Decoding KYC: From Guidelines to Global Guardianship
In the early 2000s, a new concept emerged in the world of finance: KYC, or ‘Know Your Customer.’ It acted as a safeguard against money laundering, terrorism financing, and other illicit activities. International bodies like the Financial Action Task Force (FATF) began issuing directives to combat financial crime.
The USA PATRIOT Act came into being in 2001 as part of the United States’ anti-money laundering (AML) and counter-terrorist financing (CTF) efforts. Along with this new legislation, a Customer Identification Program (CIP) was also introduced, which financial institutions were mandated to incorporate into their KYC procedures.
A few years later, in 2005, Europe came out with a Money Laundering Directive, which set stringent guidelines for businesses to monitor their customers’ transactions for any signs of suspicious activity.
As time progressed, KYC evolved into a global standard. In 2012, the FATF overhauled its recommendations, heightening the requirements for KYC. It wasn’t just about recognizing customers; it became about continuous monitoring and conducting risk assessments based on customer profiles and transaction histories.
Today, KYC is mandatory for various financial institutions, including banks, insurance companies, and investment firms. The process entails the collection of personal information and the verification of identities through documents, biometrics, and third-party verification services. It serves to protect customers against financial crimes and is a vital component of the global AML/CFT framework.