10 Steps to Know Your Customer

Posted by

Ian Hare

on 09 Aug 2023

Know Your Customer is a vital weapon against financial crime. We uncover how to integrate KYC into your compliance programme and why it's important.

Know Your Customer (KYC)

PwC's 2022 Global Economic Crime Survey revealed almost two-thirds (64%) of UK businesses experienced some form of financial crime in the previous 24 months. This is far higher than the global 46% and second only to South Africa.

Alongside anti-money laundering laws and customer due diligence, Know Your Customer (KYC) is a key weapon in the fight. However, the recent Farage-Coutts controversy reveals how easily institutions can slip up when it comes to effectively implementing KYC.

Prominent British politician and Brexit supporter Nigel Farage accused Coutts of closing his accounts due to his political views. Coutts denied this, citing commercial reasons, but a subject access request later revealed the bank's concerns about reputational risks and differences in values.

NatWest boss, Dame Alison Rose, worsened the situation with false comments about Farage's finances. Rose has since resigned, while Farage seeks compensation and considers legal action.

As the Financial Conduct Authority (FCA) look deeper into the row, the issue has emphasised the need for financial institutions to strike a balance between KYC compliance, customer communication, and customer's rights and freedoms. It also highlights the importance of ethical business practices, transparency, and open communication with clients.

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What is Know Your Customer?

KYC serves as a regulatory framework that mandates financial institutions, as well as specific businesses, to authenticate the identity of their individual and corporate customers prior to engaging in partnerships or providing services.

Under KYC, organisations must identify and verify customers and understand their financial activities and fund sources, plus any associated risks. The aim is to prevent criminal activities such as fraud, money laundering or terrorist financing.

However, while most major economies have adopted KYC, requirements can differ by country, so it's vital businesses understand what's covered – and what's not – when dealing with global customers.

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Including KYC in your compliance programme

You can do several things to make KYC part of your compliance strategy. These 10 steps will help you get started:

1. Create comprehensive policies

Create tailored KYC policies and procedures that outline customer onboarding, due diligence, how to report suspicious activities, and ongoing monitoring. Ensure it starts with your senior people for maximum buy-in.

2. Set up a customer identification programme

At a minimum, make sure you have procedures to collect and verify people's full name, date of birth, address and government-issued ID like a passport or driving licence.

3. Consider the risk

Adopt a risk-based approach that categorises customers based on their risk profiles. This could include their country of residence, nature of their business, source of their funds, transaction patterns, and any previous history of suspicious activities. Depending on the nature of your business, this could be a simple 'low/medium/high' rating or something more detailed. 

4. Carry out enhanced due diligence (EDD)

EDD involves collecting additional information and conducting more thorough checks for higher-risk customers. This might be asking for extra documents, conducting in-depth background checks, or keeping an eye on their transactions more frequently.

5. Keep monitoring

KYC is never a one-off. Use digital tools and resources to Know Your Transactions (KYT). KYT is the process of continually monitoring customer transactions for red flags or suspicious behaviour. Implementing a robust and efficient digital monitoring system is essential for staying ahead of financial crime and ensuring compliance with KYC requirements.

6. Check third-parties

If you engage in any outsourcing of services, it is crucial to conduct thorough due diligence on your partners, suppliers, or vendors to ensure that they are fully compliant with KYC regulations.

7. Employee training

Carry out regular face-to-face or online training so your staff are aware of and understand what KYC requires, its importance and its roles in ensuring compliance. If possible, tailor it to your business for maximum engagement.

8. Keep accurate records & carry out internal audits

Ensure that you maintain accurate and current records of customer information and transaction histories to facilitate audits and regulatory enquiries. Regular internal reviews and tests will ensure your KYC programme is effective and identify areas where you can improve.

9. Conduct sanctions screening

Sanctions screening involves checking customer information against various international watchlists and sanction lists maintained by governments, regulatory bodies, and international organisations. Incorporating sanctions screening into the KYC process enhances its effectiveness in preventing financial crime and maintaining regulatory compliance. This process should be carried out initially and on an ongoing basis thereafter.

10. Look out for regulatory updates

Staying aware of regulatory changes is crucial in maintaining compliance and ensuring the effectiveness of your KYC programme. The regulatory landscape is constantly evolving, with new laws and regulations being introduced regularly. By keeping on top of these changes, you can adapt your KYC procedures and policies to meet the latest requirements, reducing the risk of non-compliance.

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Which businesses use the KYC framework?

While the KYC framework is usually associated with financial institutions, other businesses also fall under its remit. The main users of KYC include:

  • Banks, including commercial and investment banks
  • Insurance companies
  • Investment firms like asset management companies and hedge funds
  • Money service businesses such as money transfers or currency exchange
  • Fintech companies
  • Cryptocurrency exchanges
  • Online payment processors like PayPal

Non-banking financial institutions like credit unions, financial advisers and tax advisors are also subject to KYC, and it also includes:

  • Accountants and auditors
  • High-value art dealers
  • Estate and letting agents
  • Gaming operators
  • Lawyers

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Why is KYC important?

KYC helps you maintain your reputation and demonstrates your commitment to a secure and responsible financial environment.

Not only does KYC reduce risks and prevent criminal activities, it encourages transparency, ensures ethical business practices, and enhances customer trust.

Educating your customers about the importance of KYC, data privacy, and security can help cultivate a compliance culture and build trust in your organisation.

As technology advances, stay on top of the associated risks and opportunities, such as blockchain, AI and digital currencies - always aim to be agile and adaptable.

The Know Your Customer framework is crucial for financial institutions and businesses to demonstrate their commitment to a secure and responsible financial environment while maintaining transparency, integrity, and customer trust.

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