The Know Your Customer process is an important part of the effective screening process. This is a term used by businesses to describe their efforts to verify the identity of their clients and assess potential risks of illegal intentions for the business relationship.
The process goes as far back as 1997, when the Financial Action Task Force (FATF) created a set of recommendations to combat money laundering, which included guidelines on customer due diligence and identification processes.
The FATF was created by the G7 Summit in 1989 to combat drug trafficking, but they have since expanded their scope to include other areas that involve financial crimes. The FATF works closely with many organizations including the United Nations, World Bank, and IMF. Their proven recommendations have taken precedence in most western countries and are now being adopted globally.
There are some very specific steps involved in the KYC process, which will vary depending on your industry and type of clientele.
Customer Identification Program:
In the Know Your Customer Process, the customer identification program (CIP) is a program that verifies the identity of their customers. CIP helps to prevent Money Laundering and other financial crimes. Financial services companies (FSC’s) must verify their customers identities before establishing an account, conducting any business or allowing funds to be withdrawn. CIP also helps to prevent companies from doing business with sanctioned countries and individuals, which may include terrorists, drug dealers, tax evaders and others who have been blacklisted by the United States government.
The Know Your Customer (KYC) process is an important part of the customer identification program for banks and financial institutions. The KYC process includes the collection of information verifying the identity and risk profile of customers. KYC forms provide all of the basic information required to perform a risk assessment on new customers and existing ones.
The information gathered through KYC allows financial institutions to manage their risks associated with money laundering, terrorist financing, bribery and corruption, fraud, and sanctions. The data enables the institution to assign a customer risk score. This score will be used to determine how much monitoring a customer will receive, what types of transactions they should be permitted to complete, and how much scrutiny each transaction will require.
The Know Your Customer process can be broken down into two key steps:
Collect customer data, including name, address, birthdate, employment details, source of wealth, source of funds and other identifying information.
Verify that the information provided by the customer is valid using documents such as passports or utility bills.
It is important for all financial institutions to know the identity of their customers. The US Patriot Act has heightened this requirement and also increased its scope. It is also important for institutions to be aware of the activities of their customers, especially with respect to money laundering.
The key to the KYC process is a thorough understanding of the customer’s business, and what they plan to do with the institution’s products and services. The goal of this process is to identify, evaluate and manage risks. This means that an institution needs to determine if their customer is involved in any criminal activity or money laundering, or if they will be placing large amounts of cash into or out of their account.
KYC Begins with Customer Information Form
The first step in the KYC process is for the customer to complete a Customer Identification Program (CIP) form. The information requested for this form includes:
Name, address, date of birth, (if applicable) tax identification number, Social Security Number (SSN), occupation, country of citizenship and passport number (if applicable)
This form is used by financial institutions when opening accounts for both individuals and businesses. This form must be kept on file at your institution in order to comply with anti-money laundering regulations. If you receive information from
One of the most important parts of the KYC process is the customer identification program, or CIP. The CIP is made up of two parts:
1. Collecting and verifying identifying information on customers.
2. Creating a risk profile for each customer based on their location, industry, and identity verification results.
The CIP must be completed before you can engage in any business activities with a customer. The information collected must be cross-referenced with public and private databases to ensure the legitimacy of your customers’ identities. The type of identifying information required depends on whether your customers are individuals or businesses, but it may include:
1. Name
2. Date of birth
3. Address
4. Government-issued ID number such as a social security number or taxpayer ID number
5. Employer identification number (EIN) for businesses
6. Passport for international customers
7. Utility bill or other proof of address for foreign nationals
You will also need to verify that none of your customers appear on regulatory watch lists such as OFAC’s Specially Designated Nationals List (SDN). Once this process is complete, you will have a complete picture of who your customer is, where they conduct business, and how they conduct business
Customer due diligence is the process of identifying a customer and assessing their suitability to engage in a business relationship. It is a crucial step in the KYC process that helps organizations to identify and analyze the risks of illegal intentions by customers.
The term ‘Customer Due Diligence’ was introduced by the Financial Action Task Force (FATF), which is an inter-governmental body established in 1989 by the G7 with the purpose of developing policies to combat money laundering and terrorism financing (TF). To help achieve this goal, FATF has issued standards on anti-money laundering (AML) and counter-terrorist financing (CFT), which are known as the “FATF Recommendations”. These include a definition of customer due diligence (CDD) requirements, as well as risk-based approach guidelines.
What is Customer Due Diligence?
In accordance with these requirements, customer due diligence refers to the collection and verification of information about an organization’s customers, which helps to determine whether they pose a potential risk of money laundering or terrorist financing.
If despite exercising reasonable efforts there are any doubts about a customer’s identity or intentions, or if there are any suspicions about potential criminal activities, then certain measures will