What is Know Your Customer (KYC)?
Know Your Customer (KYC) is a process through which businesses, especially financial institutions, verify client identity and assess associated risk profiles to prevent money laundering, fraud, and other illicit activities.
Example of KYC
A digital bank onboarding a new customer:
First customer uploads scanned ID and proof of address. The system verifies authenticity via a third-party database.
The bank then assesses risk. customer’s location, occupation, and expected transaction volumes. If a high-risk country is involved, enhanced due diligence applies.
The bank’s system flags if a customer suddenly sends a large foreign remittance exceeding expected profile.
The bank requests annual updated documents or confirms no material changes in customer profile.
Why it Important
Compliance with Regulations: Mandatory under anti-money laundering (AML) laws globally; non-compliance can lead to fines, legal penalties, and reputation damage.
Fraud & Risk Mitigation: Verifying identities reduces fake or stolen identities entering the system, lowering fraud losses.
Enhanced Customer Trust: Demonstrates to genuine customers that the institution maintains secure and transparent processes.
Safeguarding Financial System Integrity: Collective KYC efforts prevent criminals from layering illicit funds through multiple institutions.
