Know Your Customer
KYC is is the process of a business verifying the identity of its clients and assessing the
potential risks of illegal intentions for the business relationship.
In simple terms, Know Your Customer (KYC) is about demonstrating Customer Due
Diligence (CDD), i.e. verifying the identity of a customer. Banks and other financial
companies verify clients’ information to ascertain that it is safe to establish relationships
with them.
Know Your Client (KYC) is a standard in the investment industry that
ensures advisors can verify a client's identity and know their client's investment
knowledge and financial profile.
Know Your Client (KYC) are standards used in the investment and financial
services industry to verify customers and know their risk and financial profiles.
The SEC requires that each new customer provide detailed financial information before
opening an investment or banking account.
Three components of KYC
customer identification program (CIP), imposed under the USA Patriot Act in 2001,
customer due diligence (CDD)
ongoing monitoring or enhanced due diligence (EDD) of a customer's account
KYC Requirements
Customer Identification Program
CIP requires that financial firms must obtain four pieces of identifying information
about a client, including name, date of birth, address, and identification
number.
Customer Due Diligence
CDD is a process in which all of a customer’s credentials are collected to verify their identity
and evaluate their risk profile for suspicious account activity.CDD refers to a set of KYC
processes designed to assess customer risk. While regulations can vary by country, most follow
Financial Action Task Force (FATF) recommendations.
Identify and verify all customers or clients
Identify and verify all beneficial owners of companies you want to do business with.
Understand the nature and purpose of customer relationships to develop customer risk
profiles
Conduct continuous monitoring of customer activity and transactions to identify and
report suspicious activity
Enhanced Due Diligence
EDD is used for customers that are at a higher risk of infiltration, terrorism
financing, or money laundering and additional information collection is often
necessary.
Enhanced due diligence (EDD) refers to protocols that are followed when an individual or
transaction is deemed to carry a higher risk of money laundering or other financial crime. In these
cases, businesses are required to conduct an additional layer of verification.
Is a politically exposed person (PEP)
Has been linked to financial crime in the past
Is the subject of adverse media
Has a high net worth or is a celebrity/public figure
Works in an industry with a high risk of money laundering, such as gambling
Is on a sanctions list, or is tied to a company or country with sanctions lobbied against them
Is located in a high-risk country
CDD vs EDD
CDD and EDD are types of KYC processes. CDD involves identifying the customer by checking
provided data against databases. This is typically required at account opening and to enable high-
risk transactions.
If a customer is judged to be low risk, they might also only be subject to simplified customer due
diligence, where the only requirement is to identify the customer, but not verify their identity.
EDD is required as an additional type of step-up KYC process for customers who are deemed to
be high-risk. A customer may be deemed high-risk due to their location, profession or political
exposure. The requirements for completing EDD vary based on local regulation, but it is
commonly required if entering into a business relationship with a politically exposed person
(PEP), if the transaction involves a person from a high-risk or sanctioned country, or any other
situation where there is increased risk of money laundering.
KYC Process Work
Regardless of which terminology you use, a typical KYC process includes:
Verifying the customer’s identity to prevent fraud
Screening the customer against prohibited lists
Assessing the customer’s risk profile to determine if they’re higher risk
Ongoing monitoring to make sure their risk hasn’t changed
The KYC process overlaps heavily with the AML compliance program, as described in the next
section.
