KYC (Know Your Client) explained

What is KYC (Know Your Client)?

Definition: KYC (Know Your Client / Customer)  is a general regulatory requirement that financial service providers are obliged to comply with. It involves the verification of the client’s identity. The verification process combats the financing of illegal activities and money laundering. KYC is a key measure in anti-money laundering regulations.


Why is KYC necessary?

KYC checks require financial service providers to identify and verify their customers. This is done as part of efforts to comply with Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) requirements to tackle financial crime and ensure rigorous customer due diligence.

KYC actively combats criminal activity by collecting and verifying customer information. These checks improve trust in the industry and help financial service providers manage their risks. KYC has become an everyday occurrence with financial service providers, including cryptocurrency exchanges and brokers. However, some critics say it takes away the anonymity and decentralization aspects that cryptocurrency is known for.

How does the “Know Your Customer” process work?

If you open an account with almost any financial service provider, you’ll probably need to complete a KYC check. KYC requires financial service providers to collect information confirming the identity of their customers. This can be done, for example, through official identification or bank statements. KYC policies help combat money laundering, terrorist financing, fraud and illicit transfer of funds.

KYC is usually a proactive approach, not a reactive one. Most financial service providers take customer details as part of the onboarding process before they can carry out financial transactions. In some cases, accounts can be made without KYC, but their functions are limited.

When you begin the KYC process, you may be asked to provide an official identification document, such as:

  • ID
  • Driving license
  • Passport

In addition to confirming the customer’s identity, it is also important to confirm their location and address. Your ID will provide basic information such as your name and date of birth, but additional information is needed to establish, for example, your tax residence.

This is usually referred to as “Proof of Address”, which means that you will be asked to provide an official document, confirming your current address, such as:

  • A bank statement.
  • A utility bill (such as a landline internet, gas, electricity, etc.)

Keep in mind that financial service providers often need to re-verify the identity of their customers at regular intervals, so be prepared.

Who regulates compliance?

KYC regulations vary from country to country, but there is international cooperation on the basic information required. In the US, the Bank Secrecy Act and the Patriot Act of 2001 established most of the AML and KYC processes seen today. The EU and Asia Pacific countries have developed their own regulations, but there is much overlap with the US. The EU Anti-Money Laundering Directive (AMLD) and PSD2 regulations provide the basic framework for EU countries. At the global level, the Financial Action Task Force (FATF) coordinates multinational cooperation on regulatory modalities.

What advantages does KYC provide?

The benefits of KYC may not be obvious. However, its function is not limited to fighting fraud and it can improve the financial system as a whole. The main advantages KYC provides are:

  • It combats identity theft and other types of financial fraud.
  • It improves trust, security and accountability of financial service providers. This reputation has a knock-on impact on the financial industry as a whole and can encourage investment.

What are the disadvantages of KYC?

KYC has its advantages but is still controversial for some critics. Arguments against KYC are more common in the cryptocurrency world due to its history and origins. Some of the main pitfalls of KYC requirements are:

  • KYC checks involve additional costs that are often passed on to the customer through fees.
  • Some people simply do not have the necessary documentation to pass KYC checks or perhaps do not have a permanent address. This makes it difficult for them to access certain financial services.
  • The KYC process is still relatively new and many people find it difficult or intimidating, leading them to use  less trustworthy financial service providers in order to try and avoid the KYC process.
  • Irresponsible financial service providers may not have adequate data security, and hacks can lead to your personal data being stolen.

Some key questions

What is KYC?

Know Your Client (KYC) is the process of customer identity verification by financial service providers.

What is the process like?

In order to complete the “Know Your Customer” process, financial service providers will usually request an official form of government identification, such as an ID card, passport or driving license, as well as a “Proof of Address” document which confirms your current residency, such as a bank statement or a utility bill.

Some people will inevitably be classified as higher risk, so the financial service provider may request additional documents, such as a tax declaration, or pay slips in order to prove the origin of your funds and wealth.

Is KYC required?

Any regulated financial service provider in the USA, the EU and most other countries will be required by law to complete the KYC procedure, before allowing you access to their services.

What are some of the benefits of KYC?

The “Know Your Customer” process provides numerous benefits to you as a client. For example, it makes the financial industry as a whole safer, by combatting identity theft (for example, if somebody steals your ID and tries to open an account at Finansiv with it, they will be stopped in their tracks).

What are some good tips in order to make the “Know Your Client” process smoother?

For many people, the whole process of providing personal information and documents online is still intimidating or confusing. Here are some general tips to make the process smoother:

  • Take good quality images of your documents!

Remember to use good lighting when taking a picture of your documents, so they are easy to read and not blurry. Also, make sure to include the whole document in the image (all four corners), and don’t use a flash, because that can cause reflections.

  • Do not try and edit your documents!

In order to avoid unwanted trouble, always submit original images, straight from your camera. Do not try and edit the image in any way, as that can be seen as a red flag and could get you in trouble, even for something as simple as removing the background.

  • Always submit up to date  documents.

Make sure to keep an eye on the expiration dates of your identification documents! If you try to submit an expired document, it will most certainly be rejected.

Also, keep in mind that when submitting a “Proof of Address” document, it must not be older then 3 months.

  • Do not try and lie on your application.

It may seem obvious, but simply being honest is the best way to make the KYC process smoother. Remember that any trusted financial service provider can’t simply take your word and will require official documents to verify your information anyway, so lying on your application will never work to your benefit.

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