Language
Country/Area
No result found
Why do modern banks require not only KYC but also KYCC and KYB?
In financial services, KYC (Know Your Customer) guidelines and regulations require professionals to verify a client’s identity, suitability, and the risks involved in maintaining a business relationship. These procedures apply within broader anti-money laundering (AML) and countering terrorist financing (CTF) regulations. As policies continue to expand, these requirements are no longer limited to financial institutions, but even non-financial industries, fintech companies, virtual asset dealers, and even charitable organizations are included in regulation in many countries.
“KYC is a standard process used to reduce the risk of fraud and malfeasance in financial transactions.”
KYC Requirements
Under FINRA Rule 2090, financial institutions must use reasonable diligence to determine and maintain the identity of each customer and their representatives. In implementing this rule, these organizations are expected to collect all the necessary information to understand their customers. This information includes customer identification procedures (CIP), customer due diligence (CDD) and enhanced due diligence (EDD).
Customer Identification Program
Section 326 of the USA PATRIOT Act requires banks and other financial institutions to establish a Customer Identification Program (CIP). This requires institutions to collect four items of identifying information about customers, including name, date of birth, address and identification number.
Customer Due Diligence
Under the Bank Secrecy Act, customer due diligence (CDD) rules are designed to increase financial transparency and curb money laundering. This rule requires financial institutions to determine and verify the identity of customers in connection with account opening. The CDD rules include four core requirements:
- Identify and verify the customer's identity
- Identify and verify the actual owner of the company that opened the account
- Understand the nature and purpose of the client relationship and develop a client risk profile
- Continuous monitoring to identify and report suspicious transactions and update customer information on a risk basis
Enhanced Due Diligence
Once the initial identity check is completed and high-risk factors are identified, enhanced due diligence will conduct additional detailed investigations to determine the client's source of wealth and funds, conduct additional identity research and other risk identification and assessments.
Know Your Customer’s Customer (KYCC)
KYCC is the process of knowing your client's clients, which aims to identify client activities and their nature, including identifying your client's customers and assessing their risk level. As the risk of fraud hidden in secondary business relationships (such as suppliers) grows, the need for KYCC becomes increasingly apparent.
Know Your Business (KYB)
KYB is an extension of KYC laws and is designed to reduce the risk of money laundering. Its focus is on verifying a business’s registration credentials, location and ultimate owners (UBOs). The process also includes comparing the company with blacklists and grey lists to confirm whether the company is involved in criminal activities such as money laundering, terrorist financing, corruption, etc. KYB is critical in identifying fake businesses and shell companies, and is particularly important for effective KYC and AML compliance.
“KYB is key to ensuring all financial institutions operate in modern society.”
Electronic KYC (eKYC)
E-KYC uses online or digital means to verify identity, which may include authenticity checks by reviewing the provided ID and proof of address documents, or verifying information against government databases.
Legal regulations of various countries
KYC regulations vary from country to country. For example, Australia has established customer identification requirements, and Canada and India have also issued corresponding policies to ensure compliance with AML and KYC regulations. Other countries such as Italy, Japan and South Africa also have their own laws and regulations to regulate the transparency of financial transactions.
Criticisms and Challenges
However, these policies have also been criticized. On the one hand, KYC may impose a heavy cost burden on businesses in the financial sector, especially smaller businesses; on the other hand, customers may find the information requested too intrusive or cumbersome, which may cause them to choose not to establish a business relationship. . Additionally, residents of some countries, such as Canada, face challenges with KYC requirements as they question whether the sovereignty of U.S. law can influence their own regulations.
In summary, modern banks must conduct KYCC and KYB in addition to KYC to cope with the increasingly complex financial environment and the increase in illegal activities. In this era of extremely fast information flow, can banks really grasp every corner of their customers?
