Know Your Client (KYC) – Outline, Process & Advantages

FinanceBanking & FinanceFinance Management

Know Your Client (KYC) or Know Your Customer (KYC) is a crucial procedure used to validate the identification and other credentials of a financial services user before providing them with services. Identity and other information about a financial services user is verified via a regulatory procedure known as Know Your Customer (KYC).

Key Points Briefly

  • Know Your Customer (KYC) specifications are followed by the Government and financial services sector to check clients, especially their risk profiles, and to verify their presence as valid citizen in some cases.

  • In the investing business, the Know Your Customer (KYC) regulations state that every broker-dealer must make a reasonable effort in regard to customer accounts.

  • There have been many cases of privacy questions raised in the media and questions have also been raised if this is really necessary? However, the law of the land in most countries stipulate for KYC requirements.

  • There is a single exception to this rule and that is the cryptocurrency market that is yet not governed under the central bank rule and thus one is not obliged to follow the KYC rule.

KYC Process

The Know Your Customer (KYC) Process

The Know Your Customer (KYC) procedure is straightforward and varies very little from nation to country. A straightforward KYC procedure flow is shown in the above diagram. The KYC process may be broken down into the following stages, which are not necessarily followed in the same order −

Step 1 − Submitting the required papers.

An application or prospective user of financial services is needed to provide papers that will be used to verify their identity and legal residency status before any financial services can be provided. The submission may be made in either electronic or physical form, depending on your preference

Step 2 − Verification of your identity

The verification process is performed by the authorized organization on the basis of the document that has been provided. For example, if an applicant presents a driver's license, the Department of Motor Vehicles will do a verification check on the document (DMV).

Step 3 − Authentication of residency is the third step.

It is necessary to verify residence status (domestic or foreign), existing residential address, substitute home address, immigration status and other factors. The residency verification process includes the following steps

Step 4 − Confirmation of the financial standing of the company

It is necessary to verify the assets and liabilities stated by examining papers, contacting the issuer, and doing physical inspections. As a result, the possibility of deception is reduced.

Step 5 − Transactions are being monitored.

The financial institution scrutinizes the transactions carried out by the customer/client, and any transaction that is unusual/high-valued, frequent, or otherwise unusual is identified automatically and subjected to rigorous human scrutiny after being flagged.

After completing all of the procedures outlined above, the person or entity is considered KYC validated. The Know Your Customer (KYC) procedure is an important component of the numerous due diligence investigations performed by businesses, investors, banks, and other financial institutions.

Published on 28-Jul-2021 09:12:20