The advent of the internet has helped to create the world’s first truly global market place, where businesses and clients, literally from opposite ends of the earth, are able to connect and do business together, in the blink of an eye.

However, with great technology comes great responsibility. In an effort to clamp down on fraud and international crime, governments around the world have put a range of stringent checks and balances in place. These include international Anti-Money Laundering (AML) regulations, Combating the Financing of Terrorism (CFT) and others. A key component of these regulations is known as KYC or Know Your Customer.

What is KYC and How Does it Work?

Know Your Customer is a process of gathering specific bits of information that will help you to know who your customer is more clearly. KYC forms part of broader Customer Due Diligence (CDD) procedures which is a vital process used during any customer onboarding phase.

These processes and procedures are designed to ascertain where the person or entity is from or where they are currently based, the type of business that they conduct, whether or not they are a politically exposed person (PEP) and so forth.

KYC procedures can be found in both real world businesses and services, as well as with online versions of the same. You will also find KYC procedures as part of the process of opening various online accounts, including payment services such as PayPal, online gaming or gambling accounts and many others. Known as CIP or Customer Identification Program in the US, KYC procedures require details such as full name, date of birth, address and an Identification number which can be a passport or drivers license.

This data can then be verified using a number of different Identification Verification or IDV tools, which can include checks against various sanctions listings, electronic or web-based checks, document verification and other tools. In most instances, KYC will be the first phase of the Customer Due Diligence process and, depending on the rating given to the customer, person or entity, more steps or procedures may be necessary as part of a thorough CDD, particularly if the initial assessment puts them in a high-risk category.

Benefits of KYC and Consequences of Poor Customer Due Diligence

There are a number of benefits associated with KYC and proper Customer Due Diligence procedures. For one, KYC helps you to determine whether or not the person or entity you are planning to onboard, is who they say they are. This is especially important when it comes to compliance with international directives pertaining to Anti-Money Laundering activities and/or the funding of international terrorism. It therefore almost goes without saying that failing to complete your KYC procedure, or any other part of Customer Due Diligence, could put you at significant risk. This could even include prosecution, should our client or customer be found to be guilty of money laundering or funding terrorist activities.

Each year, both local and international regulations become more and more stringent. These regulations not only affect the clients that you may yet be onboarding, but pertain to your existing ones too. This is particularly true for those within the broad financial service sector (which can include any website or entity that exchanges money for services or allows money to be placed in onsite accounts such as casinos and the like). Companies are now required to have a much deeper understanding of their clients or business partners, not just as it relates to the identification of possible fraud or money laundering, but also within the context of international regulations such as the Foreign Account Tax Compliance Act, Alternative Investment Fund Managers Directive, Common Reporting Standard and of course, AML.

The consequences of not completing KYC procedures properly (or Customer Due Diligence) can be severe. For instance, if your company is suspected, either at local or international regulatory level, to be remiss in your CDD or KYC obligations, you may be investigated further. The investigative process can be quite a long, disruptive and arduous process. If indeed found to be in breach of compliance in any capacity, your business could be subject to fines, restricted from doing business to some capacity (locally or internationally) and, in extreme cases where evidence of money laundering activities or fraud is found, imprisonment.