Know your customer (KYC)

Know Your Customer (KYC) or Know Your Client is a form of due diligence which helps to ensure that financial institutions have detailed information about their clients.

Not only does this mean that financial institutions understand their clients better (including considerations such as risk tolerance and investment preferences), it also aims to clearly identify who the institution is dealing with and to check whether the client is not involved in any criminal activity (such as fraud or money laundering).

Without KYC procedures, a company could inadvertently become party to illegal activity and be subject to the legal consequences of that activity.

How does KYC work?

Many financial institutions now have comprehensive KYC policies and use a KYC form to collect data from clients.

In terms of standards, the key elements of a KYC policy are:

  • Client acceptance policy
  • Client identification procedures
  • Transaction monitoring
  • Risk management

The approach is risk-based and, as well as basic identity information, firms will seek to determine the risk of the client engaging in criminal activity and to establish transactional expectations (so that any unusual activity would be flagged up for further investigation).

Investment advisors can then also use the data provided to make better decisions in the course of managing their client's investments. This protects both the client and the investment advisor, with clear boundaries of what is and what is not acceptable.

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