KYC (Know Your Customer) is a term used in the financial sector to describe the process of identifying and verifying a customer’s identity by financial institutions before engaging in business relationships. This standard is mandatory for all companies regulated under anti-money laundering (AML) laws.
The KYC principle is applied globally and affects various financial institutions, including banks, accounting firms, cryptocurrency exchanges, and betting companies. The primary aim of KYC is to prevent financial fraud and money laundering obtained through illegal activities. Previously, compliance with KYC was optional and governed only by internal company policies. However, today KYC requirements and standards are enforced by legislative bodies, international organisations (such as the FATF), and banking regulators.
As part of KYC implementation, companies use specific questionnaires to streamline the customer identification process and help meet anti-money laundering requirements.
Why is the application of the KYC principle necessary?
The KYC principle is important because financial institutions must gather detailed information about a customer before conducting a transaction. The customer is required to provide documents such as a passport, driver’s licence, phone number, proof of address, and bank account details.
For money transfers or receiving funds, institutions may request proof of the legality of the source of funds and an explanation of the transaction’s purpose.
KYC is part of the anti-money laundering (AML) policy. Adhering to AML and KYC requirements helps companies minimise risks and ensures the protection of financial service users.
The application of the KYC principle enables a company to create a “customer profile,” which helps assess the risk of the customer’s involvement in illegal activities and determine the transparency of their transactions. Based on this profile, the security department decides whether to continue the business relationship. The customer profile may be updated and adjusted as the relationship with the customer develops.
