KYC Compliance Requirements: Your 3-Step Action Plan in 2024

Standard Chartered is a British banking giant established in 1969 and headquartered in London. In 2004, its lack of an anti-money laundering (AML) program drew scrutiny from the Federal Reserve and New York regulators. Despite a hefty $670 million fine in 2012 for breaching sanctions with Iran, the bank persisted in its questionable practices.

Accusations of aiding the Iranian government in bypassing US regulations led to further penalties. Standard Chartered was accused of flouting sanctions on several countries, prompting both UK and US authorities to impose a staggering $1.1 billion fine in 2019.

Do you know your customers? You should be especially if you're a financial institution (FI), as failure to comply could lead to fines, sanctions, and damage to your reputation if you inadvertently aid money laundering or terrorist financing.

Beyond the risks, understanding KYC compliance requirements is essential for businesses to establish strong customer identification and verification processes.

What is Know Your Customer?

The phrase speaks for itself; it is about getting to know your clients, not just on a superficial level, like knowing only their names and addresses, but by verifying and confirming the provided information.

Since KYC screening is important to financial institutions, you must have some understanding of your customers' financials and see what kind of transactions are happening and why. After that, your business can assess the risk associated with this customer.

3 Steps To Achieving Know Your Customer Compliance

The goal of KYC screening is not only to comply with regulatory requirements but also to mitigate the risks of financial crimes such as money laundering. It's a proactive measure that helps maintain the integrity of the financial system while safeguarding against illicit activities.

The KYC process typically involves three main steps:

Step 1: Establishing Customer Identity

This involves collecting and verifying information to confirm the identity of the customer. It could include details like name, address, date of birth, and government-issued identification.

Step 2: Understanding Customer Activities

Beyond just knowing who the customer is, KYC also delves into understanding their financial activities. This includes assessing the nature and purpose of their transactions to ensure they are legitimate.

Step 3: Assessing Risks

A crucial aspect of KYC authentication is evaluating the potential risk associated with a particular customer. By scrutinizing their activities and financial behaviors, institutions can identify any suspicious patterns that might indicate illegal activities.

KYC Compliance Requirements

KYC compliance requirements are basically the rules and standards that banks and businesses must follow to make sure they really know what type of customers they're dealing with. In other words, banks and businesses have to verify who their customers are, check out their financial moves, and keep tabs on any suspicious activity.

Now, why does this matter? Well, besides the obvious that nobody wants to be mixed up with money laundering or shady deals, it's also about keeping the reputation of the financial institution safe and secure and avoiding legal penalties and fines for non-compliance.

KYC compliance requirements typically involve verifying customer identities, assessing transaction patterns, and conducting ongoing KYC monitoring to detect suspicious behavior.

1. Customer Identification Program (CIP)

In the United States, this KYC requirement is mandated by the Patriot Act, the CIP sets forth minimum KYC requirements for opening an individual financial account, including collecting information such as name, date of birth, address, and identification number. While this information is gathered during account opening, institutions must also verify the identity of the account holder within a reasonable timeframe.

Verification methods may involve document review, non-documentary methods like checking information against consumer reporting agencies or public databases, or a combination of both. It's essential for institutions to conduct a risk assessment to determine the appropriate level of scrutiny for identity verification.

Factors influencing the specific policies may include the types of accounts offered, account opening methods, available identifying information, and the institution's size and customer base.

2. Customer Due Diligence

Customer Due Diligence (CDD) goes hand in hand with the Customer Identification Program (CIP) but takes the verification process a step further. 

Here's the breakdown of the three levels of due diligence:

• Simplified Due Diligence (SDD): This is for low-risk situations where a full investigation isn't necessary. 

• Basic Customer Due Diligence (CDD): This is the standard process for all customers. It involves verifying their identity and assessing associated risks.

• Enhanced Due Diligence (EDD): When things get complex or risky, Enhanced Due Diligence takes place. It requires digging deeper to gather additional information and understand customer activities better, similar to conducting a thorough background check on someone with a more complicated history.

3. Periodic Reviews & Ongoing Monitoring

Simply verifying your customer's identity once isn't sufficient. You need a system in place to continuously monitor customer activity. This ongoing KYC monitoring involves keeping tabs on financial transactions and accounts, using predefined thresholds tailored to each customer's risk profile.

When it comes to monitoring, several factors may come into play, depending on the customer and your risk management strategy:

• Any sudden spikes in activity
• Checking against sanction lists for any individuals involved
• Keeping an eye on any negative mentions in the media
• Unusual cross-border transactions or activities outside the usual area
  

If any account activity raises red flags, there might be a requirement to file a Suspicious Activity Report (SAR).

Read more: The Best 5 Sanctions Screening Software Reviewed and Compared.

KYC Categories

These are methods and technologies used for verifying the identity of customers and ensuring compliance with regulatory requirements. Each category may be suitable for different types of customers, contexts, and regulatory environments.

Specific industries or regions may have unique variations or combinations of the aforementioned categories tailored to their needs and regulatory requirements.

Corporate KYC: Focuses on verifying the identity and ownership structure of corporate entities.

Electronic KYC Verification (eKYC): Electronic KYC verification utilizes digital methods and technology for remote identity verification.

Mobile KYC: Allows customers to complete KYC compliance requirements using mobile devices.

