What is Know Your Customer (KYC)?

The demand for KYC does not seem to be slowing down anytime soon. According to AML Intelligence, the global spend on AML/KYC is projected to total a record $2.9 billion in 2025. So, what is KYC? Basically, it consists of verify customer identities in order to prevent financial crimes. There are several elements of KYC, such as Customer Identification (CIP), Customer Due Diligence (CDD), ongoing monitoring and Enhanced Due Diligence (EDD), which we will detail later in this post. So, don’t worry if these terms sound unfamiliar to you.  

What is the Purpose of KYC Compliance?

As we have mentioned in the introduction, KYC’s principal aim is to prevent financial crime such as fraud, money laundering or terrorist financing. However, it is not its sole purpose. It also plays a very crucial role in supporting AML compliance and building regulatory trust. 

Why Is KYC Compliance Important?

Let’s start by its role in preventing fraud. We have already mentioned that it is used to verify customer identity, which reduces the likelihood of several instances such as identity theft, account takeover or other types of fraud. Also, it is no longer optional, because KYC holds an increasingly indispensable place in AML laws. If you do not comply, it is almost certain that you will face heavy fines and legal action. 

In addition to avoiding financial penalties, KYC allows you to protect your reputation and customer trust since it prevents getting linked with financial crimes. KYC is also an important step you can take to ensure regulatory integrity, since compliance is a clear indication that you are operating transparently and responsibly. 

What Are the Requirements and the Process of KYC Compliance?

The process starts with Customer Identification Program (CIP), in which you must collect name, date of birth, ID documents and addresses to verify the legitimacy of the customer. Then, you must conduct Customer Due Diligence (CDD) in order to assess important metrics like the customer’s background, occupation and geographic risk. If the client you are onboarding turns out to be a PEP (Politically Exposed Person) or high-risk, you must conduct Enhanced Due Diligence (EDD) because these customers necessitate verifying the source of funds and applying additional scrutiny. 

Now that onboarding is over, you must apply ongoing monitoring in case a suspicious or anomalous activity comes up. Also, you must keep records of customer data and documents for 5-10 years (depending on the regulations) for audits or other cases. There is one more thing that you should do regularly, which is screening customers against OFAC, EU and UN sanction lists. Also, applying a Risk-Based Approach (RBA) is immensely useful since it can save you both time and resources.  Last but not least, do not neglect to train your staff on identifying red flags, understanding regulatory changes and following proper KYC procedures. 

What Are KYC Documents?

The first quintessential KYC document is the proof of identity, which you can verify through passports, government-issued IDs and driver’s licenses. After you complete this part, you can proceed to verifying proof of address through documents like utility bills, bank statements or lease agreements. For businesses, you will need additional documents such as certificate of incorporation, shareholder structure, UBO declaration and Memorandum & Articles of Association. However when it comes to high-risk accounts, you will also need salary slips, tax returns, bank statements and investment statements. 

KYC Regulators by Country

The most prominent national regulators who are responsible of KYC regulation are FinCEN (US), FCA (UK), EBA (EU), MAS (Singapore), RBI (India), BaFin (Germany), AUSTRAC (Australia), HKMA, FSA (Japan), FINMA (Switzerland).

What is Know Your Customer Software?

Fundamentally, it is a digital solution that can help you in the KYC processes that we have mentioned before.

What Does KYC Software Do?

With help of the documents you submit, these software can automatically verify a customer’s identity and confirm the authenticity using AI, OCR or database checks. Also, they can screen customers against OFAC, UN, EU and local sanctions lists and PEP databases. In addition to these, KYC tool can also evaluate the customer’s risk based on numerous factors and apply ongoing monitoring. They also prove very useful regarding the necessary documentation for audit trails.

What are Global KYC Regulatory Frameworks?

The FATF Recommendations is the most important global KYC regulatory framework, in which there is a set of 40 recommendations that aims to help countries implement effective AML/CFT measures. In EU, AMLD5 and AMLD6 are some of the most important regulations regarding the KYC. Among other prominent regulatory frameworks The U.S.’ BSA, Patriot Act and FinCEN; and the UK’s MLR 2017, are also worth mentioning. 

When Is KYC Required?

You need KYC when onboarding new customers and updating account ownership. Moreover, it is also required during high-risk transactions, PEP or corporate reviews, audits and alerts.

What Are the Sectors Subject to KYC?

Basically, all sectors that are directly or indirectly involved in high-value transactions are subject to KYC obligations: Banking, finance, crypto, blockchain, real estate, gambling/gaming, legal/accounting and insurance to name a few. 

Why KYC Is Crucial in the Banking Sector?

KYC’s crucial role for banks can be linked to several reasons. They have high exposure to fraud. They must follow several regulatory rules (e.g. FinCEN, FATF, Basel, FIU) and handle retail and corporate client types. Regulatory expectations for banks are not so different from the regulatory frameworks that we have mentioned before. There are FinCEN’s BSA and CIP for the U.S., FCA’s MLR 2017 for the UK, EBA’s AMLD5/6 for EU, RBI’s Master KYC for India to name a few.

KYC vs. e-KYC vs. Digital KYC: Key Differences

It goes without saying that the following two types are based on KYC. However, there are slight variations between them. KYC is basically manually verifying the identity using physical documents. In e-KYC, identity is electronically verified with digital methods. However, Digital KYC is fully online and automated. It is powered by AI, biometrics and real-time database checks. The traditional KYC is globally accepted and best for legacy bankings but e-KYC’s compliance varies by region, since it requires digital infrastructure, which makes it a better fit for Fintechs. Digital KYC, on the other hand, has been becoming increasingly accepted and best for regulated onboardings. Also, it should be noted that their costs go from low to high in order. 

