Know Your Customer (KYC) refers to the process institutions use to verify the identities of their customers and ascertain what fraud risks they may pose. The premise is that knowing your customers — performing identity verification, reviewing their financial activities, and assessing their risk factors — can keep money laundering, terrorism financing and other types of illicit financial activities in check.
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The U.S. Treasury has had legislation in place for decades directing financial institutions to assist the government in detecting and preventing money laundering. In an evolution of these regulations, KYC processes were introduced in 2001 as part of the Patriot Act. They were further strengthened in 2016 by the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) rulings around customer due diligence (CDD).
Globally, the European Union’s (EU) General Data Protection Regulation (GDPR) regulations took effect in May 2018. GDPR significantly restricts how institutions acquire and manage customer data. These regulations, along with the EU’s Second Payment Services Directive (PSD2), create additional hurdles for organizations in meeting anti-money laundering (AML) and CDD procedures within the KYC compliance framework.
The ultimate aim of KYC is to confirm, with a high level of assurance, that customers are who they say they are and that they are not likely to be engaged in criminal activity. KYC is mandated for some organizations — primarily financial institutions — but for other businesses that voluntarily implement KYC procedures, it’s an important signal that the business is trustworthy and cares about protecting its customers.