What Is a KYC Policy in Banking?

Introduction

Did you know that it wasn’t until 1970 when the first piece of legislation specifically dedicated to anti-money laundering was passed? It’s known as the Bank Secrecy Act and it was the first of its kind not only in the United States but worldwide.

It introduced a wave of reporting requirements, which have since evolved to include practices still in use today such as the KYC policy. KYC also referred to as ‘Know Your Customer’ or ‘Know Your Client, is a way in which financial institutions verify a customer’s identity.

In this article, we’ll take a look at the use of KYC in banking today. Let’s dive in with…

What is KYC?

Know your customer is a set of regulations and procedures utilized within the financial services industry to verify the legitimacy of a customer.

Identification of risk factors and financial profiles are all a part of the KYC process. In simple terms, the process was put in place to help lenders prevent the following:

• Money laundering
• Financing of terrorism
• Illegal fraud schemes
• Identity theft

These KYC guidelines allow lenders to effectively mitigate risk and prevent financial crimes. Let’s take a look at how lenders identify suspicious activity.

Credentials

Financial institutions regularly utilize standard due diligence practices such as when opening a checking or savings account. Credentials used for verification may include:

• Proof of address
• ID cards such as licenses or passports
• Facial recognition
• Detailed financial information

These are just a few ways that banks can properly establish a customer’s identity and banking habits.

AML and KYC

The KYC process falls under the larger umbrella of AML, or Anti-Money Laundering, procedures.

Both utilize identity verification techniques to mitigate risk vis-a-vis flagging and reporting financial crimes. Institutions will look at the following three categories as they relate to risk:

• Certain products and services
• Customer or entity in question
• Location

For individuals or entities that come with a higher risk, more scrutiny will be placed upon them during the AML and KYC process.

Future Forward

Banks have been complying with AML and KYC regulations for years. With the advent of cryptocurrency, the digital form of banking allows for new rules and regulations. So where does KYC stand in the crypto world?

While cryptocurrency exchanges deal with less traditional forms of currency, KYC practices are still necessary and have been implemented by various platforms.

Rather than sifting through various online entities for safe crypto banking, a good place to start is this business: ByteFederal. Businesses such as ByteFederal follow regulated crypto ATM policies, as well as provide secure, compliant banking transactions.

Signing Off on KYC Policy

While the regulations themselves are complex, the purpose of KYC policy and AML policy is straightforward: to prevent scams and fraudulent activity from occurring. The KYC policy protects investments, clients, and businesses alike.

From the monitoring of transactions to in-depth record-keeping, KYC establishes the facts of a customer and allows business to be conducted safely and thoroughly.

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