KYC and Risk-Based Approaches

We can divide risks into three categories: Low, medium and high. In low risk, standard checks (verifying ID, address etc.) are sufficient. When the risk is found to be at medium level, you’ll need to conduct additional checks through background screening and moderate monitoring. However, when it comes to high-risk, you must apply Enhanced Due Diligence (EDD) to verify the source of funds, get senior management approval and conduct enhanced monitoring/screening. 

How to Check KYC (KYC Screening Explained)

First thing you must do is to verify their authenticity through identification documents. Next, check customers against PEP lists, sanctions, watchlists, adverse news/negative media to find out if they appear in these. Then, assess their risk level based on several factors such as country, occupation, transaction patterns and other factors. Even after the onboarding is over, continuously track transactions and profiles in case any unusual or suspicious activity comes up. It is also worth mentioning that there are two ways you can go with KYC screening. You can leave it to internal compliance teams or, use AI-powered solutions such as Sanction Scanner, Onfido, Jumio or other Regtech solutions. 

What is Due Diligence in the KYC Process?

There are different types of Due Diligence for different customers: CDD for regular customers, EDD for PEPs, crypto users, high-risk geographies and SDD for low-risk users. Their goal is the same, which is to verify the customer, but they differ in their respective methods. 

What Does Customer Due Diligence (CDD) Include?

In CDD, you must verify the customer’s identity through official documents. Then, identify the Ultimate Beneficial Owner data so that you can verify the individuals who ultimately control the customer, which is particularly important for corporate accounts. Another important thing to do is to understand the purpose of the account and their possible transaction patterns. This can help you immensely when detecting unusual or suspicious activity. We have already mentioned that this is not a one-time-only process, so you must not neglect regularly monitoring and checking for ongoing updates as well. 

When is Enhanced Due Diligence (EDD) Required?

While we’ve already underlined the need of EDD for entities like PEPs, shell companies, crypto and offshore trusts, let’s dig a little deeper. You will need extra documents, such as more detailed KYC forms and additional ID verification, in order to verify the customer identity. Another important point is locating the origin of wealth and source of funds. You will need to gather enough evidence to show these as proof of wealth. Lastly, you must conduct deep checks through means like adverse media screening, enhanced monitoring and tighter transaction limits. 

Why Due Diligence is Critical in KYC?

First of all, it comes as a requirement of financial authorities like FATF, FinCEN and AMLD. Aside from being a mere obligation, it presents many advantages for combating financial fraud. The first benefit of KYC is that it can detect fraud and financial crime well before a potential crime escalates. Secondly, KYC can hand you audit-ready documentation, which can come very handy during regulator and internal reviews. All of this can protect your institution from fines, reputational damage and legal risk, as well as building customer trust during onboarding. 

How to Build a Compliant KYC Framework: Step-by-Step Guide

By now, you probably have a good understanding of what a compliant KYC framework consists of. However, it is equally important to know how you can build one. 

First you must check regulatory obligations that may concern you, such as FinCEN, FATF, EU AMLD. It is highly likely that you will need to comply with multiple jurisdictional obligations. As the second step, segment your customers by risk level. This can help you both save time and resources. Then set up a reliable Customer Identification Program (CIP) so that you can collect and verify ID documents, biometrics and beneficial ownership details. Then set up sanctions and PEP screening to be aware of potential dangers based on sanctions lists, OEOs, watchlists and adverse media. Also, do not forget to continuously monitor transactions and profiles. Even though KYC software can help you regarding this, you should nevertheless store the relevant data for the time specified based on the jurisdictions. Other things you can do to further improve your KYC Framework are training your staff continuously, using RegTech tools and reviewing/improving with audits and feedback.

Technologies Used in KYC

AI/ML Document Verification: This technology can help you to detect forgeries and validate ID authenticity. 

Real-time PEP and Sanctions Checks: These are pretty self-explanatory. They basically conduct continuous screening against updated global watchlists. 

eKYC APIs with biometrics: You can further verify the customer during onboarding with the help of technologies such as face recognition, fingerprint scans, liveness detection for remote onboarding. 

Behavioral biometrics: This technology analyzes how a person interacts with devices, such as typing rhythm, mouse use, how fast they type etc. 

AML-KYC integrated systems: These are technologies with a broader scope, which include platforms that can unify customer data, risk scoring and transaction monitoring altogether. 

What Are the Challenges in KYC Compliance?

There are several difficulties that may come up regarding KYC processes. The most prevalent difficulties are false positives, because their excess may keep compliance teams occupied and slow the onboarding processes. Data silos may also slow down the KYC process due to fragmented systems hindering real-time risk assessment. Moreover, having a secure system doesn’t mean that you will not face any negative results because the strict checks that come with the security may deter customers during onboarding. This has even reached to a point where certain authorities started to loosen their requirements. For example, The Economic Times’ reported that RBI has simplified KYC rules make the onboarding faster. However, certain authorities are doing the opposite due to security concerns. According to Reuters, Hong Kong has decided to implement stricter KYC regulations in order to prevent money laundering and terrorism financing. Last but not least, high costs of compliance can strain budgets, especially those of smaller firms.

What is a KYC API?

This part especially concerns fintechs, crypto and banks because KYC API enables real-time onboarding, document verification, risk scoring and AML compliance directly within apps or platforms. If you want to make your compliance processes faster, safer and cost-effective, you can leverage Sanction Scanner’s solutions, which include KYC API as well.

Request a demo now with Sanction Scanner, and our team will provide you with full compliance at speed!