Before the emergence of specific Know Your Customer (KYC) regulations, KYC practices were mainly targeted at companies that were at high risk of money laundering. However, after the attack of 9-11, the situation drastically changed. In the United States, Know Your Customer regulations were introduced in 2001 in the Patriot Act. Its introduction had become mandatory following a wide increase of legal and financial crimes. With Know Your Customer regulations being enforced on companies, it proved to be a disincentive for criminals and fraudsters. 

By the end of this blog, you will gain a clear understanding of the KYC process and what the global regulations regarding it look like. 

What is KYC?

KYC procedures involve the identity verification methods of customers to perform an in-depth risk assessment. This procedure is considered a key part of the CDD (Customer Due Diligence) process which is crucial for fraud prevention. A firm’s KYC process is implemented based on national and global Know Your Customer regulations to avoid non-compliance fines. 

What is KYC Compliance?

KYC compliance requires financial institutions to follow Know Your Customer regulations that are devised by global regulatory authorities. Let’s take the example of a bank

To stay compliant with Know Your Customer regulations, banks perform identity verification during the initial stage of customer onboarding, this requires customers to submit an ID document along with a corroborating selfie. The selfie is used to verify the image present on the document provided. Once the customer has been verified this way, the firm is able to analyze the amount of risk associated with each person. 

It should also be noted that KYC processes fall under AML (Anti-money Laundering) procedures. With AML/KYC compliance, firms can effortlessly mitigate the risk of fraud. 

Worldwide Know Your Customer Regulations 

Every state has its own set of rules and regulations regarding KYC and AML procedures. This is because every jurisdiction has its own kind of government-issued cards which are analyzed during the verification process. Industries such as e-gaming, gambling/online casinos, healthcare, education, and finance have devoted business departments to ensure compliance. That being said, let’s take a look at some KYC regulations that are being followed across the globe:

  1. Global Regulator: The FATF

The Financial Action Task Force is an intergovernmental regulatory authority that comprises 39 member jurisdictions. The organization is responsible for setting global standards for KYC and AML procedures which are introduced under AML and CTF guidelines. Based on the 40 Recommendations by the FATF, the following procedures are mandatory for every financial institution:

  • Know Your Customer processes

  • Risk-based approach 

  • AML screening 

  • Due diligence during customer onboarding 

  1. KYC Regulations in the US

In the U.S., the FinCEN (Financial Crime Enforcement Network) is responsible for setting KYC and AML standards. Under its framework, the following procedures are compulsory for businesses:

  • KYC verification is obligatory prior to customer onboarding 

  • Customers have to be anointed with a risk rating 

  • Enhanced Due Diligence must be implemented on high-risk clients

  • Non-compliance to Know Your Customer regulations can lead to heavy penalties and penalties

  1. KYC Regulations in the UK

In the aftermath of Brexit, UK-based firms are complying with the Sanctions and Money Laundering Act of 2018. Under this law, the UK is set to follow the UN’s sanction list to meet the objectives of international policy and national security. All businesses are strictly advised to devise and maintain updated AML and CTF (Counter Financing of Terrorism) measures. Additionally, all businesses are also liable to perform CDD checks on every customer that enters the system to stay in compliance with international standards. 

  1. KYC Regulations in the EU

EU-based firms are complying with the 6AMLD, abbreviated for the sixth anti-money laundering directive. Listed below are the major points included in the 6AMLD:

  • The directive points out and defines 22 offenses related to money laundering 

  • The transaction threshold for the member states of the EU has been lowered

  • Criminal penalties have become more severe

  • Economic sanctions have been leveled up to 5 million

  • The directive also places a spotlight on RegTech companies

  1. KYC Regulations in Australia 

After the pandemic struck, the Australian Transactions Reports and Analysis Center (or AUSTRAC for short) updated its AML and Know Your Customer. The amended regulations include stricter guidelines regarding the implementation of customer identity verification, anti-money laundering screening, and the verification of customers against Politically Exposed Person (PEP) lists. On top of this, it also encourages companies to adopt a risk-based approach for maximum fraud prevention. 

Key Takeaways

  • A firm’s KYC process is implemented based on national and global Know Your Customer regulations

  • With AML/KYC compliance, firms can effortlessly mitigate the risk of fraud

  • Some common features present in the KYC process include customer identity verification, screening against global watch-lists to minimize money laundering risks and the performance of CDD procedures