Biometric KYC: Uses biometric data, such as fingerprints or facial recognition, for KYC identity verification.

Video KYC: Enables remote KYC identity verification through live video calls with representatives.

Document-based KYC: Involves collecting and verifying physical or electronic documents for identity confirmation.

Blockchain-based KYC: Utilizes blockchain technology for secure and decentralized identity verification processes.

Who is Obligated To Comply With KYC Regulations?

The scope of Know Your Client compliance can extend beyond just financial institutions to include various other businesses and industries that are susceptible to money laundering or financing of terrorism. These may include:

1. Banks and Financial Institutions
2. Insurance Companies
3. Investment Firms and Brokerage Houses
4. Money Services Businesses (MSBs)
5. Cryptocurrency Exchanges
6. Real Estate
7. Law Firms and Accountants
8. Gaming Establishments

Read more: How Aseel real-estate crowd-funding reduced onboarding time by more than 87% using FOCAL

KYC Compliance Laws Requirements Across Different Jurisdictions

In this section, we will take a look at the KYC compliance process in the USA, the UK, KSA, and the UAE.

1. KYC Compliance Requirements in the USA

In the United States, oversight of KYC compliance falls under the purview of the Financial Crimes Enforcement Network (FinCEN). Also, as a member of the Financial Action Task Force (FATF), the USA adheres to global standards aimed at combating money laundering, terrorist financing, and other threats to the integrity of the international financial system.

Documentary requirements for KYC compliance in the USA involve verifying various official documents issued by relevant authorities. These may include the customer's Social Security Card, passport, driver's license, and credit or debit card.

Key elements of customer due diligence include:

1. Verification of the customer's identity.
2. Confirmation of the identities of all beneficial owners with a stake of 25% or more.
3. Understanding the nature of customer relationships to assess risk profiles.
4. Ongoing due diligence and KYC checks to identify and report suspicious activities.

2. KYC Compliance Requirements in the UK

In the UK, financial institutions, including banks, investment firms, insurers, and currency exchanges, must comply with KYC regulations under the Anti-Money Laundering (AML) framework updated in 2017.

These regulations require verifying the identity of individual customers and obtaining key details of non-individual entities overseen by the Financial Conduct Authority (FCA). The FCA advocates a risk-based approach aligned with FATF guidelines and provides a five-point framework for identity verification.

Also, businesses in the cryptocurrency sector must register with the FCA and adhere to KYC requirements. Real estate transactions are subject to AML and KYC regulations enforced by Her Majesty's Revenue and Customs (HMRC), necessitating verification of identities, sources of funds, and enhanced due diligence for high-risk clients.

3. KYC Compliance Requirements in KSA

In Saudi Arabia, financial institutions must comply with anti-money laundering (AML) regulations enforced by regulatory bodies such as the Saudi Central Bank (previously known as SAMA). Compliance involves a risk-based approach, as mandated by the Implementing Regulations to the Anti-Money Laundering Law of 2017.

Customer Due Diligence (CDD) procedures require verification of identity using official documents like national identification cards, residence permits, or passports, and address verification through utility bills or bank statements.

Enhanced Due Diligence (EDD) is necessary for high-risk clients, such as Politically Exposed Persons (PEPs) or those with suspicious transactions involving detailed information about their occupation, source of funds, assets, and transactions.

Financial institutions are obligated to retain due diligence data for at least ten years, monitor transactions continuously, and report suspicious activities to the Saudi Arabia Financial Intelligence Unit (SAFIU), as per Article 13 of the Saudi Anti-Money Laundering Law.

Penalties for money laundering violations in Saudi Arabia are severe, including fines of up to 7 million riyals ($1.8 million) and imprisonment of up to 15 years.

Read more: Top AML Fines and Penalties You Should Avoid in 2024

4. KYC Compliance Requirements in UAE

Regulatory oversight for KYC requirements in the UAE involves multiple authorities, including the Central Bank of the UAE (CBUAE), the UAE Securities and Commodities Authority (SCA), the Dubai Financial Services Authority (DFSA), and the Abu Dhabi Global Market Financial Services Regulatory Authority (ADGM FSRA). These entities enforce compliance with Federal Decree-Law No. (20) of 2018 On Anti-Money Laundering and Combating the Financing of Terrorism and Financing of Illegal Organizations, along with Cabinet Decision No. (10) of 2019.

Financial institutions in the UAE are mandated to establish AML/KYC procedures and controls. Compliance measures include conducting risk assessments, implementing due diligence measures, appointing compliance officers, and establishing management and information systems. Prompt identification and reporting of suspicious transactions to competent authorities are crucial.

The UAE has strengthened penalties for money laundering offenses, with imprisonment of up to ten years and/or a fine of between AED 100,000 and AED 500,000.

Read more: An Overview of Anti-Money Laundering (AML) Laws in the UAE

Conclusion

KYC checks are the foundational step in AML compliance and KYC compliance requirements. AI and machine learning platforms, such as FOCAL, play a crucial role in enhancing KYC compliance processes for financial institutions. The FOCAL platform empowers financial institutions with an AML Compliance solution, seamless identity verification, advanced customer due diligence, and more. FOCAL enables automation and efficiency in customer due diligence, allowing for quicker and more accurate identification and verification of individuals and entities.