There are just shy of 4800 FDIC-insured banks in the U.S., and just over 5000 credit unions. That means that Americans have access to around 9800 commercial and retail financial institutions.
Most industries experience some level of regulation, if for no other reason than to protect public and employee safety. Over the last two decades, however, financial institutions have fallen under increasing regulations, specifically to prevent money laundering, terror financing, and other financial crimes.
A key component of this is KYC compliance or know your customer compliance. Not familiar with KYC? Keep reading for an overview of know your customer and maintaining compliance.
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What Is Know Your Customer?
Broadly speaking, know your customer refers to a set of processes that financial institutions use to verify a customer’s identity when they set up an account. In other words, it’s on the bank to make sure that they don’t let someone open an account with someone else’s identity.
Beyond that, the bank must also re-verify the customer’s identity periodically.
KYC Procedures
Banks and credit unions can use a wide variety of procedures for know your customer compliance. These procedures fall into three general categories: identity, due diligence, and enhanced due diligence.
Identity
Banks and credit unions may ask for a variety of things to verify potential customer identities. Some common things banks ask for include:
- ID card verification
- Facial verification
- Document verification
These different element help banks establish who someone is, as well as where they live, and their date of birth.
Due Diligence
While gathering documents and comparing faces with IDs goes a long way toward establishing who someone is, it doesn’t do much to help banks assess risk. That’s where the due diligence element comes into play.
With due diligence, the bank uses the information it gathers to determine if someone has a high risk of engaging in financial crimes or helping to fund terrorism.
For almost everyone who tries to open an account, the process ends here.
Enhanced Due Diligence
If the bank finds information or evidence that someone is a high risk for financial crimes or funding terrorism, they take things up a notch to enhanced due diligence. That typically means asking the potential customer for additional information.
What Is KYC Compliance?
KYC compliance can prove a complex matter. It can prove even more complex if a bank operates in more than one country.
United States
U.S. banks, credit unions, and even brokers face several KYC regulations.
For example, brokers have a specific know your customer rule that they must follow, Rule 2090. In addition, they must also follow Rule 2111, which essentially means that brokers must understand their clients’ needs and financial situations and make suitable recommendations.
Banks must follow FinCEN rules and regulations that detail KYC processes, such as developing risk assessment profiles. The banks must then use those profiles as a way of picking out suspicious financial transactions.
Outside the U.S.
Many countries besides the U.S. have passed KYC laws related to international money laundering and terror financing. Some of the other nations with specific KYC laws and regulations include:
- Australia
- France
- United Kingdon
- Canada
- India
For financial institutions that operate internationally, they must comply with the rules and regulations not only of their home nation but of the other nations where they operate.
Achieving compliance typically requires implementing procedures for all new customers that ensure identity verification and due diligence for risk assessment. Beyond the U.S. borders, banks and other financial businesses should consult with local legal experts and authorities.
Biometrics
Even before the pandemic, a trend toward online banking and banking through phone apps was well underway. The pandemic pushed the adoption of that trend even further.
Customers didn’t want to go anywhere that involved interacting with other people, particularly in places where they might end up waiting in lines for long periods of time.
Converting over to online account opening creates challenges for KYC. How do you compare the picture on a digital reproduction of a government ID to a face if the person opens the account online?
Some banks adopted biometric measures, such as asking for a selfie during the application process and running it through a liveness detection system. Procedures like that will likely become increasingly commonplace as more and more banking moves online.
Non-Compliance Penalties
Non-compliance with KYC and related regulations is no joke. Banks and other financial businesses face massive fines for non-compliance. 2020 alone saw financial institutions across the globe fined around $10.6 billion for violations of KYC and anti-money laundering regulations.
KYC in Non-Finance Industries
While KYC primarily applies to banking in the U.S., it’s the only industry where some level of know your customer makes sense. Take online-only businesses like online retailers.
While they likely won’t participate knowingly in money laundering or terror financing, they also want to avoid fraud. For example, they don’t want people opening up accounts with stolen identities.
Other businesses where KYC procedures make sense include:
- Real estate
- Healthcare
- Fintech
- Legal
- Gaming
While these businesses may not want the challenges of asking for a government ID and supporting documentation, they may want to do things like verify that a person’s identity matches a provided phone number.
Businesses can turn to third-party services to verify and authenticate customers globally.
KYC Compliance and You
KYC compliance is primarily a problem for banking institutions, rather than most retail and commercial businesses. It may also apply to stock brokers and dealers as well.
These businesses must follow strict guidelines for identity verification and risk assessment profiles.
Even so, retail and commercial businesses can take a cue from banking in doing some identity verification when someone opens an account.
If nothing else, it can help businesses avoid fraud related to identity theft.
Looking for more tips on staying on the right side of the law. Check out the posts in our Business and Law sections.