KYC verification
(Also Know Your Customer, Know Your Client)
KYC verification definition
KYC verification is a process adopted by financial institutions and other businesses to authenticate their clients. KYC verification is often a legal requirement that prevents identity theft, financial fraud, money laundering, terrorist financing, and other illegal activities.
KYC processes vary from country to country. However, its goal is always to ensure that businesses know the people they’re dealing with, as that reduces the risk that their clients will engage in illegal activities.
History of KYC verification
KYC originated in 1970 in the US, via the Banking Secrecy Act. The goal of KYC was to prevent banks from being used by criminal elements for money laundering. In the late 1980s and 1990s, KYC guidelines started to take a more solid form, driven by the growth of money laundering operations connected to drug trafficking and organized crime. More emphasis began to be placed on customer identification, record keeping, and the reporting of suspicious transactions.
In 1989, the Financial Action Task Force (FATF) was created by the G7 countries to establish international standards for combating money laundering. In 2001, following the September 11 attacks, the USA PATRIOT Act was enacted in the United States. Title III of the USA PATRIOT Act significantly expanded the scope of the US anti-money laundering laws and regulations.
These developments highlighted the need for more comprehensive customer due diligence procedures. Gradually, KYC principles were incorporated into the legislation of other jurisdictions worldwide. KYC verification has evolved in complexity to combat increasingly sophisticated financial crimes.