KYC (Know Your Customer)
Quick Definition
Regulatory requirement for financial institutions to verify the identity and assess the risk profile of their clients before and during business relationships.
Key Takeaways
- Requires financial institutions to verify client identity and assess risk
- Three levels: Customer Identification, Due Diligence, and Enhanced Due Diligence
- Mandated by the Bank Secrecy Act and USA PATRIOT Act
- Helps prevent money laundering, terrorist financing, and fraud
- Higher-risk clients require more rigorous verification procedures
What Is KYC (Know Your Customer)?
Know Your Customer (KYC) is a set of regulatory requirements and procedures that financial institutions must follow to verify the identity of their clients, understand the nature of their activities, and assess the risk of illegal intentions such as money laundering or terrorist financing. KYC involves three key components: Customer Identification Program (CIP) to verify identity using government-issued documents, Customer Due Diligence (CDD) to understand the customer's risk profile and expected transaction patterns, and Enhanced Due Diligence (EDD) for higher-risk customers such as politically exposed persons (PEPs). KYC requirements are mandated by the Bank Secrecy Act, the USA PATRIOT Act, and international standards set by the Financial Action Task Force (FATF).
KYC (Know Your Customer) Example
- 1When opening a brokerage account, the firm's KYC process requires submitting a government-issued ID, Social Security number, and proof of address.
- 2A bank's Enhanced Due Diligence procedures flagged a new client as a politically exposed person, triggering additional scrutiny of the account's transaction patterns.
Related Terms
Anti-Money Laundering (AML)
Laws, regulations, and procedures designed to prevent criminals from disguising illegally obtained funds as legitimate income.
FATCA
U.S. law requiring foreign financial institutions to report information about accounts held by American taxpayers to combat offshore tax evasion.
Beneficial Owner
The true owner of an asset or account who enjoys the benefits of ownership, even if the legal title is held in another name.
Compliance Officer
A professional responsible for ensuring a financial institution adheres to all applicable laws, regulations, and internal policies.
SEC (Securities and Exchange Commission)
The primary U.S. federal agency responsible for regulating securities markets, protecting investors, and enforcing federal securities laws.
FDIC
Independent federal agency that insures bank deposits up to $250,000 per depositor, per institution, and supervises financial institutions for safety and soundness.
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