Know Your Customer (KYC): Key Definitions and Regulatory Insights

Research shows that criminals launder up to $5B globally each year. Financial fraud is costing the world an estimated $3B, and there are reports of a single terrorist organization getting $1B in funding annually.

Clearly, financial crime is a big problem. So, what are businesses and financial institutions doing about it? KYC is the best and most valued tool for detection and prevention in 2024. In fact, KYC is such a vital safeguard it’s been a legal requirement in many countries for over 20 years.

Today, I will do a full KYC breakdown. What it is, the different types, who it’s for, legal regulations, the various approaches, and its impact on emerging industries. Plus, we look at the evolution of KYC, its use of modern technology, and how quickly it’s improving to determine what KYC looks like in the future.

What is KYC?

KYC is an acronym for Know Your Customer. Financial institutions and businesses often use the KYC process to lower the risk of financial loss, prevent criminal activity, and stay compliant with local laws.

The KYC process starts with collecting personal information, including name, email, date of birth, ID, and other details to verify your identity. Money laundering, terrorism funding, and fraud efforts have all been caught and prevented at some point, thanks to proper KYC procedures!

Governments often regulate and enforce KYC because of its effectiveness. The UK, USA, Australia, Canada, the EU, and many others have made KYC a legal requirement.

There is also Know Your Business (KYB) or Corporate KYC and Know Your Gamer (KYG) – the same idea for business and gaming clients rather than a general consumer. Although, these companies may occasionally have to follow unique laws in certain countries.

Understanding KYC in Business

Businesses need to know who you are for security purposes and to stay compliant. In a KYC check, a business might:

• Check your delivery address matches your billing to verify the location
• Request ID documents with a photograph, usually a passport or driver's license
• Analyze your previous financial transactions to ensure you’re not a high risk for fraud
• See if your IP address is linked to any unusual activity

In many countries, KYC isn’t an option for businesses – it’s a legal requirement to deter fraud, money laundering, and terrorism. KYC regulations differ depending on the country you’re in and the type of company you own. But it’s not uncommon for a business to do a KYC check when you:

• Do online shopping
• Open a bank account
• Buy Cryptocurrency
• Apply for insurance
• Take out a loan
• Purchase real estate
• Apply for a loan or credit card
• Make a large money transfer
• Buy an insurance policy
• Purchase real estate

KYC for Companies

When you integrate advanced KYC procedures into your company, you can:

• Improve compliance. eKYC technology can update quickly to new regulations, ensuring continuous and easy compliance with local laws
• Lower on-boarding time automated checks such as facial recognition reduce the time to verify ID without lowering security standards
• Increase fraud detection advanced analytics allow businesses to avoid human error and quickly identify fraud attempts

KYC for Clients

KYC also has an impact on customers. It:

• Builds trust. When customers know businesses are following regulations known to improve their security – there is an immediate trust built
• Speeds up on-boarding. Quicker transactions aren’t just beneficial for companies, clients value their time too
• Improves customer experience. Naturally, when you increase security, speed up transactions, and build trust, you get happier customers

KYC Requirements for Banks

Banks use KYC to protect against criminal activity, damages, and non-compliance fines. In a KYC process, banks often:

• Look for a photo ID to verify your identity
• Compare your financial transactions to fraud watchlists
• Verify your listed address is valid and you’re able to collect mail
• Analyze your banking activity to stop high-risk behavior quickly
• Monitor your IP addresses to prevent unauthorized access attempts

For most countries, like businesses, banks are legally required to implement KYC processes to prevent illegal activities such as money laundering and fraud. You might get asked for additional info or to follow extra verification steps when you:

• Open a new bank account
• Apply for loans or credit card
• Make a big money transfer

Banks have different KYC procedures for different situations. Customer Identification Program (CIP) and Customer Due Diligence (CDD) are common choices.

Customer Identification Program (CIP)

The CIP is the process banks use to get to know you. You provide your name, address, date of birth, and government ID, such as a passport or driving license. It’s also not uncommon for you to need a utility bill to prove your address.

Once the bank verifies who you are, checks begin. What’s your credit score? Is there any record of legal issues in the past? A bank can gauge the risk associated with you in many ways and decide whether doing business with you is the right decision.

Luckily, compared to other KYC procedures, CIP regulations are flexible. It’s unlikely the banks are analyzing your entire background when you open a savings account – as there’s minimum risk. However, the banks' KYC processes become much more comprehensive if you deal in large transactions or are seen as high risk.

