Top KYC FAQs – Frequently Asked questions for Know Your Customer compliance process

Date: 31 March, 2022
By Pathik Shah

FAQs For KYC Compliance Process

KYC is an often-used term, and there are several questions related to it. KYC is an inherent part of the AML –Anti-money laundering process. It is one of the first customer verification processes used to verify the customer’s credentials. So, let’s get started. Let’s answer the popular KYC FAQs.

What is the complete form of KYC?

KYC is an acronym for ‘Know Your Customer.’ They are mandatory procedures to prevent financial frauds such as money laundering and terrorist financing. It helps banks, financial institutions, and other regulated entities to verify the customers’ identity and identify the risk of being associated with them. It allows the financial and other regulated entities to guard themselves against the perpetrators of financial crime.

What are KYC requirements?

The KYC requirements vary from one country to another. However, some basic KYC requirements are discussed as follows:

For Individuals:

Identify the customers during the onboarding process. It means verifying the individuals' identity and knowing if they are indeed what they claim to be.
Customer due diligence: evaluating the risk of being associated with the person.
Continuous monitoring of the account.

For Businesses:

Verifying the true identity of the business organisation.
Customer due diligence: determining the risk levels of associating with the company.
Continuous monitoring of the business and its accounts.

What are KYC requirements?

As per the AML rules and regulations, it is mandatory to appoint an MLRO- Money Laundering Reporting Officer – a compliance officer who oversees the effective implementation of the KYC and the Anti-money laundering program. The officer is entrusted with the responsibility of the compliance program, and they ensure that the proper procedure is followed and is in sync with the latest updates in the AML rules to avoid non-compliance.

Is KYC mandatory?

KYC is a mandatory compliance process that banks, financial institutions, money transfer services, and other regulated entities must follow to comply with the AML rules and regulations. If they fail to comply, they have to cough up huge fines. The severe penalties act as deterrence for non-compliance.

Who started KYC?

Earlier, when people opened accounts, they would come in person. The verification process was completed using a physical ID check. With the advent of technology, digital channels for opening accounts, and the rise in digital transactions, financial institutions rely on technology to thwart money compliance risks. The risks of money laundering gradually increased as criminals resorted to sophisticated ways of money laundering. The Bank Secrecy Act of 1970 was the first American Anti-Money Laundering law implemented. The BSA ensured that the banks reported suspicious transactions- domestic or international more than $10,000. After 16 years, money laundering was declared a crime by the Money Laundering Control Act after a long wait. The Patriot Act of 2001 made KYC a law. Also, after 9/11, there was a massive demand for stricter implementation to prevent terrorist financing. Finally, the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 was introduced, a section of the Patriot Act. It worked to plug the loopholes in the previous two Acts.

What significance does KYC have today?

After 9/11, the KYC comprises the CIP-Customer Identification Program and the CDD- Customer Due Diligence. The former process requires the verification of the identities of the new customers during the onboarding process by the financial institutions. It is carried out to ensure that the customer and the business are legitimate. The latter refers to maintaining vigilance, evaluating the customer risk with a rating, monitoring the transaction’s volume frequency, and reporting suspicious transactions. These protocols are followed worldwide and have become a norm today, with most countries making it mandatory for their organisations to follow the KYC process. The Patriot Act of 2001 made KYC a law. Also, after 9/11, there was a massive demand for stricter implementation to prevent terrorist financing. Finally, the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 was introduced, a section of the Patriot Act. It worked to plug the loopholes in the previous two Acts.

What is the crucial difference between AML and KYC? Are they the same?

The terms AML and KYC are often used interchangeably and understood as the same thing. But there are some differences between the two processes. But that does not mean both the terms can be used interchangeably. The fact is that financial institutions cannot determine the risk of establishing a business relationship with an individual/ entity without verifying their identity. So, KYC is an essential part of the Anti-Money Laundering compliance framework.

AML compliance has several aspects, such as AML Training, continuous monitoring, and regular reporting of suspicious transactions. AML policy implementation needs the supervision of an MLRO- Money Laundering Reporting Officer.

Read here to know more about the differences between the KYC and AML

What are the main components of KYC?

There are three main components of the KYC process:

Customer Identification: verifying the identity of the customers and knowing if they are who they claim to be.
Customer Due Diligence: Determining the risks of associating with a particular person/business – where their money comes from and how they generate income.
Customer Monitoring: Continuous monitoring of the customers’ accounts and transactions.

Who regulates KYC?

KYC regulations differ from one country to another. Also, the organisation is liable to answer to different regulators depending on the type of industry, nature of business, and location. The FATF- the Financial Task Force has provided a set of recommendations. It is an international organisation that sets standards for AML compliance to prevent money laundering and terrorist financing. The governments of different countries implement laws for AML compliance. Some agencies are appointed to oversee the implementation, provide guidance, and help in avoiding AML non-compliance.

Regional obligations also influence the regulations that some industries/ organisations follow. For example, the rules for gaming and casinos are different, the former does not have an overriding national body, and the latter has to follow state-level regulations.

How to evaluate the AML risk?

The best way is to adopt a risk-based approach to understand the AML risks. The following factors are considered for evaluating the AML risks:

Amount of money in the accounts.
Frequency of the transactions.
Amount of money involved in each transaction.
Participants in the transactions.
Location/ origin of the transactions.

What is the benefit of KYC?

KYC is a mandatory process that is followed worldwide. It helps to identify financial crimes such as money laundering. It identifies fraudulent entities and prevents them from laundering money and running it through legal and financial systems. Preventing the criminals from laundering their illicit money also helps protect the organisation from fraud. By following the KYC compliance process, they can safeguard their reputation and create goodwill in the market.