Comply with Know Your Customer Guidelines

Know Your Customer Compliance

The USA PATRIOT Act & Know Your Customer (KYC) Compliance

Financial institutions have always understood the importance of knowing whom they are doing business with, but the USA PATRIOT Act (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism) made the depth of this knowledge much more critical. The Act was passed in 2001 in response to the attacks of 9/11 and requires that all financial institutions create programs to fight money laundering schemes that may be financing terrorist activities. In fact, banks can and are being held accountable for Know Your Customer guidelines and processes, for both new and existing customers on a continual basis. Financial institutions must confirm client identities and keep detailed records of the process they use to do it. Proof of this process helps mitigate the severity of charges against a bank if it’s discovered the institution accidentally funded terrorists.

KYC Compliance: A Bank’s Responsibility

The government has not standardized a single process or set of processes to implement in order to comply with Know Your Customer guidelines and regulations. Instead, it is up to each institution to establish procedures most appropriate for its operations. Generally speaking, banks are responsible for knowing their customer’s type of business, source of funds, purpose of individual transactions and anticipated types of transactions. Accurate customer information must be maintained on an ongoing basis, which means continuous monitoring for the banks in order to comply with the regulations.

Policy Elements to Note

The main purpose of the regulation is to help banks avoid being used (intentionally or not) for laundering money. Know Your Customer guidelines typically include these policy elements:

  1. Customer Policy
  2. Customer Identification Procedures
  3. Transaction Monitoring
  4. Risk Management

Controls should be put in place to:

  • collect and analyze customer identity
  • name match against watch lists
  • determine risk levels for accidental money laundering, terrorist financing or identity theft schemes

Banks should create a profile of the customer that includes the expectation of transactional behavior, and monitor all transactions against this expectation, as well as other customers fitting a similar profile.

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