Customer Due Diligence (CDD)

CDD is another critical KYC check banks use. There are three levels, with stricter checks for higher-risk individuals:

• Simplified Due Diligence (SDD) – for low-risk customers, banks only request minimal info, including your name, email, address, and photo ID (passport or driver's license)
• Standard Customer Due Diligence (CDD) – most bank clients go through the CDD process where banks use financial history, source of funds, and transaction monitoring
• Enhanced Due Diligence (EDD) – high-risk customers are subject to EDD with detailed background checks, advanced account monitoring, and comprehensive fund analysis

Innovative Approaches to KYC

In the past, KYC was time-consuming and expensive – everything was paper-based and human-reviewed. Now, the whole process has been streamlined thanks to electronic Know Your Customer (eKYC.)

Electronic KYC (eKYC) Overview

eKYC is known to improve:

• Speed. It connects with the best identity verification software to reduce processing from days to minutes
• Accuracy. Automated systems reduce errors so that companies can collect more precise data
• Cost. No physical storage, manual processing, or paperwork requirements, which means fewer processing expenses
• Adaptability. The best eKYC systems are built for easy and quick updates, making regulatory updates much more manageable
• Integration. eKYC systems usually integrate easily with anti-money laundering (AML) databases and government verification services, which helps in early detection and prevention
• Reporting. Advanced eKYC enhances customer tracking, auditing, and reporting, reducing the risk of being found non-compliant and the heavy penalties that come with it
• Customer Experience. The improved efficiency of eKYC with reduced speeds and lower costs enhances the customer journey

eKYC is the preferred choice for heavily regulated industries, including banking, cryptocurrency, and online gaming!

Mobile Verification Methods

Most people have phones with cameras, fingerprint scanners, and GPS. Our phones are designed to make sharing this information easy. So, it only makes sense that many businesses are opting to use mobile KYC to simplify verification processes and easily collect vital info such as:

• Geo-location. Your phone number, IP address, and GPS to estimate your real location
• Device Information. Your phone model, IMEI number, usage patterns, and operating system to build a more extensive profile
• Documentation. Mobile apps allow customers an easy way to send photos of verification documents
• Biometrics. Facial recognition and fingerprinting technology is becoming more common in modern smartphones, allowing businesses to perform more advanced checks

You can learn more about the advancements in mobile verification tech with our comprehensive iDenfy review.

Facial Recognition Technology in KYC

Thanks to machine learning, modern-day eKYC verification is easy. Facial recognition technology has played a big part in this, allowing businesses to:

• Improve security. With sufficient training, AI systems can accurately recognize faces, reducing errors and improving detection
• Speed up onboarding. Automated facial recognition removes the dependence on human verification processes, which means near-instant onboarding
• Enhance user experience. User-friendly apps and automated technology allow customers to verify their identity in just a few steps
• Reduce costs. Fewer humans needed in ID verifications typically means lower overheads

KYC Laws and Regulations Around the World

I collected the legal frameworks, regulatory bodies, and KYC requirements from various countries using government resources and other trusted sources. Below is a table of what I found.

It’s important to note the penalties are the maximum sentence for breaching anti-money laundering and counter-terrorism regulations. It’s not a penalty specifically for breaking KYC laws. However, failure to comply with the required KYC procedures may make you partly responsible for crimes associated with these heavy penalties.

Also, this is a simplification of a very complex subject with lots of potential factors at play. To ensure you’re fully compliant with KYC regulations, it’s best to consult with regulatory compliance experts or an accredited legal advisor to get personalized advice.

