What Is KYC, and What Is It Used For?

Dec 18, 2023 By Triston Martin

The expertise of a client's risk tolerance, investing knowledge, and financial situation is a criterion in the investment business known as "Know Your Client" or "Know Your Customer." Clients and investment advisors are both safe with KYC. It is in clients' best interest to ensure that their financial advisors are aware of the types of investments that best suit their specific needs. With this knowledge, investment advisors are protected against themselves and their clients. Transaction monitoring and risk management are two of the most common KYC criteria and procedures.


Acquiring an Awareness of Know Your Client (KYC)


In the securities sector, the Know Your Client rule is an ethical duty for people who create and manage accounts for clients. In July 2012, two rules were put into place to address this issue: (Know Your Customer) and Rule 2111 (Financial Industry Regulatory Authority) (Suitability).


These regulations protect customers and brokers alike, which were put in place to ensure that brokers and businesses treat their consumers properly. Know Your Customer Rule 2090 specifies that every broker-dealer should make a reasonable effort to create and manage customer accounts. Each customer's vital facts must be known and recorded, and anybody authorized to act on the customer's behalf must be identified.


Rule of Suitability



Regulation 2111, included in the FINRA Rules of Fair Practices, tackles the matter of offering recommendations in conjunction with the KYC rule. The appropriateness When a broker-dealer makes a recommendation based on a customer's financial status and requirements, it must have reasonable reasons, according to Rule 2111. When making a buy, sell, or exchange of a security, the broker-dealer must thoroughly evaluate all the relevant facts and information about the customer, including their prior investments.


The Know-Your-Customer Procedure



The KYC procedure is straightforward, with minor variations from one jurisdiction to the next. The following diagram illustrates a specific method for doing KYC: However, not usually in the same sequence, these are the phases in the KYC process:


Documents


Proof of identification and residency status are necessary for financial service applicants and potential customers. Both electronic and physical submissions are acceptable.


Verify identity


The authorized agency or organization conducts the identity verification based on the given documentation. In this case, the Department of Motor Vehicles will check the applicant's driver's license (DMV).


Verifying residency


Verifying a person's place of residence necessitates finding out if they are a domestic or foreign resident and their present address and any alternate addresses they may have.


Verify your financial status.


Several methods are used to verify the assets and liabilities stated by the claimant. By doing this, the likelihood of misrepresentation is decreased.


Keep track of all transactions.


Automated and manual checks are performed on every unusually high-valued transaction, often occur, or are identified by the financial institution as a suspicious activity. KYC verification is complete when all of the preceding stages have been completed. A verification certificate is included in some instances, although this is not the norm.


While the user experience may be straightforward, the verification procedure at the financial institution necessitates time and effort on the part of the staff. Companies, investors, banks, and other financial institutions use the KYC procedure for their due diligence checks.


Compliance With KYC Regulations


For KYC purposes, the U.S. Financial Crimes Enforcement Network (FinCEN) has established minimum standards. Financial institutions must perform more in-depth evaluations of their client's risk profiles to avoid money laundering. Financial institutions must verify customers and their beneficial owners by FinCEN's regulations.


The ownership requirement is decreased for companies with a high risk of anti-money laundering and terrorist funding (AML). When creating a client risk profile, FinCEN mandates that financial institutions consider the nature and purpose of the connection with the consumer. This risk profile is employed as a baseline when the client relationship is established for suspicious activity detection purposes.


Creating a Profile of Your Ideal Client


It is the responsibility of the investment adviser and the investment business to know each customer's financial condition by investigating and obtaining the client's age and other investments as well as their tax status and economic demands. Financial information such as name, date of birth, residence, work status and identification number must be provided before a new client may register an account with the SEC.


Know Your Customer (KYC) and Bitcoin (BTC)


Despite its widespread plaudits as a decentralized and secretive means of trade, cryptocurrency poses several problems in combating money laundering. Because criminals use cryptocurrencies to facilitate their unlawful operations and launder money, regulatory agencies are searching for methods to enforce KYC on cryptocurrency marketplaces, requiring cryptocurrency platforms to check their consumers in the same way financial institutions do. Even though KYC isn't yet mandatory, numerous outlets have already integrated it.

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