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  • Writer's picturePooja Yadav

Know Your Customer: Definition and Compliance Regulations


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What is KYC ( Know Your Customer)?


Know Your Customer, or KYC is a standard procedure in the financial sector that aims to confirm clients' identities and determine whether they qualify for different types of financial services. To stop fraud, money laundering, and other illegal actions, means acquiring information about the identities, financial activity, and risk profiles of clients.


There are three main components of the KYC framework:


Customer Identification Programme (CIP), Customer Due Diligence (CDD), and Enhanced Due Diligence (EDD) of a customer's account once it has been created.


Understanding Know Your Customer


In the financial services sector, a basic ethical duty is the Know Your Customer guideline. It requires careful consumer identification as well as continuous account maintenance.


Implementing KYC at the outset of the customer-broker relationship ensures an understanding of each client's profile before offering financial advice. Clients are also informed of their duty to comply with laws and industry regulations.


 

KYC Regulations


Customer Identification Program (CIP): Financial firms must gather four key pieces of information—name, date of birth, address, and identification number—to identify clients.


Customer Due Diligence (CDD): This process involves collecting all client credentials to confirm their identity and assess the risk of suspicious account activity.


Enhanced Due Diligence (EDD): Used for high-risk customers, EDD involves additional information collection to mitigate risks like infiltration, terrorism financing, or money laundering.


KYC Compliance


KYC compliance involves verifying customer identities, assessing their risk profiles, and ensuring adherence to regulations to mitigate financial crime risks, such as money laundering and terrorist financing, within the financial industry.


KYC is regulated by FINRA rules 2090 and 2111, emphasizing customer identification and suitability assessments in the financial industry.


FINRA Rule 2090 mandates broker-dealers to diligently maintain client accounts, record customer profiles, and identify authorized representatives, ensuring regulatory compliance.


FINRA Rule 2111 requires broker-dealers to ensure recommendations suit customers' financial situations and needs, based on thorough reviews of their profiles and investments.


 

AML and KYC


AML (Anti-Money Laundering):


  • AML refers to a set of regulations and practices aimed at preventing money laundering and other financial crimes.


  • It involves implementing measures to detect and deter illicit financial activities, such as laundering proceeds from criminal activities.


KYC (Know Your Customer):


  • KYC involves verifying the identity of customers and assessing their risk profiles to ensure compliance with regulations.


  • It aims to mitigate the risk of financial institutions being used for illicit purposes, such as money laundering or terrorist financing.


 

KYC and Cryptocurrency


KYC (Know Your Customer):


  • In cryptocurrency, KYC involves verifying the identity of users before allowing them to engage in trading or transactions on exchange platforms.


  • It's implemented to comply with regulatory requirements and mitigate risks associated with money laundering, fraud, and illicit activities.


Cryptocurrency:


  • Cryptocurrency refers to digital or virtual currencies that use cryptography for security and operate on decentralized networks.


  • It offers advantages such as decentralization, transparency, and lower transaction fees but also poses risks related to volatility, security breaches, and regulatory uncertainties.


 

Conclusion


KYC is a set of standards to verify customer identity and assess associated risks in financial services. It involves gathering personal identification and understanding clients' risk tolerance and financial standing for investment advisors.


FAQs


What Is KYC Verification?

KYC verification is the process of confirming the identity of customers and assessing their risk profiles in the financial sector.

What Is KYC in the Banking Sector?

What Are KYC Documents?







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Mar 19
Rated 5 out of 5 stars.

Fabulous Piece of Content

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