Know your customer

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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.

Standards[edit]

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:[citation needed]

  • 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:[citation needed]

  • 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.

Laws by country[edit]

  • Australia: The Australian Transaction Reports and Analysis Centre (AUSTRAC), established in 1989, monitors financial transactions in Australia [1][2] 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. A pending lawsuit is active in Canada challenging the constitutionality of the new legislation.[3]
  • India: The Reserve Bank of India introduced KYC guidelines[4] 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.[5]
  • Japan: Act on identification of customers by financial institutions 2003 [6]
  • South Korea: Act on Reporting and Use of Certain Financial Transaction Information regulates due diligence in the country.[7]
  • 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.[citation needed]
  • 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.{LEY FEDERAL PARA LA PREVENCIÓN E IDENTIFICACIÓN DE OPERACIONES CON RECURSOS DE PROCEDENCIA ILÍCITA
  • Namibia: Financial Intelligence Act, 2012 (Act No. 13 of 2012) published as Government Notice 299 in Gazette 5096 of 14 December 2012.[8]
  • 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 (the latter has an extremely wide meaning).[9]
  • Singapore: Various industries in Singapore are subject to AML/CFT requirements, including requirements promulgated by the Monetary Authority of Singapore applicable to financial institutions.[citation needed]
  • South Africa: The Financial Intelligence Centre Act 38 of 2001 (FICA)[citation needed]
  • 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.[citation needed]
  • 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. The related processes are required to conform to a customer identification program (CIP).[citation needed]

KYCC[edit]

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 (business) is involved in.[10]

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. (a customer's customer).[10]

KYB[edit]

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 (Ultimate Beneficial Owners) of that business, etc. Also, the business is screened against blacklists and grey lists to check if 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.[11]

eKYC[edit]

Electronic know your customer (eKYC) involves the use of internet or digital means of identity verification.[12]

Criticism[edit]

Criticisms of this 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.[13]
  • Customers may feel the information requested to be intrusive and burdensome and may choose not to enter the business relationship as a result.[14]
  • 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.[15]
  • 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 the 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 (Canada) are fighting back against the USA over-reach into their sovereign banking system and have challenged new USA law in their courts.[16]
  • 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.[17]

See also[edit]

References[edit]

  1. ^ "Search results".
  2. ^ "Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1)".
  3. ^ "Lawsuit filed challenging FINTRAC".
  4. ^ "'Know Your Customer (KYC) Guidelines - Anti-Money Laundering Standards". Archived from the original on 2012-08-01.
  5. ^ "Banca d'Italia".
  6. ^ "Law information by The house of representative Japan (In Japanese)".
  7. ^ http://moleg.go.kr/english/korLawEng?pstSeq=57338&pageIndex=12. Missing or empty |title= (help)
  8. ^ "Financial Intelligence Act 2012" (PDF).
  9. ^ "AML CFT 2009".
  10. ^ a b PYMNTS (2018-01-03). "https://www.pymnts.com/news/security-and-risk/2018/trulioo-kyc-due-diligence/". PYMNTS.com. Retrieved 2019-04-24. External link in |title= (help)
  11. ^ "Things you should know about KYC and KYB before compliance published on 30 December 2019".
  12. ^ HIRAOKA, DAIKI; HOTTA, AKAFUMI. "Japan's Toppan beefs up ID security with Taiwan developer purchase". asia.nikkei.com. Nikkei. Retrieved 31 December 2020.
  13. ^ "Patriot Act a Beastly Burden for Small B/Ds". November 2003.
  14. ^ "Know Your Customer (KYC) Will be a Great Thing when It Works".
  15. ^ (PDF) https://www.govinfo.gov/content/pkg/FR-1998-12-07/pdf/98-32333.pdf. Missing or empty |title= (help)
  16. ^ "Alliance for the Defence of Canadian Sovereignty".
  17. ^ "Treasury accused of illegally spying on Americans".