What is the KYC Process and Why is It Important

What is the KYC?

In the world of cryptocurrency trading, there will always be terms that we do not understand. Such as Token, Coin, Blockchain,… and especially KYC. In the article What is the KYC process and why is It Important we will make you clear about what KYC is, how KYC works. And finally the importance of KYC in e-commerce transactions.

First, if you want to know the importance of KYC, you must know what it is.

What is the KYC?

Knowing who your customers are and enacting protocols to prevent financial crime are major and ongoing challenges for financial institutions. These financial institutions include (banks, credit unions, Fortune 50 financial companies). Having to comply with increasingly complex regulations to be able to verify a customer’s identity is called KYC. Typically for this article we will cover KYC requirements in the US.

There are two ways of calling KYC as “Know Your Customer” or “Know Your Client” which is a set of procedures to determine the identity of a customer before and during business with banks and other financial institutions. By complying with KYC regulations, the system can prevent money laundering, terrorist financing, and many other mass fraud schemes.

What is the KYC?
What is the KYC?

By first verifying the identity and understanding of a customer’s intentions at the time of account opening and then by creating their transaction patterns, financial institutions will more accurately identify suspicious activity.

Financial institutions are increasingly subject to ever higher standards when it comes to KYC laws. They will have to spend more money to aim to comply with KYC laws- Otherwise they incur a high penalty. These regulations mean that most businesses, platforms or organizations that interact with a financial institution to unlock accounts or engage in transactions must comply with these.

What is KYC in a bank?

KYC means a standard due diligence process used by financial institutions and other financial service companies for the purpose of assessing and monitoring a client’s full risk and identity verification of customers. KYC ensures that customers will always benefit the most.

According to the KYC source, customers will have to provide login information to prove their identity and get their address. These verifications are very important, three include ID card verification, face verification, biometric verification or document verification. For the purposes of proof of address, for example a utility bill is an acceptable document.

KYC in a Bank
KYC in a Bank

KYC is an important process to be able to determine the customer’s risk along with whether the customer can meet the organization’s requirements to use their services. Thereby showing us, this is also a legal basis to comply with Anti-Money Laundering (AML) law.

Therefore, financial institutions must ensure that customers will not engage in criminal activities but use their services.

What are the three components of KYC?

KYC includes three indispensable components that are:

– Customer Identification Program (CIP): Customers here are themselves.

Customer due diligence (CDD): To assess a client’s level of risk, including considering the beneficial owners of a company.

– Continuous monitoring: checks all transaction patterns of all customers and will report suspicious activities on an ongoing basis.

This is the 3 Components of KYC
This is the 3 Components of KYC

Customer Identification Program (CIP)

In order to be fully compliant with the Client Identification Program, a financial institution will require identification information from its customers. Depending on the client approach, each financial institution will implement its own process (CIP) based on its risk profiles.

As a result, customers may be required to provide different information depending on the requesting organization:

For individuals, the information provided includes:

Driving license


For a company, the information provided will include:

The products are clearly certified by the establishment

Business license issued by the government

Cooperation Agreement

Trusted tool

For businesses or individuals, additional verification information will include:


Information from a consumer reporting agency or a public database

A financial report

These individuals and organizations are required to verify this information is accurate and reliable using documented, non-documentary verifications or possibly a combination of both for greater accuracy.

Due diligence of customers

Client due diligence requires financial institutions to perform detailed risk assessments. Financial institutions will double-check the types of potential financial transactions that customers will make to easily detect unusual or suspicious behavior. This allows organizations to assign clients a risk rating that will determine the extent and frequency of the accounts being monitored. Organizations are required to identify and verify the identity of any individual who owns 25% or more of a legal entity and an individual that controls the entity.

Although there are no standard procedures for conducting due diligence, organizations can think of them at three levels as follows:

  1. Simplified Due Diligence (“SDD”): For accounts with low value or low risk of money laundering or terrorism financing, a full CDD may not be necessary.
  2. Basic Customer Due Diligence (“CDD”): At this level of due diligence, financial institutions are required to verify the identity and risk profile of their clients.
  3. Enhanced Due Diligence (“EDD”): High-risk or high-value customers can collect additional information to enable financial institutions to better understand financial activities and customer risks. Typically politically exposed (PEP) clients may be at higher risk of money laundering.

