Full Form of KYC

The full form of KYC is Know Your Customer or Know Your Client, which signifies the process adopted by the banking or financial institutions to know their customers or clients better and use the documents for verification before, during or post processing a transaction.  It is part of the client or customer’s on-boarding process.

In the United States, Know Your Client is a mandatory requirement for investment industries to keep a record of their clients and customers while they maintain their opening, maintenance, and closing of investment accounts. KYC holds relevance in all industries dealing with any kind of financial instruments, be it money, assets or securities, or cryptocurrencies, etc.

The full form of KYC is both Know Your Customer and Know Your Client. The form in which the term is used depends on where it is being used. While the banking institutions use it in the former form, the investment sector defines in the latter form. Though the abbreviation is expanded differently in different industries, the significance is the same. In any sector used, itis a standardized process carried out by an entity to verify and determine future new engagements or clients’ identities. It is alternatively also used to assess the scope of business relationships.

The KYC process involves a set of documents to be filled in and attached by the customers or clients for the entities they are dealing with to go through and verify. The banking and financial institutions, through these documents, can assess how real a customer profile is. This way, these entities can ensure they prevent any money laundering, terrorism financing, and other financial risks and illegal conducts.

The full form of KYC in Know Your Customers. Here, the customers are given the KYC forms to be filled in as and when they approach their banks to open a savings or recurring account. It is a mandatory document to be submitted to the bank or insurance companies along with attached proof of address and identity.

In the context of investments in various financial products, the KYC is also known as Know Your Client. Here, the investment entities have this on-boarding process designed for the clients to ensure the investment account holders are not engaged in anything unethical. The KYC for investment industry has three components surrounding the entire procedure, including customer identification program (CIP), customer due diligence (CDD), and enhanced due diligence (EDD) of one’s account.

Know Your Customer or Know Your Client procedure is undertaken to serve many objectives simultaneously. Let us have a look at the purpose for which the KYC forms are filled in and preserved by the banking and financial institutions:

• It is employed to facilitate comprehensive background checks.
• It is a standardized procedure utilized to gauge the requirements and intentions of the client.
• It assesses whether the intentions are legitimate or illegitimate.
• One may use it to reduce the problem of adverse selection.
• Adverse selection is a situation wherein the entity in question has a bad profile for doing business and is interested in taking up additional risks on its head since the entity taking up service has more knowledge than the seller.
• Additionally, one may utilize it to reduce information asymmetry.
• It has broad usage in identifying customers or entities involved in money laundering.

Whether the full form of KYC is used for customers or clients, it must comply with the set regulations established by the governing authorities. The two bodies that take care of working of this KYC procedure are the Financial Industry Regulatory Authority (FINRA) Rule 2090 and FINRA Rule 2111. While the former sets some rules and requirements for every broker or dealer to abide by when opening or maintaining client accounts, the latter is the regulation that limits a firm or individual to have ethical reasons to believe that a requested transaction toward an investment is suitable for a customer or client.

Listed below are the requirements jotted down by various regulatory bodies relating to the KYC procedure. Let us have a look at them:

• Normally, KYC is utilized in the onboarding of new customers by banks and financial institutions.
• To perform KYC, the bank may ask the new customer to submit valid ID proof.
• Acceptable proof of identity documents ranges from voter ID card, passport, and driving license.
• A valid ID proof should detail the first name, last name, and visible and identifiable picture with the birth date.
• It additionally asks for address proof.
• Address proof may range from utility bills, credit card bills, or acceptable ID proof.
• The address proof should detail the first name, last name, and address associated with the full name.
• It asks for a valid date of birth proof in some process.
• These documents help the bank understand how the entity, customer, or client looks and where they come from.
• As technology has progressed immensely, KYC representatives have also started collecting biometrics information.
• Some instruments store fingerprints and retina scans into fully secured databases.

The KYC process is not a one-step thing. Instead, it involves a series of steps to be taken care of to ensure the requirements are fulfilled. Some of these steps include the following:

• The individual wishing to engage with the bank or financial institution for business has to reach the nearest financial institution branch.
• Once reaching out to the nearest branch, the individual has to reach out to the nearest available representative facilitating KYC’s process in the branch.
• The individual has to ensure that the individual has valid documents and there is no scope for invalid documents.
• The documents should decimate information on the individual’s background, and there should be no discrepancy.
• Submit the valid documents along with the biometrics to the nearest KYC representatives.

For the implementation, the central bank of the nation establishes broad guidelines. The broad guidelines generally cover the cross-verification of KYC documents with the latest information in the government database. Therefore, as a KYC representative, the individual should specifically ask for the latest ID proof and address proof to facilitate the cross-verification of information. The representatives should ask and direct questions to the individual concerning their background. In turn, helps gauge the intentions of the party as to why they are looking to collaborate with the business.

At the corporate or business levels engaging with a different business, the entities generally hire third-party vendors to facilitate the background checks for the employees hired under them. They lay down the guidelines to the third-party vendors on how they would perform KYC on their hired resources. Normally, a bank, financial institution, or corporation may collect ID proofs, address proofs, and biometrics of their employees or business entities.

One must collect additional consent from banks and corporations for biometrics to curb potential misuse. Based on the entities’ risk, the process can be bifurcated into basic and enhanced KYC. The basics would cross-validate the details of the entity with KYC documents only. Suppose the risk posed by the customer or entity is relatively very high. In that case, the bank or third-party vendor will scan them using proprietary software that facilitates KYC. It can run scans regarding adverse media, politically exposed persons, etc.

The KYC has a broad application in detecting money laundering activities and the imposition of sanctions on funding terrorist activities. Money laundering is an activity that involves the illegal usage of financial assets by disguising them altogether. The people involved in money laundering transform the money earned from illegal or illegitimate sources into legitimate sources.

The nation’s central banks establish broad guidelines of Know your customer, ensuring that money laundering activities curbs altogether. However, to maintain business reputations, big corporations have not taught the practice of knowing your client or customer to ensure that only the right candidates with no criminal backgrounds are on board for the job. Instead, the corporates specifically engage third-party vendors or businesses performing such checks.

These checks may include address verification and verification of credit scores. They also verify the education details and ensure that the corporation is not committing fraud to the organization.

The Know Your Customer is a comprehensive process performed by banks, financial institutions, and big corporations. Moreover, it ensures that the business deals with and onboards only legitimate entities. The process can bifurcate into several broad aspects.

For example, as per the business need and criticalness of transactions, the KYC could be pursued in simplified form, or it can be enhanced to validate the credentials of the individuals. Some of the benefits of the KYC process are as follows:

• It reduces information asymmetry. This means there is a transparency and no one party gets more information related to the transaction or client/customer than the other.
• It reduces the scope of adverse selection.
• It helps in onboarding only legitimate individuals, entities, or businesses.
• It prevents any potential threats from money laundering.
• Big corporations who onboard a prospective individual to the jobs perform background checks to ensure that the candidates are not involved in any illegal activities.

This article has been a guide to what is the Full Form of KYC. Here, we explain its purpose, requirement, procedures, importance, and advantages. You may refer to the following articles to learn more about finance: -

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