Know Your Client (KYC)

What Is Know Your Client ( KYC ) ?

The Know Your Client or Know Your Customer is a standard in the investment diligence that ensures investment advisors know detailed information about their clients ‘ hazard allowance, investment cognition, and fiscal position. KYC protects both clients and investment advisors. Clients are protected by having their investment adviser know what investments well suit their personal situations. investment advisors are protected by knowing what they can and can not include in their client ‘s portfolio. KYC conformity typically involves requirements and policies such as gamble management, customer acceptance policies, and transaction monitor .

Key Takeaways

  • Know Your Customer (KYC) are a set of standards used within the investment and financial services industry to verify customers, their risk profiles, and financial profile.
  • In the investment industry, KYC stipulates that every broker-dealer should use reasonable effort regarding client accounts.
  • The Financial Crimes Enforcement Network (FinCEN) established minimum KYC requirements, including verifying beneficial owners and setting standards for dealing with third parties.
  • The SEC requires that a new customer provide detailed financial information before opening an account.
  • The cryptocurrency market is not required to employ KYC standards, although some have.

Understanding Know Your Client ( KYC )

The Know Your Client ( KYC ) rule is an ethical prerequisite for those in the securities industry who are dealing with customers during the opening and wield of accounts. There are two rules which were implemented in July 2012 that cover this subject together : fiscal Industry Regulatory Authority ( FINRA ) rule 2090 ( Know Your Customer ) and FINRA Rule 2111 ( Suitability ). These rules are in place to protect both the broker-dealer and the customer and therefore that brokers and firms deal fairly with clients .

The Know Your Customer Rule 2090 basically states that every broker-dealer should use reasonable feat when open and maintaining customer accounts. It is a prerequisite to know and keep records on the essential facts of each customer, american samoa well as identify each person who has agency to act on the customer ’ mho behalf .

The KYC rule is important at the begin of a customer-broker relationship to establish the necessity facts of each customer before any recommendations are made. The substantive facts are those ask to service the customer ’ mho explanation effectively and to be aware of any extra treat instructions for the report. besides, the broker-dealer needs to be familiar with each person who has the assurance to act on behalf of the customer and needs to comply with all the laws, regulations, and rules of the securities industry .

suitability rule

As found in the FINRA Rules of Fair Practices, Rule 2111 goes in tandem with the KYC rule and covers the topic of making recommendations. The suitability Rule 2111 notes that a broker-dealer must have reasonable grounds when making a recommendation that is suitable for a customer based on the client ’ s fiscal position and needs. This duty means that the broker-dealer has done a complete review of the current facts and profile of the customer, including the customer ’ s other securities before making any buy, sale, or exchange of a security .

Requirements for KYC Compliance

The U.S. Financial Crimes Enforcement Network ( FinCEN ) has set service line requirements for KYC in concurrence with the core requirements for the due application program. To prevent money wash, fiscal institutions are required to conduct deeper assessments of their clients ‘ gamble profiles .

FinCEN requires that fiscal institutions verify the identities of their customers and their respective beneficial owners⁠—owners with at least 25 % ownership⁠. For entities with a gamey anti-money laundering and terrorism finance ( AML ) hazard, extra examination is required and the doorsill for ownership is lowered .

FinCEN requires fiscal institutions to understand the type and function of the customer relationship when developing the customer risk profile. This risk profile is created when the customer relationship is established and is used as a service line for detecting leery activities .

When using third parties to collect and verify customer profiles, fiscal institutions must verify that the third party employs specific risk controls and has an appropriate government structure. To remain in conformity, they must secure AML and customer recognition program ( CIP ) certificates from a third party each year .

last, fiscal institutions must besides maintain current and accurate customer information and continue to monitor their accounts for leery and illegal activities. When detected, they are required to promptly report their findings .

Establishing a Customer Profile

investment advisors and firms are creditworthy for knowing each customer ‘s fiscal situation by exploring and gathering the client ‘s senesce, other investments, tax condition, fiscal needs, investment experience, investment time horizon, liquid needs, and risk tolerance. The SEC requires that a new customer provide detailed fiscal information that includes identify, date of birth, address, use condition, annual income, net worth, investment objectives, and identification numbers before opening an history .

KYC and Cryptocurrency

Cryptocurrency is wildly praised for being decentralized and a medium of substitution that promotes confidentiality ; however, these benefits besides present challenges in preventing money launder. Criminals see cryptocurrency as a think of of furthering their illegal activities and as a vehicle to launder money ; as a resultant role, governing bodies are looking for ways to impose KYC on cryptocurrency markets, requiring cryptocurrency platforms to verify their customers much like fiscal institutions. Although not so far required, many platforms have implemented KYC practices .

Exchanges are classified as either crypto-to-crypto or fiat-to-crypto. Because crypto-to-crypto exchanges do n’t deal with traditional currentness, they do not have the like pressures to employ KYC standards as with exchanges that deal with decree currencies .

Fiat-to-crypto exchanges facilitate transactions involving decree currencies and cryptocurrencies. Since decree currency is the official currency of a nation, most of these exchanges employ some measure of KYC. fortunately, fiscal institutions should have already vetted their customers according to KYC requirements .

$60 million

The punishment assessed against Bitcoin mixer Larry Dean Harmon for violating anti-money launder laws. In early 2021, FinCEN proposed that cryptocurrency and digital asset grocery store participants submit, maintain, and verify customers ‘ identities.  This proposal would classify certain cryptocurrencies as monetary instruments, subjecting them to KYC requirements .

KYC FAQs

What Is KYC Verification ?

The Know Your Client or Know Your Customer ( KYC ) confirmation are a set of standards and requirements used in the investment and fiscal services industries to ensure they have sufficient information about their clients, their risk profiles, and fiscal position .

What Is KYC in the Banking Sector ?

KYC in the trust sector involves bankers and advisors identifying their customers, beneficial owners of businesses, and the nature and determination of customer relationships, ampere well as reviewing customer accounts for leery and illegal activity. Banks must besides maintain and ensure the accuracy of customer accounts .

What Are KYC Documents ?

Requirements differ in unlike jurisdictions. however, bill owners broadly must provide a government-issued ID as proof of identity. Some institutions require two forms of ID, such as a driver ‘s license, birth security, social security calling card, or passport. In addition to confirming identity, the address must be confirmed. This can be done with proof of ID or with an accompanying document confirming the address of the record.

The Bottom Line

Know Your Customer ( KYC ) are a fructify of standards and requirements investment and fiscal services companies use to verify the identity of their customers and any consort risks with the customer relationship. KYC besides ensures investment advisors know detailed data about their clients ‘ hazard allowance and fiscal side. The U.S. Financial Crimes Enforcement Network ( FinCEN ) prescribed rules fiscal institutions must follow when verifying the identity of customers and their beneficial owners, if any. They must verify the circumstances around the customer relationship, american samoa well as admonisher and report any fishy or illegal bodily process. Focus is shifting to cryptocurrency markets as pressures to conform to KYC standards increase .

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