What is Know Your Customer (KYC)?

Typing AI - Jan 28, 2022

Even though KYC aka Know Your Customer phrase seems unimportant for some organizations. However, it possesses an important meaning in the world of business. It is because KYC is actually a process performed by organizations to know their customers better. This also helps them in identity verification for their clients before starting to do any business with them.

However, if you are the one who doesn’t have any idea what does Know Your Customer means and how it can benefit your business. Then you must have a look at the details below to understand things better in this regard.

What is Know Your Customer?

Know Your Customer commonly known as KYC is a standard in the financial and investment industry to ensure that your business knows details about their clients. For example, their capability of risk tolerance, financial position, and investment knowledge.

KYC is important to ensure the protection of both, advisors and clients. With this, clients will be protected by letting their financial or investment advisor know the type of investments that are best suited for their personal situations.
However, on the other hand, KYC protects financial advisors by having a better idea about what they can or can’t include in the portfolio of their clients.
Compliance with Know Your Customer usually involves policies and requirements, for example, risk management, transaction monitoring, and customer acceptance policies.
In simple words, KYC is an ethical requirement for those who have to deal with their financial and investment processes. According to the KYC 2090 rule, every broker-dealer has to spend some time and make reasonable efforts to open and maintain client accounts.

This requirement is all about knowing and keeping records of each customer’s essential facts.

Key Objectives of Know Your Customer.

KYC is important to consider for multiple reasons by businesses operating in the financial and investment industry. Some of the key objectives of KYC include:

It can help lenders in performing essential risk assessment by knowing the prior financial history and owned assets of their potential users.
KYC helps in money laundering
It can also limit fraudulent activities that commonly result because of hiding customers' identities.
Additionally, this can also help in bringing stability and more investment to the countries. Also, it can help in making the financial infrastructure of the company more reliable and trustworthy.

Due to all these reasons, more and more companies are looking to use KYC compliance for their financial institutions.

What are the key requirements for Know Your Customer Compliance?

The FinCEN has set some minimum baseline requirements for KYC compliance in conjunction with the due diligence program’s core requirements. These are important for the prevention of money laundering. For this, financial institutions have to conduct a deeper assessment of the risk profiles of their clients.

According to FinCEN, financial institutes must verify the identities of their customers as well as their respective beneficial owners, with 25% ownership, at least. Customers with higher AML risk will require additional scrutiny while the ownership threshold is lower. Additionally, FinCEN also requires financial institutes to understand the purpose and type of customer relationship while developing their risk profile. However, if financial institutions are using third-party services to collect and verify the information of their customer, they must ensure that third-party employ certain risk controls with appropriate governance structures.

Most importantly, financial institutions must spend some time to ensure their customers’ information is current and accurate. Also, they have to keep monitoring their accounts for any illegal activity.

Key Takeaways

Know Your Customer aka KYC is a set of standards used within the financial and investment services industry for customer verifications, their financial and risk profiles.
In the investment industry, every broker-dealer needs to spare some time to know more about their customer's accounts.
Additionally, FinCEN has also enabled some requirements for KYC. These commonly include setting standards and verifying beneficial owners to deal with 3rd parties.
According to SEC, customers have to provide details about their financial information to open an account.
Compliance with KYC standards can help businesses in multiple ways from risk assessment to understanding their customers' needs better and a lot more.

So, that’s all that you need to know about Know Your Customer.

Image source: Freepik