Know Your Customer

The know your customer or know your client (KYC) guidelines in financial services require 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 (AML) 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 non-profit organizations are liable to oblige. 

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 :

• Customer acceptance policy;

• Customer identification procedures;

• Monitoring of transactions; and

• Risk management.

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(i.e. the beneficial owner);

• 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 that 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.

What is e-KYC ?

eKYC, or Electronic Know Your Customer, is a digital process used to verify the identity of clients. It replaces traditional paper-based methods with digital verification, allowing organizations to remotely confirm individual identities. This process is faster, more efficient, and often more secure than manual verification.

eKYC is particularly important in sectors like finance and fintech, where it helps organizations comply with regulatory requirements, reduce fraud risks, and streamline customer onboarding. It involves collecting and verifying personal information such as name, address, and identification documents through digital means.

Laws by Country

• Australia : The Australian Transaction Reports and Analysis Centre(AUSTRAC), established in 1989, monitors financial transactions in Australia and sets client identification requirements.

• Canada : The Financial Transactions and Reports Analysis Centre of Canada(FINTRAC), established in 2000, is Canada's financial intelligence unit. It updated its regulations in June 2016 regarding acceptable methods to determine the identity of individual clients to ensure compliance with AML and KYC regulations.

• India : The Reserve Bank of India introduced KYC guidelines for banks in 2002.

• 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 (AML) 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's administration and came into force in 2013 with the president Enrique Peña Nieto administration.

• Namibia : Financial Intelligence Act, 2012(Act No. 13 of 2012) published as Government Notice 299 in Gazette 5096 of 14 December 2012.

• New Zealand : Updated KYC laws were enacted in late 2009 and entered into force in 2010. KYC is mandatory for all registered banks and financial institutions.

• Singapore : Various industries in Singapore are subject to AML/CFT requirements, including requirements promulgated by the Monetary Authority of Singapore applicable to financial institutions.

• South Africa : The Financial Intelligence Centre Act 38 of 2001(FICA).

• United Kingdom : The Money Laundering Regulations 2017 are the underlying rules that govern KYC in the UK. Many UK businesses use the guidance provided by the European Joint Money Laundering Steering Group along with the Financial Conduct Authority's 'Financial Crime: A guide for firms' as an aid to compliance.

• United States : Pursuant to the USA Patriot Act of 2001, the Secretary of the Treasury was required to finalize regulations before October 26, 2002 making KYC mandatory for all US banks.