One of the biggest challenges that the financial services and banking industry has been facing for a long time is financial crime and money laundering. Criminals take advantage of anonymity and identity theft to commit financial crimes. However, what if banks and other financial institutions could correctly identify their customers?  Most of the money laundering, corruption, terrorism financing, and other financial crimes would be dealt with. This is where Know Your Customer (KYC) and Anti-money laundering comes in.

What is Know-Your-Customer (KYC)?

Also referred to as “Know-Your-Client”, it’s a term that may not mean much to most people, however, it is a critical aspect of the operation of banks and other financial institutions. KYC is the procedure carried out by financial institutions to verify the identity of their customers in compliance with legal requirements such as the Fourth European Union Money Laundering Directive. It involves checking personal and business details to exclude negative hits such as watch lists, sanctions lists, and PEP lists. KYC also involves identifying ownership relationships, the link between companies, and involvement in anti-money laundering (AML).

KYC has become a significant element in the fight against corruption, money laundering, terrorist funding, and other financial crimes. Customer identification is the first step in the entire process.

KYC is an Anti-Fraud Measure

Money laundering and terrorism financing are the major threats facing the global financial industry. KYC regulations were made more stringent in the aftermath of the 2008 great financial crisis, where banks were found involved in huge money laundering scandals. Ever since the crisis that threatened the global financial system, local governments, nations, and global regulatory authorities have been up to the task to curb financial crimes by bringing stricter and more effective legislation and policies. The Panama Papers scandal later worsened this scenario. In this scandal, many significant world leaders and organizations were exposed for money laundering, some of which were linked with terrorist financing. 

Such cases have made regulators such as the Financial Action Task Force (FATF) issue serious sanctions to financial institutions to push them to improve their compliance structure. The Fair and Accurate Credit Transactions Act (FACTA) was also introduced to protect consumers from credit card and identity fraud by directing businesses to implement KYC verification.  

The European Union has set minimum standards for due diligence checks through the Fourth Anti-Money Laundering Directives (AML4) that came into effect in June 2017 with a series of norms for financial institutions to protect them from these threats.

According to AML4, financial institutions have the responsibility to check the identity of their existing and new clients – as directed by KYC. They are to share this identity information with the national central register.

Failure to comply with the due diligence requirement may result in heavy fines, reputational damage, withdrawal of your business permit, or even a prison sentence. Therefore, KYC and Know Your Supplier (KYS) checks should be a fixed component of your compliance management system (CMS). 

The nature and depth of the check are dependent on the level of the expected risk. However, the primary aim of KYC due diligence is to reveal the origin and whereabouts of funds. For example, client due diligence must be particularly thorough if it involves customers linked with politicians or government bodies since politically exposed persons are more vulnerable to corruption and bribery.  

KYC Procedures

KYC must be applied in the initial stage of any business relationship with a new customer or client. Generally, it involves the submission of identity documents such as identity cards, tax registration numbers, driving licenses, and passports. Financial institutions must also identify the beneficial owner is known all the time on whose behalf the account has been opened. In other cases, location identity may also be incorporated in the KYC procedure. Customer location identity procedure may require the submission of a recent utility bill or a bank statement. 

In some institutions, the procedure may be carried out in person using hard copy documents. However, other companies have implemented a fully digital verification process, which even includes the use of biometric verifications such as fingerprint reading and facial recognition to identify the document holder.

Benefits of KYC to Financial Institutions

KYC and AML allow financial institutions to comply with regulatory requirements in the trading process. They are necessary to ensure smooth operations and avoid penalties such as fines or withdrawal of operation licenses. 

KYC and AML also gives a company a good reputation thus attracting more customers. Customers and clients want to work with organizations that promise security by complying with the laid security measures by the authority. 

KYC provides an essential safety net for most organizations. It helps prevent scammers, establishing criminality, combating criminal acts, and ensuring safety. Therefore, it can help you avoid the headache that comes with being a victim of financial criminal acts. It provides peace of mind regarding the security of the company as well as customer data. 

Additionally, it can be easily implemented in an organization, either as a document-based verification or as a technologically advanced technique including facial recognition. It also helps Paytah to handle risks efficiently, by knowing and understanding our clients. 

Benefits of KYC to Customers

KYC helps in ensuring the security of customers’ personal data and prevents account takeovers by fraudsters. In case the customer has lost the access details, they can be helped to quickly restore their account through the data submitted during the KYC procedure. Individual clients can also avoid reputational, tax, and legal inconsistencies through KYC. Finally, it establishes a level of trust, which is healthy for both parties.


KYC is a practice that not only satisfies a business need to identify who their customers really are as a compliance issue, but that is also an effective way of reducing the risk of fraud. This security measure enables both financial institutions and customers to protect themselves by guaranteeing they are doing their businesses with legitimate parties.

Paytah’s KYC procedures ensure compliance and it’s also a way to create a safe environment for our customers. We are happy to insist on undergoing a thorough and proper onboarding process in order to provide better banking.