Know Your Customer
Know Your Customer (KYC) regulations help nations protect themselves against illegal financial transactions by requiring businesses to have a well-rounded knowledge of the individuals they’re doing business with. These regulations are becoming more and more important on an international level since many illegal financial transactions are taking place between countries and international banks.
KYC is a set of regulations requiring businesses and banks to obtain basic identifying information about each customer, which not only allows for better identity verification processes when customers are logging onto accounts online or phoning in requests, but also allows for protections against corruption in both business and financial transactions. These regulations also protect against financial crimes such as bribery, money laundering, and terrorist financing.
Following the KYC regulations, this allows banks and businesses to better monitor and understand the truth behind customers’ financial transactions and requests. These regulations include gathering identifying information on each customer, such as name, date of birth, and Social Security number; regularly updating information on customers; and continuing to monitor international watch lists.
The idea behind KYC is that by having a solid grasp on the individual identities of each customer, businesses are then able to monitor transactions with more information and thus will notice when something out of the ordinary is requested or transferred between accounts.
Legislation that includes KYC has been implemented in several countries, such as the Anti-Money Laundering and Counter Terrorist Financing Act of 2006 in Australia, the Patriot Act of 2001 in the United States, and the Financial Intelligence Centre Act 38 of 2001 (FICA) in South Africa, to name a few. These due diligence requirements have spread globally largely because these illegal financial activities often involve more than one country in transactions (e.g., offshore bank accounts to veil criminal money laundering). It has become a global effort to keep business and financial transactions monitored and legal, and these international efforts are still ongoing today.
Just as having a criminal justice system keeps criminals from committing acts for fear of incarceration, having institutions become more transparent, as KYC regulations require, makes these regulated institutions less attractive to those committing financial crimes.
KYC in Relation to Anti-Money Laundering (AML) and Counter Terrorist Financing (CFT)
A criminal engaging in money laundering often use a bank as part of these illegal activities. KYC is a type of protection used to fight against corrupt transactions. Obtaining basic data on customers also allows institutions to compare these customers to lists of individuals who have taken place in corrupt activities or who are on government watch lists. As AML and CFT have become more and more prevalent, and harder to monitor, KYC regulations have increased.
Businesses and financial institutions must now be diligent when gathering customer information and performing due diligence around transaction monitoring. KYC regulations help protect against criminal acts related to identity theft, bribery, money laundering, and terrorist funding, among other illegal transactions. Understanding the laws and guidelines is crucial for any business to properly protect against these crimes.