Know Your Customer (KYC) is a mandatory check for financial entities whenever they onboard a new customer. This is essential to identify illegitimate actors from opening accounts that could be possibly used to launder black money. The ill-obtained money is later used to carry out nefarious activities such as drug trafficking or funding terrorist entities. In this regard, regulatory authorities charter strict KYC compliance standards for financial businesses to prevent the illegal flow of money. 

What is KYC Verification?

The KYC process is carried out to identify and validate whether a customer’s identity is legitimate. In this regard, authentic identity documents issued by the government such as a passport, driving license, or a national ID card are used to authenticate the user. KYC verification usually starts with a Customer Identification Program (CIP) that acquires identity information needed to identify the customer. 

How Important is KYC Compliance?

Financial institutions have some regulatory obligations to meet one of which is KYC compliance. KYC is also a requirement for Non-banking Financial Companies (NBFCs) such as insurance firms, currency exchange platforms, etc. Obligated entities are required to develop KYC compliance programs to meet the standards set out by global regulators. KYC compliance has a list of requirements which are listed below:

  • Create an identification process for the customer
  • Verify customers through identity documents
  • Follow a risk-based approach for creating customer risk profiles
  • Practice AML compliance within the organization

What does KYC Due Diligence Mean?

Enterprises practicing KYC means that they are taking essential measures required for the due diligence of customers. The type of due diligence procedure usually depends upon the type of customer and the level of risk they pose to a business.

Stage 1 – Simplified Due Diligence

KYC checks performed in this stage are usually for low-risk customers. Simplified Due Diligence (SDD) doesn’t require a detailed verification of the customer using background checks. 

Stage 2 – Customer Due Diligence

CDD verification of customers entails a standard KYC verification. Customers for CDD have a low or medium risk profile which indicates the compliance requirements needed. Each country and jurisdiction has its own defined rules to carry out CDD checks. 

Stage 3 – Enhanced Due Diligence

KYC compliance requirements are different when it comes to customers placed on sanction lists such as PEPs (Politically Exposed Persons), or blacklists provided by the government. These high-risk customers need ongoing monitoring to mitigate any possible instance of money laundering. 

KYC Regulations

KYC Regulation differs based on the financial system in a country and the laws implemented there. Some KYC regulations in different regions are listed below:

United Kingdom

In the UK, the Sanctions and Money Laundering Act of 2018 lists sanctions defined by the UN to meet KYC compliance and national security. As per UK law, enterprises should meet all AML/KYC requirements and practice CFT compliance to prevent financial crime. Financial entities should perform KYC due diligence checks to comply with global standards as well.

United States 

FinCEN – the financial regulatory body in the US – has laid out KYC guidelines to make banking and other financial services providers safe from bad actors. The KYC requirements in the US are:

  • Mandatory KYC verification before onboarding new customers
  • A risk rating should be assigned to every customer 
  • EDD checks for customer with a high-risk profile
  • Hefty fines in case of non-compliance with KYC laws

European Union

In the EU, 5AMLD and 6AMLD are of prime importance when it comes to KYC regulations. The laws state predicate offenses that enterprises should be aware of, with a focus on RegTech companies.  

Automated KYC Solution for Enterprises

Financial enterprises can benefit from automated software for KYC verification. A digital KYC solution helps businesses to cut on compliance costs and breeze through the process of onboarding customers. Most KYC solutions come with the support of document verification and facial recognition which make the verification process foolproof and effortless based on KYC compliance.  


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