What is KYC? The verification process that defines financial security

What is KYC and why is it so important?

KYC, or “Know Your Customer” by its acronym (Know Your Customer), is a fundamental mechanism used by financial institutions to collect information about the identity and contact details of new and existing customers. Its purpose is clear: to combat fraud, prevent money laundering, and stop other illicit practices that may compromise the integrity of accounts. In the United States, this practice has been mandatory since the approval of the Patriot Act in 2001.

The international origins of KYC and AML

The fight against money laundering worldwide has an important protagonist: the Financial Action Task Force (FATF), founded in 1989. This organization sets international standards and issues recommendations through AML practices (Anti-Money Laundering). Member countries implement laws and regulations based on these guidelines. Thus, KYC and AML work together as an inseparable duo to prevent criminal and dishonest financial activities.

How does the KYC verification process work?

The process begins before someone officially becomes a customer. Financial institutions must verify the declared identity of a prospective customer before authorizing account opening. Since there are no uniform legal standards for verification, each bank may carry out slightly different procedures.

The typically requested documents include:

• Driver's license or government-issued photo ID
• Passport
• Social Security Number
• PAN Card
• Voter ID

In addition, it is required to verify the address by means of documents such as utility bills, bank statements, credit card issuer confirmations, or rental agreements.

Continuous verification and monitoring

Once the account is active, the work does not end. Institutions perform periodic updates of records through intermittent KYC information requests. They assign risk levels to each client and monitor their transactions to verify that the behavior matches expectations.

KYC beyond banks

The financial investment sector also implements these processes under FINRA's KYC Rule 2090 (Financial Industry Regulatory Authority). Beyond the anti-money laundering objective, KYC allows investment firms to better understand the specific needs of their clients.

KYC in the world of cryptocurrencies

In cryptocurrency exchanges, the landscape is different. Many allow you to create accounts before completing KYC verification, but these unverified accounts have limited functionalities. This initial flexibility contrasts with the traditional banking sector.

Benefits and Challenges of KYC

Implementing what KYC is and keeping it up to date significantly reduces money laundering and financial fraud. Although it complicates and slows down processes, especially for banks and clients, the benefits likely outweigh the drawbacks. Standardized practices could expedite these procedures.

In the crypto space, using digital currencies for illicit activities has raised considerable concern. Reducing this benefits both cryptocurrencies and their overall reputation.

The importance of security in your data

Although KYC compliance takes time and must be continuously promoted, users should be cautious. Do not provide sensitive information without first verifying that the company implements the necessary security standards to protect your personal data.