Know Your Customer (KYC)

Overview of Know Your Customer (KYC)

  • Know Your Customer (KYC) is a process carried out by financial institutions as part of their regulatory obligations.

  • Its primary purpose is to identify and verify the identities of their customers.

  • KYC is critical in preventing financial crime, such as money laundering or fraud.

Key Aspects of KYC

  • Customer Identification Programme (CIP): This requires the customer to provide identification information, such as name, date of birth, and address.

  • Customer Due Diligence (CDD): The financial institution reviews the customer’s profile, including monitoring account activity, examining source of funds, and identifying any possible risk factors.

  • Enhanced Due Diligence (EDD): Applied for higher-risk customers, this involves further scrutiny of a customer’s activities, often including investigating the source of their wealth.

  • Ongoing Monitoring: Financial institutions have an obligation to continually monitor customer accounts to spot suspicious activities or any changes to risk profiles.

Relevance of KYC in Law and Ethics in Financial Services

  • In terms of legal principles, financial institutions are obliged by law to implement KYC procedures, to prevent illegal activities such as money laundering or terrorism financing.

  • In terms of professional ethics, KYC helps to build trust and integrity in the financial system, as it assures that institutions do business legally and responsibly.

KYC Regulations and Enforcement

  • The Financial Conduct Authority (FCA) regulates KYC procedures in the UK.

  • KYC regulations fall under the broader umbrella of the Money Laundering Regulations.

  • If a financial institution fails to comply with KYC requirements, they can face sanctions, including fines, loss of licence, and even imprisonment for the responsible individuals.

Impact of KYC on Financial Services

  • KYC procedures help prevent financial crime, fostering security and stability in the marketplace.

  • This establishes public confidence in the financial system, encouraging participation in the system.

  • Nonetheless, KYC involves a significant administrative burden for financial institutions, impacting on how they operate and their profitability.

Professional Ethics and KYC

  • KYC is tied to the professional principle of acting honestly and professionally, allowing financial institutions to avoid illegal activity and to act in the best interests of all stakeholders.

  • Upholding KYC standards is crucial for preserving a firm’s ethical reputation, both with customers and in the wider business community.