Country	Key Legal Framework	Regulatory Body	KYC Requirements	Penalties for breaching
Australia	Anti-Money Laundering and Counter-Terrorism Financing Act (AML/CTF Act)	AUSTRAC	Banks and Financial Institutions, Casinos and Gambling Services, Cryptocurrency Exchanges, Bullion Dealers, Legal and Accounting Firms, Real Estate Agents, Trust and Company Service Providers	A$6.2M / life-imprisonment
Brazil	Law No. 9,613/1998 (Money Laundering Prevention)	COAF	Financial Institutions, Insurance Companies, Payment and Credit Card Administrators, Property Distributors, Leasing, and Factoring Companies	R$50M / 10 years
Canada	Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA)	FINTRAC	Money services businesses, Real estate brokers and developers, Insurance companies, Professional services such as law firms and accounting firms, Casinos and gaming establishments	$2M CAD / 5 years
European Union	5th Anti-Money Laundering Directive (AMLD)	European Banking Authority (EBA)	Banks and other financial entities, Managers of assets, Experts in the law, Estate agents, Cryptocurrency, Gambling	€5M or 10% of annual turnover / 4 years
India	Prevention of Money Laundering Act (PMLA)	Reserve Bank of India (RBI)	Courier, Companies, Banks and other financial institutions	₹5L / 10 years
Mexico	Federal Law for the Prevention of Illicit Operations	Financial Intelligence Unit (UIF)	DNFBPs, Cryptocurrency, Retirement funds, Insurance bonds, Gambling, Real estate, Other financial organization	5,000-day fine / 15 years
New Zealand	Anti-Money Laundering and Countering Financing of Terrorism Act (AML/CFT Act)	Financial Markets Authority (FMA)	Financial organizations, VASPs, Casino, Accountants, Lawyers, High-value dealers	NZ$300,000 / 2 years
South Africa	Financial Intelligence Centre Act (FICA)	Financial Intelligence Centre (FIC)	Financial institutions, Cryptocurrency, Legal professionals, Brokers, Casino, PEPs, Precious stone and metal dealers, Real estate agents, Charities	R100M / 15 years
United Kingdom	Money Laundering, Terrorist Financing and Transfer of Funds Regulations (2017)	Financial Conduct Authority (FCA)	Legal and professional services, Real estate, Gaming and casinos, E-commerce, Payment processors, Digital wallets, Financial organizations, PEPs	unlimited fine / 14 years
United States	Bank Secrecy Act (BSA) and USA PATRIOT Act	Financial Crimes Enforcement Network (FinCEN)	Financial institutions, Online retailers, Crypto and other digital assets, Real estate agents, Insurance companies	$500,000 fine or twice the amount involved in the transaction / 20 years
Rest of the World	Various national laws	Various monetary agencies	Various organizations	Various other fines and prison terms

The Role of KYC in Emerging Industries

KYC procedures are crucial in emerging industries like cryptocurrency and online gaming. These sorts of businesses are more vulnerable to fraud, and KYC offers a vital layer of protection.

KYC in Cryptocurrency Markets

Cryptocurrency exchanges use KYC to verify customer identities. The process involves collecting government-issued IDs, proof of address, and even biometric data (in some cases.) KYC is essential to prevent cryptocurrency use in money laundering and terrorist financing, ensure transaction transparency, and build trust in a volatile market.

KYC requirements in cryptocurrency vary from country to country:

In the United States, cryptocurrency exchanges must request a user's address, government ID, and file a Suspicious Activity report for any large or unusual transactions. Additionally, you must register with the Financial Crimes Enforcement Network (FinCEN)

In the European Union, the 5th Anti-Money Laundering Directive requires both cryptocurrency exchanges and wallets to do KYC checks. You must verify identity, monitor transactions, and report suspicious activities to the appropriate national authorities.

Cryptocurrency KYC processes have proven useful in dozens of cases around the world, including when:

• Changelly, successfully tracked and recovered $585,000 using KYC data
• Binance avoided scrutiny for its poor security measures by integrating advanced eKYC standards
• Quadriga Fintech Solutions collapsed, and the FBI used KYC to locate missing funds and speed up the appropriate reimbursements

KYC in the Online Gaming Industry

In online gaming, KYC is key to ensuring platform security. It involves verifying user identity, age, location, and source of funds. These checks help prevent fraud and money laundering, block minors from inappropriate content, block users in certain regions, and comply with anti-money laundering laws (AML.)

Like in the crypto industry, KYC requirements in online gaming depend on local laws:

In the United Kingdom, the UK Gambling Commission (UKGC) ensures all online gaming platforms follow KYC procedures outlined in the Gambling Act 2005.

In the United States, state-specific laws regulate gaming KYC procedures. For example, gaming platforms must verify identity and age in New Jersey, Pennsylvania, and Nevada to prevent money laundering and fraud.

There are many times KYC proved helpful in the online gaming industry, like when:

• Ubisoft, to prevent cheaters from creating new accounts, used advanced device tracking to identify banned users and reported a 78% reduction in account spoofing
• Casumo began using AI KYC technology, allowing for fast age, address, and identity verification – a much smoother player experience
• Verifymyage was released, allowing game developers to integrate age verification easily and encouraging dozens of dev companies to install a vital safeguard for children

Future Trends of KYC

As AI, blockchain, biometrics, and natural language processing (NLP) continue to improve, so does our ability to verify and evaluate information automatically. With less need for human resources, KYC costs are reduced, and regulators can hold companies to higher standards.

This means the future of KYC is promising with advancements in facial recognition, image processing, and modern technology such as fingerprint scanners. Customers can expect faster onboarding, companies can improve detection, and government agencies can prevent more crime.

But, of course, advancements in technology work for both sides. Yes, tech evolution is going to improve KYC Checks. But criminals also have easy access to advanced technology such as AI. Could they use these advancements to evade KYC detection, and how will governments, regulators, and businesses stop them?

FAQ