What is Know Your Customer (KYC)?
Although the phrase “know your customer” may seem insignificant to most people, it has a very important meaning in the business world. The process of knowing your customer, otherwise referred to as KYC, is what businesses do in order to verify the identity of their clients either before or during the time that they start doing business with them. The term KYC can also reference the regulated bank practices that are similarly used to verify clients’ identities.
Banks and companies of all sizes have become big supporters of KYC. It is increasingly common for banking institutions, credit companies, and insurance agencies to require that their customers provide them with detailed information in order to ensure that they are not involved with corruption, bribery, or money laundering.
KYC policies have been expanding for some time and they have become very important globally. With issues pertaining to corruption, terrorist financing, and money laundering becoming so prevalent, KYC policies have now evolved into an important tool to combat illegal transactions in the international finance field. KYC allows companies to protect themselves by ensuring that they are doing business legally and with legitimate entities, and it also protects the individuals who might otherwise be harmed by financial crime.
Many financial institutions begin their KYC procedures by simply collecting basic data and information about their customers, ideally using electronic identity verification. Some countries call this a “Customer Identification Program”. Pieces of information such as names, social security numbers, birthdays, and addresses can be very useful when determining whether or not an individual is involved in a financial crime.
Once this basic data is collected, banks generally compare it to lists of individuals that are known for corruption, on a list of sanctions, suspected of being involved with a crime, or at a high risk of partaking in bribery or money laundering. Financial institutions also look at lists of Politically Exposed Persons, or PEPs.
From there, the bank then quantifies how much of a risk their client appears to be and how likely they are to become involved in corrupt or illegal activity. Once this calculation has been made, the bank can make a theoretical outline of what that client’s account should look like in the near future. Once the expected trajectory of the account is in place, the bank can then consistently monitor the client’s account activity and make sure that nothing appears to be out of place or suspicious.
Doing this for one individual also enables financial institutions to compare that client’s profile to those of his or her peers. If a bank has two clients that have very similar occupations and backgrounds, and they are known for interacting in their respective field, it is assumed that their accounts will look rather similar.
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