The Scope of KYC Regulations

KYC is part of a broader framework aimed at preventing money laundering (AML) and combating the financing of terrorism (CTF). Originally focused primarily on financial institutions, KYC regulations have now extended to various sectors, including fintech companies, virtual asset dealers, and even non-profits. Companies of all sizes utilize KYC processes to ensure that their customers, agents, and distributors comply with anti-bribery laws and accurately represent their identities.

KYC Requirements in the US

In the United States, the Financial Industry Regulatory Authority (FINRA) enforces Rule 2090, which mandates that financial institutions employ reasonable diligence to confirm the identity of each customer and any representatives acting on their behalf. This involves gathering essential information through three main components:

Customer Identification Program (CIP): As stipulated by Section 326 the USA Patriot Act, financial institutions must collect four key pieces of information from customers:

• Name
• Date of birth
• Address
• Identification number

Customer Due Diligence (CDD): The Bank Secrecy Act requires institutions to enhance their CDD processes to improve financial transparency and deter illegal activities. Key components of CDD include:

• Verifying customer identities
• Identifying beneficial owners of companies/entities
• Understanding the nature of customer relationships to assess risk
• Conducting ongoing monitoring for suspicious transactions

Enhanced Due Diligence (EDD): For customers identified as high-risk, enhanced due diligence processes are initiated, which may involve deeper investigations into the source of wealth and funds, as well as additional identity verification.

• Verifying the source of wealth or investments
• Conducting additional identity research
• Assessing and identifying additional risk factors

Emerging Concepts: KYCC and eKYC

As the KYC landscape evolves, new concepts have emerged:

Know Your Customer’s Customer (KYCC): This process focuses on identifying the activities of a customer’s clients, assessing associated risks, and addressing potential fraud that may arise from these secondary relationships.

Electronic Know Your Customer (eKYC): The rise of digital technologies has given birth to electronic Know Your Customer (eKYC) processes. These utilize online platforms for identity verification, often involving automated systems that validate provided information against government databases.

Global Perspectives on KYC

KYC regulations vary significantly across countries. Some entities in other countries have challenged KYC regulations in their own courts, while others have adopted similar security provisions.

• Australia: KYC is managed by AUSTRAC, which has set identification requirements since its establishment in 1989.
• Canada: FINTRAC oversees compliance, with updates made to regulations in 2016.
• India: The Reserve Bank of India introduced KYC guidelines for banks in 2002.
• Italy: The Banca d’Italia oversees regulatory functions in the financial sector and established KYC requirements for financial institutions operating within Italy in 2007.
• Japan: The Act on the Identification of Customers by Financial Institutions was enacted in 2003.
• Mexico: The Federal Law for the Prevention and Identification of Operations with Resources from Illicit Origin was introduced during President Felipe Calderón’s administration in 2012 and took effect in 2013 under President Enrique Peña Nieto.

The European Union and KYB

Know Your Business (KYB) extends KYC principles to businesses, ensuring verification of registration, beneficial ownership, and compliance with anti-money laundering regulations. This helps in identifying fraudulent entities and shell companies. Per the EU’s 5th AML directive, KYB is required for the following entities:

• Credit institutions
• Trusts & Estate agents
• External accountants
• Financial institutions
• Gambling services
• Notaries
• Services auditors
• Tax advisors
• Investment firms

Conclusion

KYC processes are essential for ensuring that financial institutions and businesses maintain integrity and compliance with regulatory frameworks. As these regulations continue to evolve, both technology and global collaboration will play vital roles in enhancing the effectiveness of KYC practices. By understanding and implementing robust KYC protocols, organizations can better protect themselves against financial crime and foster a safer business environment.

Still Have Questions?

Follow the practices above to improve client engagement and watch satisfaction rates soar! And check out our other articles for more advice on specific industries and use cases.