Know Your Customer

Know your Customer

Know your Customer (KYC)is the due diligence and bank regulation that financial institutions and other regulated companies must perform to identify their clients and ascertain relevant information pertinent to doing financial business with them. In the United States, KYC is typically a policy implemented to conform to a customer identification program mandated under the Bank Secrecy Act and USA Patriot Act. Know your customer policies are becoming increasingly important globally to prevent identity theft, fraud, money laundering and terrorist financing. In a simple form these rules may equate to answering twelve questions, but this is the tip of the iceberg and regulators expect much more in days to come.

The main aspect of KYC checking is to satisfy that the customer is not on any list of known fraudsters, terrorists or money launderers maintained by the country’s law enforcers. These list contain thousands of entries and is periodically updated. As well as sanctions lists there are lists of third party vendors that track links between persons regarded as high risk owing to negative reports in the media about them in public records.

Beyond name matching, a key aspect of KYC controls is to monitor transactions of a customer against their recorded profile, history on the customer account(s) and with peers.

Banks doing KYC monitoring and Anti Money Laundering (AML) and checks relating to Combating the Financing of Terrorism (CFT) increasingly use specialized transaction monitoring software, particularly name analysing software and trend monitoring software. The generated alerts identify unusual activity which is then subjected to due diligence or enhanced due diligence (EDD) processes that use internal and external sources of information on the subject, including the internet. This helps to determine whether a transaction or activity is suspicious and requires reporting to the authorities. (In our country, Reserve Bank of India, recently pulled up three leading private sector banks, namely HDFC Bank, Axis Bank and ICICI Bank for lapse on this score and have taken the matter very seriously and investigations are going on.)

In the United States this Suspicious Activity Reporting is to be made to Financial Crimes Enforcement Network. In the United Kingdom this reporting is done to Serious Organized Crime Agency and in Canada, the same is managed by the Financial Transactions and Reports Analysis Centre of Canada also known as FINTRAC.

Know Your Customer processes are also employed by regular companies of all sizes, for the purpose of ensuring their proposed agents’ consultants’ or distributors’ anti-bribary compliance.

Reserve Bank of India, for the first time issued guidelines on KYC to all banks vide circular DBOD. No. AML. BC. 18/ 14.01.001/ 2002-2003 dated August 16, 2002. RBI followed this up with their Circular No DBOD. No. AML. BC. 58/14.01.001/2004-2005 dated November 29, 2004 directing all the banks full compliance of the provisions of the circular before 31^st December, 2005. The purpose was to prevent money laundering, terrorist financing, theft of identity and so on.