Continuous monitoring

Continuous monitoring means that financial institutions will have to continuously monitor customer transactions to detect suspicious and unusual activity. For this component, a dynamic, risk-oriented approach to KYC is applied. Once unusual or suspicious activity is detected, the financial institution is obligated to submit a Suspicious Activity Report (SAR) to FinCEN as well as other relevant law enforcement agencies.

What are the KYC requirements?

The two basic documents required by KYC are photo identification and proof of address. These proofs are intended to establish a person’s identity at the time of account opening. Examples include: savings accounts, fixed deposits, mutual funds and insurance.

The list of documents generally accepted as standard proof of identity is:

  • Pan card
  • ID card
  • License
  • State or central government photo identification
  • Ration card with photo
  • Letter from a public authority or recognized official
  • Bank passbook with photo
  • Employee ID card of a listed company or a company in the public sector
  • Identity card from university or education board like ISC, CBSE, etc.
  • The list of generally accepted identification documents that would serve as standard proof of address includes:
  • Passport
  • ID card
  • License
  • Electricity and telephone bills (including mobile, fixed, wireless and similar connections) not older than six months
  • Bank account statement
  • Connecting card for gas consumption or gas bill
  • Letter from any public authority or recognized official
  • Credit card statement
  • Certificates of all kinds,..

Who needs KYC?

KYC is mandatory for financial institutions dealing with customers during account opening and account maintenance. Once a business reaches a new customer or when an existing customer has a product under management, standard KYC procedures are applied.

Financial institutions that need to comply with KYC protocols include the following:


Credit Union

Asset management companies and brokerage centers

Fintech (fintech) applications, depending on the activities they participate in

Private lenders and lending platforms.

KYC regulations are becoming increasingly important for most organizations that interact with money (so for a business). While banks are required to comply with KYC to prevent fraud, they pass those requirements on to the institutions with which they do business.

What triggers KYC?

Factors to enable KYC include:

– Unusual trading activity

– New or changed information for customers

– Change the client’s career

– Changing the nature of the customer’s business

– Add new parties to the account

What triggers KYC?
What triggers KYC?

Why is It Important?

By law, KYC will be required for financial institutions to legally establish the identity of their customers and to identify risk factors. KYC processes will help prevent bad practices such as identity theft, money laundering, financial fraud, terrorist financing as well as other financial crimes. Failure to comply may result in heavy fines.

KYC requirements were introduced in 1990 for anti-money laundering purposes. Looking at the 9/11 attacks, the US enacted and passed stricter KYC legislation as part of the Patriot Act. Those changes were made before 9/11, but the terrorist attacks created the political momentum needed to make them happen.

In Title III of the Patriot Act, financial institutions are required to fulfill two requirements to comply with enhanced KYC obligations: Customer Identification Program (CIP), and Customer Due Due Diligence. (CDD). Existing KYC processes are taking a risk-based approach to combat fraud, money laundering, identity theft, and financial fraud.

– Money laundering: Both organized and unorganized crime fields also use fake accounts in banks to store finance for bad purposes such as: Drugs, human trafficking, smuggling, fraud island, … By spreading money over a long list of many accounts, these criminals will try to find a way to avoid suspicion.

Identity theft: KYC will help financial institutions establish proof of the legitimate identities of their customers. This will prevent fake accounts and identity theft from fake documents as well as identity documents being stolen.

Financial Fraud: KYC is designed to prevent all fraudulent financial activities. For example, using a fake or stolen ID to be able to apply for a loan and then be able to receive money using fraudulent accounts.


KYC regulations have very important implications for financial institutions and consumers. Financial institutions are required to follow KYC standards when dealing with new clients. Because these standards are designed to fight financial crimes, money laundering, identity theft, terrorist financing or other crimes.

Talking about money laundering and terrorist financing often relies on accounts opened anonymously. Increased emphasis on KYC regulations has resulted in increased reporting of suspicious transactions. The KYC risk-based approach can help eliminate the risk of fraudulent activities and can ensure the best customer experience.

Through this article, fully sharing about What is the KYC Process and Why is It Important can help you to add more knowledge about KYC. If you find it interesting, please share this article with your friends or people who need information about KYC. Thank you.

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