KYC compliance

Know Your Customer (KYC) compliance regulation has proved to beone of the biggest operational challenges banks, accountants, lawyers andsimilar financial service providers worldwide have had toovercome.World-Check, the industry standard KYC compliance solution,provides an overview of KYC compliance and its origins, and outlines thecompliance mandate as applicable to banks, accounting firms, lawyers and otherregulated financial service providers – not just in the UK, Europe and the USA,but all around the world. Relied upon by more than 3,000 institutions worldwide,this KYC database solution provides effective legal and reputational riskreduction.Why “Know Your Customer?”The 9/11 terroristattacks on the World Trade Centre revealed that there were sinister forces atwork around the world, and that terrorists activities were being funded withlaundered money, the proceeds of illicit activities such as narcotics and humantrafficking, fraud and organised crime. Overnight, the combating of terroristfinancing became a priority on the international agenda.For thefinancial services provider of the 21st century, “knowing your customers” was nolonger a suggested course of action. Based on the requirements of legislativelandmarks such as the USA PATRIOT Act 2002, modern Know Your Customer (KYC)compliance mandates were created to simultaneously combat money laundering andthe funding of terrorist activities.What is Know Your Customer(KYC)?Know Your Customer, or KYC, refers to the regulatorycompliance mandate imposed on financial service providers to implement aCustomer Identification Programme and perform due diligence checks before doingbusiness with a person or entity.KYC fulfils a risk mitigation function,and one its key requirements is checking that a prospective customer is notlisted on any government lists for wanted money launders, known fraudsters orterrorists.If preliminary KYC checks reveal that the person is aPolitically Exposed Person (PEP), for example, Advanced Due Diligence must bedone in order to ensure that the person’s source of wealth is transparent, andthat he or she does not pose a reputational or financial risk in terms of theirfinances, public positions or associations. Beyond customer identificationchecks, the ongoing monitoring of transfers and financial transactions against arange of risk variables forms an integral part of the KYC compliancemandate.But to understand the importance of KYC compliance for financialservice providers better, its origins need to be examined.Origins ofKnow Your Customer (KYC) complianceThe arrival of the new millenniumwas marred by a spate of terrorist attacks and corporate scandals that unmaskedthe darker features of globalisation. These events highlighted the role of moneylaundering in cross-border crime and terrorism, and underlined the need to clampdown on the exploitation of financial systems worldwide.Know YourCustomer (KYC) legislation was principally not absent prior to 9/11. Regulatedfinancial service providers for a long time have been required to conduct duediligence and customer identification checks in order to mitigate their ownoperation risks, and to ensure a consistent and acceptable level ofservice.In essence, the USA PATRIOT Act was not so much a radicaldeparture from prior legislation as it was a firmer and more extensivearticulation of existing laws. The Act would lead to the more rigorousregulation of a greater range of financial services providers, and expanded theauthority of American law enforcement agencies in the fighting of terrorism,both in the USA and abroad.In October 2001, President George W. Bushsigned off the USA PATRIOT Act, effectively providing federal regulators with anew range of tools and powers for fighting terror financing and moneylaundering. During July 2002, the US Treasury proceeded to introduce Section 326of the PATRIOT Act, a clause that removed some key burdens for regulators andadded significant enforcement muscle to the Act.What 9/11 changed, inessence, was the extent to which existing legislation was being implemented.Using the provisions of the earlier anti-terrorism USA Act as a foundation, itincluded the Financial Anti-Terrorism Act, which allowed for federaljurisdiction over foreign money launders and money laundered through foreignbanks. Significantly, it is this anti-terror law that would make the creation ofan Anti Money Laundering (AML) programme compulsory for all financialinstitutions and service providers.Section 326 of the USA PATRIOT Actdealt specifically with the identification of new customers (“CIP regulation”),and made extensive provisions in terms of KYC and the methods employed to verifyclient identities.In accordance with this piece of updated KYClegislation, federal regulators would hold financial institutions accountablefor the effectiveness of their initial customer identification and ongoing KYCscreening. Institutions are required to keep detailed records of the steps thatwere taken to verify prospective clients’ identities.Although currentKYC legislation does not yet demand the exclusion of specific types offoreign-issued identification, it recommends the usage of machine-verifiableidentity documents. The ability to notify financial institutions if concernsregarding specific types of identification were to arise, combined with arisk-based approach to KYC, proved to provide a robust mechanism for addressingsecurity concerns.Effectively, the risk-based approach to customer duediligence grants regulated institutions a certain degree of flexibility todetermine the forms of identification they will accept, and under whichconditions.KYC compliance: Implications for banks, lawyers andaccounting firmsThe KYC compliance mandate, for all its positiveoutcomes, has burdened companies and organisations with a substantialadministrative obligation. Additionally, KYC compliance increasingly entails thecreation of auditable proof of due diligence activities, in addition to the needfor customer identification.