The know your customer or know your client guidelines in financial services requires that professionals make an effort to verify the identity, suitability, and risks involved with maintaining a business relationship. The procedures fit within the broader scope of a bank's Anti-Money Laundering policy. 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 demanding 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 the non-profit organizations are liable to oblige.
Standards
The objective of KYC guidelines is to prevent businesses from being used by criminal elements for money laundering. Related procedures also enable businesses to better understand their customers and their financial dealings. This helps them manage their risks in a well-judged manner. Today, KYC principles apply to banks as well as different online businesses. They usually frame their KYC policies incorporating the following four key elements:
The stringent regulatory environment establishes KYC as a mandatory and crucial procedure for financial institutions as well as non-financial institutions. As it minimizes the risk of fraud, by identifying suspicious elements earlier on in the client-business relationship. For the purposes of a KYC policy, a customer/user may be defined as:
a person or entity that maintains an account or has a business relationship with the reporting entity;
one on whose behalf the account is maintained ;
beneficiaries of transactions conducted by professional intermediaries such as stockbrokers, Chartered Accountants, or solicitors, as permitted under the law; or
any person or entity connected with a financial transaction which can pose significant reputational or other risks to the bank, for example, a wire transfer or issue of a high-value demand draft as a single transaction.
Italy: The Banca d'Italia exercises regulation power for the financial industry, in 2007 set KYC requirements for financial institutions that operate on Italian territory.
Japan: Act on identification of customers by financial institutions 2003
South Korea: Act on Reporting and Use of Certain Financial Transaction Information regulates due diligence in the country.
Luxembourg: KYC is governed in the Anti-Money Laundering laws and regulations, which became effective in 1993 and were amended for the last time in 2015.
Mexico: The "Federal Law for Prevention and Identification of Operations with Resources from Illicit Origin", promulgated in 2012 with president Felipe Calderon administration and came into force in 2013 with the president Enrique Peña Nieto administration.
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 those people, assessing their associated risk levels and associated activities the customer's customer is involved in. KYCC is a derivative of the standard KYC process, that was necessitated from the growing risk of fraud originating from fraudulent individuals or companies, that might otherwise be hiding in second-tier business relationships. i.e..
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 of that business, etc. Also, the business is screened against blacklists and grey lists to check that 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.
Controversies
Controversies over this legislation/regulation/policy include:
Know your customer places a costly burden on businesses operating in the financial industry, especially smaller financial companies where compliance costs are disproportionately heavy.
Customers may feel the information requested to be intrusive and burdensome and may choose not to enter the business relationship as a result.
Innocent, law abiding individuals such as digital nomads are very likely disproportionately disadvantaged as living a nomadic life makes it increasingly difficult or even impossible to hold any formal banking relationship anyplace in the world due to lack of proof of address, bills, and/or debt documentation required by KYC.
Retired people who travel within their own country without having a permanent fixed address may also be disproportionately disadvantaged for the same reason.
Jurisdictions across the Americas, EMEA, and Asia Pacific indicated that all of these jurisdictions permit a form of reliance on customer information provided by third parties. In many instances this data is incorrect, potential bank customers may be unaware of the error and there is no grievance procedure to correct or sanction the bad data provider.
Some citizens in other countries are fighting back against USA over-reach into their sovereign banking system and have challenged new USA law in their courts.
The intelligence division at the Treasury Department has repeatedly and systematically violated domestic surveillance laws by snooping on the private financial records of US citizens and companies, according to government sources.
