Know your customer

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Know your customer (KYC) guidelines and regulations in financial services require professionals to verify the identity, suitability, and risks involved with maintaining a business relationship with a customer. The procedures fit within the broader scope of anti-money laundering (AML) and counter terrorism financing (CTF) regulations.

Contents

KYC processes are also employed by companies of all sizes for the purpose of ensuring their proposed customers, agents, consultants, or distributors are anti-bribery compliant and are actually who they claim to be. Banks, insurers, export creditors, and other financial institutions are increasingly required to make sure that customers provide detailed due-diligence information. Initially, these regulations were imposed only on the financial institutions, but now the non-financial industry, fintech, virtual assets dealers, and even non-profit organizations are included in regulations in many countries.

Know your customer requirements

In the United States, the Financial Industry Regulatory Authority (FINRA) Rule 2090 states that financial institutions must use reasonable diligence to identify and retain the identity of every customer and every person acting on behalf of those customers. [1] In enforcing this rule these organizations are expected to collect all information essential to knowing their customers. Information deemed necessary for enforcing Know Your Customer Requirements include the Customer Identification Program (CIP), Customer Due Diligence (CDD), and Enhanced Due Diligence (EDD). [2]

Customer Identification Program

Section 326 of the USA Patriot Act requires banks and other financial institutions to have a Customer Identification Program (CIP). Financial institutions must collect four pieces of identifying information about its customers including:

Customer due diligence

The Bank Secrecy Act, the common name for the Currency and Foreign Transaction Reporting Act of 1970 and its amendments and other statutes, established the customer due diligence (CDD) rule as part of an effort to improve financial transparency and deter money laundering. The CDD rule enhances CDD requirements for "U.S. banks, mutual funds, brokers or dealers in securities, futures commission merchants, and introducing brokers in commodities. [3] " The CDD rule requires that financial institutions identify and verify the identity of customers associated with open accounts. The CDD rule has four core requirements: [3]

  1. Identify and verify the identity of customers
  2. Identify and verify the identity of the beneficial owners of companies opening accounts
  3. understand the nature and purpose of customer relationships to develop customer risk profiles
  4. conduct ongoing monitoring to identify and report suspicious transactions, and on a risk basis, to maintain and update customer information

Beneficial owner information is required for any individual who owns 25 percent or more of a legal entity and an individual who controls the legal entity. [3]

Enhanced due diligence

Enhanced due diligence [4] is required when initial identity checks have been completed and high-risk factors have been identified for an individual or a business. When these requirements have been met "enhanced" or additional due diligence above and beyond CDD is conducted which identifies the following information: [4]

Know your customer's customer (KYCC)

KYCC or know your customer's customer is a process that identifies a customer's customer activities and nature. This includes the identification of the customer's customers and assessing the risk levels associated with their activities. [5]

KYCC is a derivative of the standard KYC process that arose because of the growing risk of fraud obscured by second-tier business relationships (e.g. a customer's supplier). [5]

Know your business (KYB)

Know your business or simply KYB is an extension of KYC laws implemented to reduce money laundering. KYB is a set of practices to verify a business. It includes verification of registration credentials, location, the UBOs (ultimate beneficial owners) of that business, etc. Also, the business is screened against blacklists and grey lists to check if it was involved in any sort of criminal activity such as money laundering, terrorist financing, corruption, etc. KYB is significant in identifying fake business entities and shell companies. It is crucial for efficient KYC and AML compliance.

According to the European Union's 5th AML directive, [6] KYB is required for the following AML-regulated entities:

Electronic know your customer (eKYC)

Electronic know your customer (eKYC) involves the use of internet or digital means of identity verification. [7] This may involve checking information provided is valid by using systems to validate ID and proof of address documents or by checking information against government databases such as the official passport database of a country. [8]

Laws by country

Criticism

Criticisms of this policy include:

See also

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<span class="mw-page-title-main">Bank Secrecy Act</span> 1970 act of the United States Congress

The Bank Secrecy Act of 1970 (BSA), also known as the Currency and Foreign Transactions Reporting Act, is a U.S. law requiring financial institutions in the United States to assist U.S. government agencies in detecting and preventing money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, file reports if the daily aggregate exceeds $10,000, and report suspicious activity that may signify money laundering, tax evasion, or other criminal activities.

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A Customer Identification Program (CIP) is a United States requirement, where financial institutions need to verify the identity of individuals wishing to conduct financial transactions with them and is a provision of the USA Patriot Act. More commonly known as know your customer, the CIP requirement was implemented by regulations in 2003 which require US financial institutions to develop a CIP proportionate to the size and type of its business. The CIP must be incorporated into the bank's Bank Secrecy Act/Anti-money laundering compliance program, which is subject to approval by the financial institution's board of directors.

