Know Your Customer (KYC) procedures are a critical function to assess customer risk and a legal requirement to comply with Anti-Money Laundering (AML) laws. Effective KYC involves knowing a customers identity, their financial activities and the risk they pose.
Do you know your customer? At any rate, you ought to. If you’re a financial institution (FI), you could face possible fines, sanctions, and reputational damage, if you do business with a money launderer or terrorist. More importantly, KYC is a fundamental practice to protect your organization from fraud and losses resulting from illegal funds and transactions.
“KYC” refers to the steps taken by a financial institution (or business) to:
- Establish customer identity
- Understand the nature of the customer’s activities (primary goal is to satisfy that the source of the customer’s funds is legitimate)
- Assess money laundering risks associated with that customer for purposes of monitoring the customer’s activities
To create and run an effective KYC program requires the following elements:
-Customer identification program: How do you know someone is who they say they are? After all, identity theft is widespread, affecting over 16.7 million US consumers and accounting for 16.8 billion dollars stolen in 2017. For obliged entities, such as financial institutions, it’s more than a financial risk – it’s the law.
-Customer due diligence: For any financial institution, one of the first analysis made is to determine if you can trust a potential client. You need to make sure a potential customer is trustworthy; customer due diligence (CDD) is a critical element of effectively managing your risks and protecting yourself against criminals, terrorists, and Politically Exposed Persons (PEPs) who might present a risk.
-Ongoing Monitoring: It’s not enough to just check your customer once, you need to have a program to monitor your customer on an ongoing basis. The ongoing monitoring function includes oversight of financial transactions and accounts based on thresholds developed as part of a customer’s risk profile.