customer activities is essential to manage financial reporting requirements and to prevent money laundering or the transfer of funds to terrorist organizations.
- Evaluation of risk: Another element of a robust Know Your Customer program is the ongoing evaluation of risk for each customer. Working with a company that offers assistance in identifying and verifying customers can provide a baseline for risk evaluation in the financial sector.
What Is a Customer Identification Program?
The first element in a robust KYC program is the Customer Identification Program. Identification can be established through documents or through non-documentary verification. Documents may include driver’s licenses or other government-issued identification methods. Non-documentary verification methods for CIP may involve direct contact with the customer, evaluation of credit information or comparison of information provided with government databases and other sources of reliable information.
Customer Due Diligence (CDD): What It Is and How It Works
The Financial Crimes Enforcement Network (FinCEN) issued a final rule on Customer Due Diligence that went into effect on July 11, 2016. This rule covers several different activities on the part of financial institutions:
- Detecting suspicious activity or unusual transactions
- Reporting unusual activity that could result in financial losses or risks to financial capital
- Preventing criminal activities that may include money laundering, the use of banking institutions for funding terrorism and fraudulent transactions
- Applying accepted, safe and sound practices to all financial transactions and activities
The right due diligence can prevent many issues that could otherwise result in penalties, fines or other regulatory responses. Working with a company that offers assistance with Know Your Customer identification and verification can make CDD more effective in protecting your financial institution.
Know Your Customer With Video
Video KYC methods are used to verify the identity of customers through live video interviews. Rather than traveling to the location of the financial institution or to the customer, video KYC uses modern telepresence technology to create a virtual face-to-face meeting between banks and their customers. By using video KYC, financial institutions can comply with all elements of Know Your Customer without the expense and inconvenience of in-person meetings. Best of all, video KYC meetings can be recorded and retained to manage future reporting requirements.
Electronic Know Your Customer (EKYC) Identification Methods
Electronic KYC methods can provide added help in determining the identity of customers and in maintaining records for regulatory reporting requirements. These methods may include some or all of the following:
- Biometric verification using voice recognition or facial recognition
- Multi-factor authentication to verify the identity of the customer
- Digital documents uploaded to the financial institution’s website or database
- One-time passwords
- Electronic identity verification methods
- Digital breadcrumbing through the use of IP addresses, email addresses and even typing speed
These modern verification methods can streamline some elements of Know Your Customer. Financial institutions can often benefit from the expertise of professional authorization, identification and verification services offered by companies that specialize in this sector of the technological industry.
What Is Know Your Customers Customer (KYCC)?
Banks and other financial institutions often provide services for businesses in the consumer or business-to-business marketplaces. Know Your Customers Customer (KYCC) programs require financial institutions not only to verify the identity of their direct customers but also to monitor the clients of those customers to determine if any irregularities or red flags are present. This process can sometimes be challenging for banks and may require the help of specialists in creating a KYCC system that will collect data and information. Implementing a Know Your Customers Customer program can often be facilitated with the right outside help.
KYC Software and Tools
Financial institutions use a wide range of technologies and tools to manage Know Your Customer requirements. Some of the most important tools for managing KYC requirements are listed here:
- Identity verification tools range from simple submissions of government-issued IDs to electronic Know Your Customer interviews and database searches.
- Biometric verification can be achieved more easily by using tools available for installation on smartphones. Biometric multi-factor authentication can use facial matches and other biometric data to make sure that customers are who they say they are.
- Monitoring software is typically used to manage financial transactions and to flag any transactions over a set amount or that otherwise are out of the norm for the client or the industry.
- Electronic know your customer or eKYC software encompasses a variety of digitally submitted and stored documents and data points. These tools can help financial institutions to manage KYC implementations more efficiently.
- Fraud prevention requires both identity verification and advanced analytics to spot trends and patterns that might indicate criminal activity or money laundering.
- Compliance tools often incorporate monitoring and reporting functions in one platform. These software options can streamline compliance for banks and other businesses in the financial sector.
What Is Know Your Business (KYB)?
Know Your Business, often referred to as KYB, includes both KYCC and other elements of Know Your Customer to verify companies using available information. EKYC and online databases are often consulted to find the data needed for KYB requirements.
Understanding Know Your Business Requirements
KYB requirements can present real challenges for financial institutions and other companies that serve businesses in the modern marketplace. One of the most important legal concepts associated with Know Your Business is the determination of ultimate beneficial ownership of the company in question. Shell companies are often used to conceal the ownership interests of individuals or other companies. While some legitimate companies engage in this practice, it is also a favored tactic for money laundering or for other illegal activities. Ultimate beneficial ownership is the determination of the actual owners of the company and may require extensive research on the part of financial organizations and other industries that are required to comply with KYB requirements. Global business registries can often provide added help in determining the ultimate beneficial ownership of companies when the
Financial institutions and businesses that work in the financial sector are required to implement robust identity verification and to comply with Know Your Business guidelines. By staying on the right side of KYB regulations, these institutions can avoid serious consequences to their reputations and their ability to succeed in the future.
KYC Requirements by Industry
Know Your Customer requirements vary depending on the industry and the market sector in which they are applied. While banks and financial institutions must meet strict standards for identification and monitoring, other business enterprises can also benefit from the advanced ID systems available through KYC. Understanding the KYC requirements that apply to your industry can often assist you in managing all aspects of compliance much more effectively.
KYC in banking
Know Your Customer requirements in the banking industry have historically been tied to anti-money laundering regulations. The 2001 USA PATRIOT Act expanded these KYC regulations to cover transfers of funds to terrorist organizations. In general, however, programs for KYC in banking are designed around a few basic elements:
- Customer identification: Compliance with KYC in banking requires that institutions pull at least four items of personally identifying information for their customers. These may include name, address, date of birth, Social Security number or other identifying number. Most banks also check to see if the individual or company appears on any watch lists or is subject to any government restrictions before opening an account or conducting other business with the bank.