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References

  1. ↑ "2090. Know Your Customer | FINRA.org". www.finra.org. Archived from the original on 2024-09-03. Retrieved 2024-02-03.
  2. ↑ "Know Your Client (KYC): What It Means, Compliance Requirements". Investopedia. Archived from the original on 2024-02-05. Retrieved 2024-02-03.
  3. 1 2 3 "Information on Complying with the Customer Due Diligence (CDD) Final Rule". fincin.gov. February 3, 2024. Archived from the original on February 3, 2024. Retrieved February 3, 2024.
  4. 1 2 "What is Enhanced Due Diligence (EDD)?". Dow Jones Professional. Archived from the original on 2024-02-03. Retrieved 2024-02-03.
  5. 1 2 PYMNTS (2018-01-03). "Businesses Can't Just KYC, They Must Also KYCC". PYMNTS.com. Archived from the original on 2019-04-24. Retrieved 2019-04-24.
  6. ↑ "Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC (Text with EEA relevance)". data.europa.eu. Jun 5, 2015. Archived from the original on July 23, 2015. Retrieved Oct 21, 2022.
  7. ↑ HIRAOKA, DAIKI; HOTTA, AKAFUMI. "Japan's Toppan beefs up ID security with Taiwan developer purchase". asia.nikkei.com. Archived from the original on 31 December 2020. Retrieved 31 December 2020.
  8. ↑ "Stolen and Lost Travel Documents database". www.interpol.int. Archived from the original on 2023-09-26. Retrieved 2023-09-15.
  9. ↑ "Search results". www.legislation.gov.au. Archived from the original on 2024-09-03. Retrieved 2017-03-07.
  10. ↑ "Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1)". www.legislation.gov.au. 7 December 2016. Archived from the original on 3 September 2024. Retrieved 7 March 2017.
  11. ↑ "Canadian citizens' challenge to FATCA enforcement will be further appealed | STEP". www.step.org. Archived from the original on 2021-09-30. Retrieved 2021-09-30.
  12. ↑ "'Know Your Customer (KYC) Guidelines - Anti-Money Laundering Standards". Archived from the original on 2012-08-01.
  13. ↑ d'Italia, Banca. "Banca d'Italia - Provvedimento recante disposizioni attuative in materia di adeguata verifica della clientela". www.bancaditalia.it. Archived from the original on 2016-11-18. Retrieved 2016-09-12.
  14. ↑ "金融機関等による顧客等の本人確認等に関する法律". www.shugiin.go.jp. Archived from the original on 2021-09-30. Retrieved 2021-09-30.
  15. ↑ "LEY FEDERAL PARA LA PREVENCIÓN E IDENTIFICACIÓN DE OPERACIONES CON RECURSOS DE PROCEDENCIA ILÍCITA" (PDF). www.diputados.gob.mx (in Spanish). Archived from the original (PDF) on March 21, 2021. Retrieved Oct 21, 2022.
  16. ↑ "Financial Intelligence Act 2012" (PDF). www.fic.na. Archived (PDF) from the original on November 8, 2022. Retrieved Oct 21, 2022.
  17. ↑ "Anti-Money Laundering and Countering Financing of Terrorism Act 2009 No 35 (as at 11 May 2021), Public Act Contents – New Zealand Legislation". legislation.govt.nz. Archived from the original on 30 September 2021. Retrieved 30 September 2021.
  18. ↑ http://moleg.go.kr/english/korLawEng?pstSeq=57338&pageIndex=12 [ bare URL ]
  19. ↑ "Money Laundering Regulations 2017". www.gov.uk. 15 March 2017. Archived from the original on 3 December 2022. Retrieved Oct 21, 2022.
  20. ↑ Gill, M. (2004-07-01). "Preventing Money Laundering or Obstructing Business?: Financial Companies' Perspectives on 'Know Your Customer' Procedures". British Journal of Criminology. 44 (4): 582–594. doi:10.1093/bjc/azh019. ISSN   0007-0955. Archived from the original on 2024-09-03. Retrieved 2021-09-19.
  21. ↑ Leitch, Will (1 November 2003). "Patriot Act a Beastly Burden for Small B/Ds". www.wealthmanagement.com. Archived from the original on 24 May 2019. Retrieved 24 May 2019.
  22. ↑ Pasley, Robert S. (2002). "Privacy Rights v. Anti-Money Laundering Enforcement". North Carolina Banking Institute. 6 (1): 147.
  23. ↑ Proposed Rules Archived 2019-05-24 at the Wayback Machine Federal Register December 7, 1998
  24. ↑ "ADCS | Alliance for the Defence of Canadian Sovereignty". www.adcs-adsc.ca. Archived from the original on 2024-01-18. Retrieved 2021-09-30.
  25. ↑ Leopold, Jason; Garrison, Jessica (6 October 2017). "US Intelligence Unit Accused Of "Domestic Spying" On Americans' Finances". BuzzFeed News. Archived from the original on 24 May 2019. Retrieved 24 May 2019.
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