Know Your Customer Regulations
Know Your Customer Regulations

What is KYC?

When conducting business with consumers, banks, financial institutions, and other organizations must abide by KYC standards. “Know your customer” refers to banks’ requirements to gather and verify information on the clients they work with.

These rules work to stop money laundering, the financing of terrorism, and fraud by spotting questionable transactions in advance. All nations have some KYC legislation in place. However, each one may be significantly different from the others. This is a global phenomenon.

Know Your Customer: Why is KYC Important?

It’s crucial to conduct your research before starting a relationship. Without getting to know your spouse, you wouldn’t get married, and without an interview, you wouldn’t hire someone at risk. While bringing on new clients or consumers, why do you risk getting into a poor relationship?

Organizations can identify and validate their consumers with the aid of Know Your Customer (KYC) protocols. Customer due diligence and identity verification reduce the risk of unintentionally interacting with people or organizations engaged in illicit behavior or money laundering. This is crucial for banks, financial institutions, owners of online gaming sites, and other businesses that fraudsters routinely target.

KYC aids organizations in understanding and managing potential risks throughout the customer onboarding process, in addition to preventing exploitation by criminals. This might make businesses seem more reliable to potential new clients.

Who needs KYC?

Financial institutions that deal with clients when opening and managing accounts must comply with KYC requirements. Standard KYC procedures often apply when a company onboards a new client or when a current client purchases a regulated product.

The following financial organizations must adhere to KYC protocols:

  • Banks
  • Unions of credit
  • Companies that manage money and broker-dealers
  • Applications for financial technology (fintech apps), based on the activities they engage in
  • Platforms for lending and private lenders

The importance of KYC laws has increased for nearly any entity that deals with money (so, just about every business). While banks are obligated to comply with KYC to reduce fraud, they also carry this requirement to the companies they work with.

What triggers KYC?

Among the KYC triggers are:

  • Unusual transaction activity
  • any updates or modifications to the client
  • alteration in the client’s line of work
  • Change in a client’s industry or kind of business
  • Including extra parties in a transaction

A bank might identify specific risk elements, for instance, frequent wire transfers, overseas transactions, and interactions with off-shore financial hubs due to initial due diligence and continuous monitoring. The customer may subsequently be questioned more frequently about his dealings or required to give more information regularly for a “high-risk” account.

What are the three components of KYC?

The following are the three elements of KYC:

  1. The consumer is who they claim to be, according to the Customer Identification Program (CIP)
  2. Assess the risk posed by the customer by performing customer due diligence (CDD), which includes looking into a company’s beneficial owners.
  3. Regular monitoring: Examine client transaction trends and alert authorities to suspicious behavior.

What are KYC requirements?

The two primary required KYC documents are a proof of address and a proof of identity with a photo. When creating an account, such as a savings account, fixed deposit, mutual fund, or insurance, these are needed to verify a person’s identity.

List of official documents that are typically accepted as identity proof:

  • Card PAN
  • voter identification card
  • a driving permit
  • government identification photo from the federal or state level
  • A ration card with a picture
  • letter from a reputable public official or employee
  • a bank passbook with a picture
  • Employee identification cards from public firms or listed companies
  • University or board of education identification card, such as ISC, CBSE, etc.


KYC rules affect both financial institutions and consumers significantly. Financial institutions are expected to follow KYC criteria when dealing with a new clients. These rules were established to combat economic crime, money laundering, the sponsorship of terrorism, and other unlawful financial activities.

Accounts that are formed anonymously are frequently used for money laundering and terrorist financing. Therefore the increased focus on KYC regulations has increased the reporting of questionable transactions. By combining KYC with a risk-based strategy, it is possible to reduce the possibility of fraudulent activity and improve customer satisfaction.


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