- “Know Your Customer” (KYC) refers to the processes and regulations by which financial (and other) institutions verify the identity of their customers, understand their risk, and monitor their activities.
- The goal is to prevent criminals from using services for money-laundering, financing terrorism, fraudulent trading, etc.
- In the U.S., for example, key regulatory frameworks include the Bank Secrecy Act (1970) and the USA PATRIOT Act (2001) (which amended the BSA) to include identification and monitoring obligations.
Why is KYC important?
- Without effective KYC, institutions may inadvertently facilitate financial crime—thus exposing themselves to regulatory penalties, reputational damage and financial losses.
- KYC also supports trust in the system: by verifying who is on the other side of a transaction, institutions can make better risk judgments (e.g., assessing a customer’s behaviour or source of funds).
Key components of KYC and verification
Typical KYC elements:
- Customer Identification Program (CIP): verifying legal name, date of birth, address, identification number, etc.
- Customer Due Diligence (CDD): assessing the nature of the customer relationship, beneficial ownership, risk profile.
- Enhanced Due Diligence (EDD): for higher-risk customers, additional scrutiny (source of wealth, ownership structure, more frequent monitoring).
- Ongoing monitoring: KYC is not a one-time onboarding check: customer information and behaviour must be reviewed on a continuing basis.
Common types of KYC-fraud
Some common fraud risks:
- Identity theft / synthetic identities: Fraudsters create or steal identities to open accounts and conduct illicit activity. For example, in 2021, ~$24 billion was stolen in identity-theft affecting ~15 million U.S. consumers.
- Money-laundering and illicit funds: Without robust KYC and monitoring, illicit actors can channel illegal funds, hide origins, or use shell entities.
- Account takeover and transaction misuse: Even once a customer has been verified, weak monitoring can allow misuse of accounts for fraudulent transactions or layering schemes.
Technology, cost and challenges
- Implementing KYC programs can be very expensive; a major financial institution could incur up to ~$500 million annually for full implementation.
- Technology (identity-verification software, biometric checks, digital onboarding, etc) is increasingly vital — t technology needs to support both compliance and fraud risk management.
- A key challenge: There’s often a gap between compliance (i.e., “we have documented KYC procedures”) and actual fraud prevention — processes may satisfy regulators but still leave vulnerabilities.
Learn how our Identity Gateway can provide more insights into your customers and prospects while also preventing fraud. Contact us today for more information!