Identity Verification
3 Steps to KYC Compliance
Discover KYC regulations in the USA, Europe and Australia, and learn how to achieve KYC compliance and establish effective KYC processes.
October 30, 2023
min read

What Is KYC Compliance?

Know Your Customer (KYC) is a process by which organizations verify a customer's identity and evaluate the risk of fraud. The process includes conducting identity verification procedures, reviewing the customer's financial activity, and assessing relevant risk factors. The idea is that organizations can help prevent illicit activities such as money laundering and terror financing if they know their customers. 

Financial institutions must help detect and prevent money laundering, as stipulated by decades-old legislation. Government regulations continue to evolve, and in the US, the 2001 Patriot Act introduced KYC processes, which were bolstered by the 2016 rulings of the US Treasury's FinCEN (Financial Crimes Enforcement Network) regarding customer due diligence.

The primary objective of KYC processes is to provide a sufficient level of confidence that customers are who they claim to be and that there is little risk that they are engaged in criminal activities. Some organizations, such as financial institutions, are obligated to apply KYC by law, while others may implement KYC processes voluntarily to signal their responsibility and protect their customers.

In this article, you will learn:


Who Is Obligated to Comply with KYC Regulations?

KYC compliance laws are enforced in many countries and affect companies from various industries. In most of the world, the following sectors are required to comply with KYC regulations:

  • The finance industry—including banks, securities companies, insurance companies, and mortgage brokers
  • Fintech—including digital payment services, cryptocurrencies, and digital lenders
  • Healthcare—including medical facilities and hospitals, online drug and service providers, and prescription-only medicine (POM) sellers
  • The gaming industry—including online gaming platforms and lottery companies
  • High-value product dealers—including art and precious metals
  • The real estate sector
  • The legal sector

KYC Regulations: USA, France, UK, Canada, and Australia

In most cases, KYC laws are part of anti-money laundering (AML) systems and are shaped by Financial Action Task Force (FATF) recommendations. Here are some examples of KYC laws in force around the world:

  • The US Banking Secrecy Act (BSA)—requires reporting entities such as banks to implement measures to verify customer identities and report suspicious activities to FinCEN. In addition, the US Patriot Act requires banks to adopt customer identification procedures.
  • The French Anti-Money Laundering Act (AMLA)—specifies how businesses in the financial sector must verify customer identities.
  • The 2017 UK Money Laundering Act (MLA)—defines the obligations of reporting entities regarding customer verification.
  • Canada's Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA)—establishes KYC requirements and reporting entities.
  • The AML/CTF Act of Australia—provides guidelines for KYC and AML compliance guidelines and is enforced by AUSTRAC. It requires identity verification for both individual and corporate customers. 

Related content: Read our guide to AML compliance 

3 Steps to an Effective KYC Process

The following steps will help you continuously establish organizational processes to achieve KYC compliance.

1. Customer Identification Program (CIP)

The Know Your Customer process includes the Customer Identification Program (CIP) phase, collecting and verifying personally identifiable information (PII). The CIP phase is essential for preventing criminal activities like money laundering and terrorist funding. In addition, inadequate customer identification can provide more opportunities for misconduct.

There is no ubiquitous solution for CIP, which provides general guidelines but leaves it to each institution to determine their policies and the type of PII they require when it comes to KYC regulations. 

Examples of more commonly used PII include:

  • The customer's full name
  • The customer's date of birth
  • The customer's address

To verify their PII, customers may be required to submit official documents such as passports, ID cards, driver's licenses, and residence permits. However, in addition to these three examples, companies may request different types of PII, with the PII verification process adjusted accordingly.

Identity verifiers can also run checks against global blacklists of sanctioned figures and Politically Exposed Persons (PEPs). 

2. Customer Due Diligence

Financial institutions must analyze potential customers to determine if they can be trusted. This process, known as customer due diligence (CDD), is essential for risk management and protecting organizations against criminals, Politically Exposed Persons (PEPs), and terrorists.

The three levels of CDD are:

  • Simplified due diligence (SDD)—there is a minimal risk of terrorist financing or money laundering 
  • Basic customer due diligence (CDD)—regular customer risk assessments
  • Enhanced due diligence (EDD)—involves a higher-risk customer and requires the collection of additional information to ensure the risks are mitigated.

CDD programs should include these steps:

  • Identity verification—ascertain the customer's identity, location, and business activities. For example, locate PII that confirms the customer's name and address. Learn more in our detailed guide to identity verification
  • Risk category—classify potential customers according to their activity types and the risk level. Learn more in our detailed guide to high-risk merchants
  • Determining the need for EDD—assess whether you need to go further than basic CDD. This includes checking existing customers over time to ensure they don't start posing a greater risk. The necessity of EDD can be determined using factors such as the customer's location and occupation, and the type, scale, and frequency of transactions.
  • Maintain CDD records—any CDD or EDD performed on a customer must be documented and kept for regulatory audits.

3. Continuous Monitoring

It is not enough to check a customer once. Organizations must implement programs that continuously monitor their customers. Continuous monitoring includes threshold-based oversight of financial accounts and transactions and account monitoring that considers the customer's risk profile.

Depending on the particular customer and the risk management strategy, other factors that may need to be monitored include:

  • Dramatic shifts (particularly increases) in financial activity
  • Atypical activities conducted abroad
  • The appearance of a person on a sanctions list
  • Media coverage of harmful activities

Organizations are often required to file Suspicious Activity Reports (SARs) on accounts with unusual activity.

A critical best practice is to review accounts and their associated risks regularly. The reviews should consider questions such as:

  • Are the account records up to date?
  • Do the transaction type and volume fit the account's stated purpose?
  • Is the level of risk appropriate for the transaction type and volume?

The scope of monitoring generally depends on the risk assessment of a particular transaction or account.

Benefits of KYC: Beyond Compliance

Implementing an intelligent KYC system allows organizations to fulfill compliance requirements, offering other benefits, especially for financial businesses. These include:

  • Seamless onboarding process—enhanced ID verification helps smooth out the process of onboarding customers. As a result, banks and financial institutions can leverage digital systems to streamline the more time-consuming aspects of onboarding.
  • Increased operational efficiency—automated KYC systems help alleviate the operational burden of the KYC process. They allow organizations to analyze and process large amounts of data more accurately and less time. 
  • Risk minimization—automated KYC systems can also help minimize the risks associated with human error. Organizations can configure their KYC system according to business requirements, allowing them to keep up with ever-changing regulations and reduce compliance-related risks. 

KYC Compliance with BlueCheck

BlueCheck's industry-leading identity verification infrastructure enables merchants to grow their business faster. As we serve a wide variety of industries, our solutions are custom-tailored to the unique needs of our customers, including PACT Act and eCommerce compliant offerings. 

Schedule a call today with a BlueCheck specialist to learn more about our Age & ID Verification solutions.