Definition of "Know Your Customer (KYC)"
Know Your Customer or KYC, refers to the regulatory compliance mandate imposed on financial service providers to implement a Customer Identification Program and perform due diligence checks before doing business with a person or entity.
KYC compliance regulation has proved to be one of the biggest operational challenges banks, accountants, lawyers and similar financial service providers worldwide have had to overcome.
The 9/11 terrorist attacks on the World Trade Centre revealed that there were sinister forces at work around the world, and that terrorists activities were being funded with laundered money, the proceeds of illicit activities such as narcotics and human trafficking, fraud and organized crime. Overnight, the combating of terrorist financing became a priority on the international agenda.
For the financial services provider of the 21st century, KYC was no longer a suggested course of action. Based on the requirements of legislative landmarks such as the USA PATRIOT Act 2002, modern KYC compliance mandates were created to simultaneously combat money laundering and the funding of terrorist activities.
Meeting KYC Compliance Requirements
In order to meet KYC compliance requirements, financial institutions must:
Verify that customers are not or have not been involved in illegal activities
such as fraud, money laundering or organized crime.
Verify a prospective client’s identity.
Maintain proof of the steps taken to identify their identity.
Establish whether a prospective customer is listed on any sanctions lists
in connection with suspected terrorist activities, money laundering,
fraud or other crimes.