Know-Your-Customer (KYC) requirements were designed to prevent financial crimes that cause up to $2 trillion in losses to global GDP every year. Thus, regulators are tightening the rules for financial institutions to turn the situation around. All companies, without exception, are required to verify the identity of their customers, assess the risks of cooperation, and monitor changes in activity — otherwise, businesses may face harsh penalties.
The UK is one of the countries that take the most active measures to combat financial crime. The recent high-profile cases of Commerzbank and Deutsche Bank are a clear illustration of how the FCA as a regulator deals with companies that fail to comply with the requirements.
This article will help to understand more about the importance of KYC and requirements for business.
Why Do We Need KYC Policies?
KYC requirements in the UK and other countries are the main tools for combating ML/FT crimes.
Law violations in this area pose a serious problem for the global economy. In the UK alone, the scale of illegally laundered funds reaches £100 billion a year, according to the National Crime Agency.
For this reason, regulatory bodies and companies are paying increasing attention and emphasising the importance of KYC in the UK. Counteracting corruption schemes, financial fraud and financing terrorism is impossible without a clear understanding of who the client is.
The rules cover all areas related to the provision of financial services, such as:
- Banking sector.
- Insurance companies.
- Real estate agencies.
- Crypto services and gaming services.
- Private creditors, brokers, etc.
On a global scale, KYC guidelines are being developed by the Financial Action Task Force (FATF). It is an international organisation that monitors and combats financial crime, and its recommendations are implemented in more than 190 countries.
KYC is not a static area. Companies face new challenges every year and must revise their KYC approaches as financial scams become more sophisticated as technology advances. Legislators must respond quickly to the development of new industries, such as the crypto industry, NFTs, etc.
What are Know-Your-Customer (KYC) Checks?
KYC is defined as a compliance measure that is related to the identification of a customer. This procedure includes the collection and verification of personal and business information, assessing the risk associated with the client, verifying the PEP status and checking across multiple sanctions lists, and checking for corruption scandals, fraud, and dubious business connections.
KYC in the UK and other countries has its differences and specifics. But due diligence and compliance standards and requirements are accepted in most countries. Regardless of jurisdiction, they are designed to prevent ML/FT crimes and other illegal activities.
In the EU countries, the main sources of KYC legislation are Anti-Money Laundering Directives (AMLDs). Those directives set out requirements for businesses and penalties for violations, such as fines, criminal liability and the revocation of licences from offending companies.
Companies must check not only the clients that apply for services but also the contractors with whom they plan to cooperate. The latter procedure is known as "Know Your Supplier" (KSP).
The amount of information and depth of analysis during the check will depend on the potential risks. The greater the risk an individual or supplier poses (for example, they are a PEP or affiliated person) — the more thorough the check will be.
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KYC Processes
KYC in the UK and other countries may imply varying degrees of background checks and "digging" into the customer's history. As a result, the company should be confident in the client's or contractor’s reliability, and make sure they are not associated with criminal activity.
KYC requirements in the UK, at a minimum, include verification of documents such as a national ID, driver's licence or international passport. Companies also request data on the date and place of birth, and residence address.
More thorough screenings are carried out for high-risk clients, such as foreign residents or PEPs. They are subject to an EDD (Enhanced Due Diligence) check, which may include adverse media screening, and verifying the origin of funds and affiliates, among other things.
It should be noted that the verification of individuals will be different from the verification of companies. When reviewing companies, it is important to determine the ultimate beneficial owners (UBOs) who are running the business.
What is KYC in Banking
Banks are at the forefront of implementing KYC rules, as they handle all financial transactions. Any vulnerability in this sector can trigger a surge in financial crimes, so companies need to carefully check every transaction, every client, partner, and contractor.
The latest innovations in banking are associated with the active development of online technologies as a result of the COVID pandemic. More and more customers nowadays expect to receive services in digital form, without the need for a physical presence in the bank. A recent FICO report states that 62% of USA customers expect to go through KYC verification online when opening an account. Banks are already implementing AI and biometric technologies to meet this demand.
KYC Checks in the UK
KYC in the UK is a legal requirement. Thus, all institutions involved in financial transactions must verify information about their clients.
Why are KYC checks performed?
- To prevent financial crime and money laundering.
- To maintain the reputation of the business, and as a result — the stability and trust of customers.
- To avoid fines, criminal liability and business closure.
- To comply with the global financial sanctions regime.
Customer due diligence includes several measures, including:
- Request for basic information and documents from the client and verification through independent sources.
- Additional measures proportionate to the risk assessment.
- Conducting EDD checks where applicable, e.g. for high-risk clients, and establishment of ownership structure for legal entities.
If the verification results in the wholeness of the information about the client, this means that the financial institution can be sure of the security of working together and of providing services.
In addition to new clients, it is also necessary to update information about the current client base. LIGA UNITED will help you cope with the amount of information.
KYC Requirements in the UK
KYC in the UK is supported by a developed legislative framework. Compliance with the requirements is monitored by the Financial Conduct Authority (FCA). The effectiveness of this regulator and know-your-customer rules in the UK is noted and earned international recognition. For instance, the FATF mentions the UK as a global leader in corporate transparency.
Strengths include, among other things, the adoption of a risk-based approach, which, in addition to following the letter of the law, encourages flexibility and individuality in assessing clients. Also, the development of the KYC sphere at this stage is impossible without the introduction of technological innovations that are actively used in the UK.
The main document that defines KYC rules in the UK is the Money Laundering Regulations of 2017. Companies are also guided by the FATF guidelines and the FCA guidelines as their main regulator.
The basic verification requirement for individuals is verification of name, date of birth, address, ID cards, and additional documents from UK authorities.
Information for verification of legal entities includes:
- Official company name.
- Registration number.
- Top managers and ultimate beneficial owners.
The KYC form is a document where information is collected to identify the client. It usually includes the name, date of birth, ID number, etc.
Know-your-customer in the UK is a common procedure among banks and financial institutions.
KYC regulations in the UK are based on international recommendations from the FATF and the main internal document — the Anti-Money Laundering Regulation 2017. According to these rules, companies must verify information about their customers among individuals and legal entities.
KYC requirements in the UK help combat money laundering and financial crime. Verification of individuals and legal entities helps companies assess the risks concerning customers, and is a mandatory procedure under the law.
