Why It Matters
KYC is the frontline defense against financial crime. Without proper customer identification, organizations cannot detect money laundering, terrorism financing, or sanctions evasion. Regulators have issued some of the largest fines in history for KYC failures — often not for actual money laundering, but simply for inadequate customer verification procedures.
The Three Pillars of KYC
1. Customer Identification Program (CIP)
Collecting and verifying identity information:
- Individuals: Name, date of birth, address, government-issued ID
- Legal entities: Registration documents, articles of incorporation, address
- Verification: Must use reliable, independent sources (government databases, official documents)
2. Customer Due Diligence (CDD)
Understanding the customer's activities and risk level:
- Nature of the business — what does the customer do?
- Source of funds — where does the money come from?
- Expected transaction patterns — what's "normal" for this customer?
- Beneficial ownership — who ultimately owns or controls the entity?
3. Enhanced Due Diligence (EDD)
Additional scrutiny for higher-risk customers:
- Politically Exposed Persons (PEPs) — government officials, their family members, and close associates
- High-risk jurisdictions — countries on FATF or EU high-risk lists
- Complex ownership structures — multiple layers of entities, trusts, nominees
- Unusual transaction patterns — activity inconsistent with the customer profile
Ongoing Monitoring
KYC is not a one-time check. Organizations must:
- Monitor transactions continuously for suspicious patterns
- Update customer information periodically (especially for high-risk customers)
- Screen against sanctions lists on an ongoing basis
- File Suspicious Activity Reports (SARs) when anomalies are detected
KYC in the Digital Age
- eKYC — electronic identity verification using digital documents, video calls, and biometrics
- AI-powered screening — automated sanctions screening and adverse media checks
- Blockchain KYC — exploring shared KYC utilities to reduce duplication
- Regulatory sandboxes — regulators allowing innovation in KYC technology
Key Regulation
- EU 6AMLD & AMLR — EU KYC requirements
- FATF Recommendation 10 — international CDD standard
- US Bank Secrecy Act (BSA) — US KYC requirements
- UK Money Laundering Regulations 2017 — UK KYC framework