- Transaction monitoring: Staying in compliance with KYC in banking institutions also requires monitoring all transactions and ensuring that the source of funds is legitimate. Large deposits are often flagged during the monitoring process and, in some cases, could be indicative of illegal activity.
- Risk management: Categorizing customers and transactions according to risk can streamline some elements of KYC in banking. A robust risk management plan typically includes software designed to spot high-risk transactions and to alert banks to these issues promptly.
- Reporting requirements: Banks and other financial institutions are required to report suspicious transactions and transactions over a specific dollar limit. These reporting requirements are intended to combat money laundering and to prevent fraudulent activities that could affect banks and their customers.
Banking institutions must maintain the highest standards of identification and verification to protect their customers and to prevent criminal activity. Failing to do so could result in fines, penalties and significant damage to the bank’s public reputation.
KYC in finance
Investment firms and other financial firms must adhere to the same KYC regulations and must report transactions in the same way that banks do. The Internal Revenue Service and the Securities and Exchange Commission (SEC) oversee the activities of investment firms and stock exchanges in the United States. Staying on the right side of all regulations governing customer identification is essential for investment firms and advisors.
KYC in finance, as with the banking industry, focuses primarily on transactions and customer identification. Incorporating advanced customer ID systems with advanced features like passwordless authentication can reduce the risk of unauthorized access and misuse of the finance industry to fund terrorism or to launder money derived from illegal sources. Implementing a comprehensive program for KYC in finance can protect investment firms and their clients from fraudulent activities that could affect their financial bottom lines.
KYC in business
Companies that sell their goods or services directly to consumers or to other businesses can benefit from KYC in business operations in several important ways:
- Reduced risk of identity theft or fraudulent transactions
- Reliable regulatory compliance
- Improved public reputation
- Lower risks of data breaches
- An active role in preventing criminal activity and terrorist funding
While businesses do not operate under the same strict rules as banks or financial institutions, they can benefit significantly by integrating strong identification controls and verification systems to know their customers and the companies they do business with in the commercial marketplace.
KYC in cryptocurrency
Cryptocurrency transaction monitoring is required as part of anti-money laundering regulations. In general, cryptocurrency platforms must confirm the identity of each user and must monitor the transactions that pass through their platform to determine if money laundering could be occurring. Virtual asset service providers (VASPs) are required to follow these steps when onboarding a new customer or client:
- Collect information from the customer to include full legal name, date of birth, address and other identifying data
- Compare the collected information with government-issued identification and other proof of residence and identity
- Check the name and identifying information against official databases of sanctioned individuals and Politically Exposed Persons
Ongoing monitoring will also be required to verify the identity of each customer and to determine if money laundering or other illegal activities may be occurring on the platform.
KYC in gaming
Casinos and other gaming establishments must comply with the guidelines of KYC in accepting funds and paying out winnings. Casinos have traditionally been popular ways for criminals to launder money. By implementing KYC in gaming, it may be possible to reduce the impact of these criminal activities and to protect casinos and their customers from money laundering and its negative effects on the economy.
Gaming establishments are required to follow the same KYC rules for identifying customers as other financial institutions, including checking relevant databases and comparing identification presented with government-issued IDs.
KYC in international exports
The Bureau of Industry and Security is part of the U.S. Department of Commerce and has created a set of guidelines for businesses to follow when evaluating international shipments of products. Making sure that your export partners are legitimate can reduce the risk of certain criminal activities and can prevent financial losses resulting from fraud or malfeasance.
KYC and Anti-Money Laundering
Know Your Customer was originally envisioned as a way to prevent criminals from hiding their ill-gotten gains through money laundering strategies. In most money-laundering schemes, criminals deposit funds with a bank or invest in a business while concealing the source of these funds. The funds can then be extracted from the company or withdrawn from the bank later. In this way, criminal organizations can make it appear that funds generated by their illegal activities came from a legitimate and legal source.
Although KYC is an integral element in anti-money laundering (AML) efforts, KYC and AML are not the same thing. KYC is just one part of a comprehensive AML program. Additionally, KYC also works to prevent fraudulent transactions that are not connected to money laundering and can protect customers against identity theft or misuse of identifying information in the financial or business sector. Accurate identification of customers is used to combat tax evasion and to determine the ultimate beneficial owners of shell companies that may be fronts for the drug trade.
How Know Your Customer Blocks Funding for Terrorism
U.S. and international law prohibits the funding of terrorist organizations. The International Monetary Fund has been instrumental in the fight against money laundering and terrorism. Terrorist organizations have been linked with efforts to develop weapons of mass destruction and widespread forms of fraud designed to destabilize the economies of friendly nations. Implementing Know Your Customer identification procedures can often reduce the risk that funds could reach terrorist organizations to fund criminal activities in the United States or around the world.
The Right Partner for KYC Implementations
Finding the right company to assist you in implementing Know Your Customer procedures and processes can sometimes be challenging. At authID Inc., our biometric identity platform makes it easier to achieve accurate identification for customers and to manage KYC more effectively. From replacements for knowledge-based authentication systems to advanced identity verification strategies, our team can assist you in creating a comprehensive Know Your Customer program that prevents unwanted regulatory entanglements and that provides real protection for you and your customers against identity theft, illegal activities and fraud. The identity verification experts at authID can design a KYC program that is precisely right for your needs.
To learn more about the services we offer and how they can provide you and your customers with greater security, you can book a demo today to experience authID for yourself. We look forward to the opportunity to create a customized solution for you.
