What is KYC

KYC, which stands for Know Your Customer, is a form of protection for both clients and financial institutions. Many regulatory authorities require banks and other financial institutions to be compliant with KYC regulations in order to be a fully functional legal entity.

‘Know Your Customer’ regulation explained

When establishing a bank or financial institution, it is imperative to research and find out about all necessary regulations with regards to bank formation and banking license. The guidelines and necessary requirements for bank formation are outlined by the jurisdiction’s financial regulatory authority – this is the legal entity that issues the banking license as well.

In order to comply with the regulatory authority in place within your bank or financial institution’s jurisdiction, banks are required by law to comply with KYC formalities. This procedure is also in line with the Money Laundering Prevention Act of 2002, which states that KYC procedures are mandatory.

The primary purpose of KYC is to enhance the effective management of banking risks. According to KYC regulations, the bank must implement an extensive identification program that incorporates a more expansive due diligence for accounts that have higher risk levels. Therefore KYC provides banks with detailed information about their clients’ risk tolerance, investment knowledge and financial position.

KYC is a very effective tool as it ensures that the bank is aware of their customers’ history and background, effectively negating risks of money laundering. All financial institutions are required to perform KYC, in order to identify their clients and obtain relevant information in order to carry out financial activity with them.  Under KYC, both the client and bank are protected. The client is protected by having the financial institution know what investments best suit their personal situation.