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Strabo Glossary: KYC (Know Your Client)

KYC (Know Your Client)


KYC, an acronym for "Know Your Customer," is a process and set of procedures that financial institutions and other regulated entities follow to verify and understand the identity of their customers. KYC is an important aspect of regulatory compliance and risk management in the finance industry.

The primary objectives of KYC in finance are to prevent money laundering, terrorist financing, fraud, and other illicit activities. By implementing effective KYC procedures, financial institutions can ensure they have sufficient information about their customers to assess the risks associated with their transactions and maintain the integrity of the financial system.

Key Aspects

Here are some key aspects of KYC in finance:

  1. Customer Identification: Financial institutions are required to verify the identity of their customers by collecting specific information, such as name, date of birth, address, identification documents (e.g., passport, driver's license), and sometimes additional details like occupation or source of funds.
  2. Risk Assessment: KYC involves assessing the risk profile of customers based on factors such as their country of residence, business activities, transaction patterns, and any known associations with high-risk entities or individuals. This helps financial institutions determine the level of due diligence required for each customer.
  3. Enhanced Due Diligence (EDD): In cases where higher risk is identified, such as for politically exposed persons (PEPs) or customers from high-risk jurisdictions, financial institutions may conduct enhanced due diligence. This involves gathering additional information and performing more thorough checks to mitigate the higher risk associated with these customers.
  4. Ongoing Monitoring: KYC is not a one-time process. Financial institutions are responsible for continuously monitoring customer transactions and activities to detect any suspicious or unusual behavior. Ongoing monitoring ensures that the customer's risk profile remains up to date and any potential red flags are identified promptly.
  5. Regulatory Compliance: KYC is a legal and regulatory requirement in many jurisdictions to combat financial crimes and comply with anti-money laundering (AML) and counter-terrorism financing (CTF) regulations. Financial institutions must have policies, procedures, and systems in place to meet these compliance obligations and report any suspicious activities to the appropriate authorities.
  6. Data Privacy and Security: Financial institutions have an obligation to protect the personal information collected during the KYC process. They must adhere to data privacy laws and implement robust security measures to safeguard customer data from unauthorised access, theft, or misuse.

In Summary

KYC requirements may vary across jurisdictions, depending on local laws and regulations. Financial institutions are expected to implement risk-based approaches that align with regulatory requirements and industry best practices. By following KYC procedures, financial institutions can better understand their customers, mitigate risks, and contribute to the overall integrity and security of the financial system.

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