KYC, which stands for “Know Your Customer,” is a process used by businesses and financial institutions to verify the identity of their customers and assess their potential risks in terms of money laundering, terrorism financing, and other illegal activities. The origins of KYC can be traced back to the early 2000s when international bodies, such as the Financial Action Task Force (FATF), began to issue recommendations and guidelines to combat money laundering and terrorist financing.
In the United States, the USA PATRIOT Act of 2001 (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act) introduced a number of measures aimed at enhancing the country’s anti-money laundering (AML) and counter-terrorist financing (CTF) framework, including requiring financial institutions to develop and implement a Customer Identification Program (CIP) as part of their KYC procedures.
In Europe, the Third EU Money Laundering Directive of 2005 introduced a similar framework, requiring financial institutions to identify their customers, verify their identities, and monitor their transactions for potential suspicious activity.
Since then, the implementation and enforcement of KYC regulations have been strengthened and expanded around the world. In 2012, the FATF issued revised recommendations on AML/CFT measures, which further refined the requirements for KYC, including the need for ongoing monitoring of customer transactions and risk assessments based on customer profiles and transaction histories.
Today, KYC procedures are mandatory for financial institutions, including banks, insurance companies, and investment firms, as well as other businesses, such as cryptocurrency exchanges and online marketplaces. The process typically involves collecting personal information and verifying the identity of customers through various means, such as documents, biometrics, and third-party verification services. KYC procedures are seen as an important tool in the fight against financial crimes and a key component of the global AML/CFT framework.