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Understand the secrets behind KYC: How do financial institutions combat money laundering and terrorist financing?
In the global financial system, identifying and verifying a customer's identity is a vital task, and this is at the heart of Know Your Customer (KYC) regulations. These regulations are not only targeted at financial institutions, but also gradually extended to non-financial industries, financial technology companies, virtual asset traders and even non-profit organizations. As the risks of money laundering and terrorist financing continue to increase, institutions in various countries are paying more and more attention to the KYC process.
The KYC process is part of the Anti-Money Laundering (AML) and Combating Terrorist Financing (CTF) norms and is designed to ensure the security of business relationships established with customers.
Under Rule 2090 of the U.S. Financial Industry Regulatory Authority (FINRA), financial institutions are required to conduct reasonable due diligence on each customer and their representatives and collect necessary identity verification information. This includes not only the customer’s basic identity information, but also how to further understand the customer’s needs and risks.
KYC requirements
KYC requirements can help financial institutions ensure that their customers are not involved in any wrongdoing. According to Section 326 of the USA Patriot Act, financial institutions must develop a Customer Identification Program (CIP), which requires the collection of four important identity information including name, date of birth, address and identification number.
Customer Due Diligence (CDD)
The Customer Due Diligence (CDD) rules set out core requirements for U.S. banks, mutual funds and other financial institutions under the Bank Secrecy Act. These requirements include:
- Identify and verify the customer's identity.
- Identify and verify the identity of the beneficial owners of the holding company.
- Understand the nature and purpose of customer relationships to develop a risk profile.
- Conduct ongoing monitoring of suspicious transactions and maintain and update customer information based on risk.
Individuals holding 25% or more equity must provide their information to facilitate a more comprehensive risk assessment.
Enhanced Due Diligence (EDD)
After the initial identity check is completed, if high-risk factors are found, further enhanced due diligence (EDD) is required. This process involves checks on the client's source of funds, wealth and further identity research.
Know your customer’s customer (KYCC)
KYCC, or "Know Your Customer," is the identification and risk assessment of a customer's customer activities, which is an extension of the KYC process. As business relationships become more multi-layered, this process becomes even more important, especially when it comes to guarding against fraud.
Know your business (KYB)
KyB is a set of standards used to ensure the legitimacy of enterprises. By verifying registration certificates, locations, ultimate beneficial owners (Ultimate Beneficial Owners) and other information, this can effectively prevent money laundering, terrorist financing and other issues. According to the EU's 5th AML Directive, KYB is required to be implemented in a variety of AML regulated entities.
Electronic Know Your Customer (eKYC)
eKYC utilizes digital means for identity verification, which not only improves efficiency but also increases customer convenience. Financial institutions can more easily verify a customer's identity by verifying the provided identification and address documents.
Legal regulations of various countries
The legal regulations for KYC vary from country to country. For example, Australia's AUSTRAC oversees financial transactions, and Canada's FINTRAC has also incorporated stricter supervision on customer identity. The Reserve Bank of India has proposed KYC guidelines since 2002, emphasizing the regulation of banks. In different countries, such as Japan, Mexico, South Africa and Singapore, the implementation of anti-money laundering regulations is constantly strengthening.
Critical comments
Although the KYC policy aims to combat money laundering and terrorist financing, it has also been criticized. Smaller financial firms often face higher compliance costs, and customers may feel that information requests are too intrusive. Some digital nomads living in a nomadic state also find it difficult to maintain banking relationships because they are unable to provide the necessary proof of address.
Excessive KYC requirements may cause some innocent, law-abiding citizens to face difficulties when establishing financial relationships.
The understanding and implementation of KYC is gradually deepening around the world, and this process will have a profound impact on the security and transparency of the entire financial system. How will future regulations and procedures affect our financial interaction patterns?
