How KYC works

KYC (Know Your Customer) is a process of verifying and identifying clients that is used by financial institutions, banks, fintech companies and other organizations to prevent fraud, anti-money laundering (AML) and terrorist financing. The main goal of KYC is to make sure that the client is who they claim to be and to assess the risks associated with them. Let's take a closer look at how KYC works, its stages and methods.

1. Main objectives of KYC​

1.1. Customer identification​

• Establishing the identity of the client:
  • Checking documents (passport, driver's license).
  • Data verification through databases.

1.2. Risk assessment​

• Determining the client's risk level:
  • Geography (e.g. countries with high levels of corruption).
  • Type of business (eg casinos or cryptocurrencies).

1.3. Crime Prevention​

• Protection against fraud, money laundering and terrorist financing:
  • Identifying suspicious clients.
  • Compliance with regulatory requirements.

2. Stages of KYC work​

The KYC process consists of several key stages:

2.1. Collection of information​

• Collecting customer data:
  • Personal information (full name, date of birth, address).
  • Documents (passport, ID card, utility bills).

2.2. Verification of documents​

• Verification of the authenticity of the documents provided:
  • Use of document recognition technologies (OCR, Optical Character Recognition).
  • Comparison of data with official databases.

2.3. Identity verification​

• Customer Identity Verification:
  • Biometric verification (face scanning, fingerprints).
  • Video identification (the client records a video with documents).

2.4. Checking for compliance with legislation​

• Checking the client through databases:
  • Sanctions lists (e.g. OFAC, UN).
  • PEP (Politically Exposed Persons): Persons holding public office.
  • Blacklists.

2.5. Activity Monitoring​

• Continuous monitoring of client transactions:
  • Detecting anomalies.
  • Updating data when the client's status changes.

3. KYC Methods of Work​

KYC uses various methods to verify customers:

3.1. Process automation​

• Modern technologies make KYC easier:
  • OCR (Optical Character Recognition): Recognition of text on documents.
  • AI (Artificial Intelligence): Data analysis and detection of suspicious activity.

3.2. Biometrics​

• Use of biometric data:
  • Face scanning.
  • Comparison of photos in documents with a real face.

3.3. Databases​

• Verification of clients through global databases:
  • Sanctions Lists: Sanctions lists.
  • PEP Lists: Politically Exposed Persons.
  • Watchlists: Blacklists.

3.4. Video identification​

• The client is identified via video call:
  • Shows documents.
  • Answers operator's questions.

4. Examples of KYC work​

4.1. Banking sector​

• Banks use KYC to open accounts:
  • Checking documents upon registration.
  • Monitor transactions to identify suspicious activity.

4.2. Fintech companies​

• Fintech companies are implementing automated KYC systems:
  • Using AI to analyze data.
  • Online customer verification.

4.3. Cryptocurrencies​

• Cryptocurrency platforms verify users:
  • Identity verification before withdrawal.
  • Monitoring transactions on the blockchain.

5. How do regulators control KYC?​

Regulators require organizations to comply with KYC processes:

5.1. Legislation​

• FATF (Financial Action Task Force): International KYC standards.
• GDPR (General Data Protection Regulation): Protection of personal data.

5.2. Fines for violations​

• Organizations that fail to comply with KYC may be fined:
  • Millions of dollars for serious violations.
  • Confiscation of assets.

5.3. Audits​

• Regular checks by regulators:
  • Analysis of KYC processes.
  • Evaluation of the effectiveness of systems.

6. Advantages and Disadvantages of KYC​

6.1. Advantages​

• Protection: Prevention of fraud and money laundering.
• Compliance: Compliance with legislation.
• Trust: Building customer confidence.

6.2. Disadvantages​

• Time: The process may take a long time.
• Cost: High costs for implementing systems.
• Privacy: Risk of data leakage.

7. Conclusion​

KYC is an important tool for protecting the financial system from crime. Its main task is to identify customers and assess the risks associated with them. Modern technologies such as AI and biometrics make the process more efficient and secure.

Key takeaway: Effective KYC is based on a combination of technology, legislation, and the human factor. Compliance with KYC requirements helps organizations not only avoid fines but also protect their reputation.

How does KYC (Know Your Customer) work?​

KYC (Know Your Customer) is a mandatory customer verification procedure in banks, fintech companies and other financial institutions. Its purpose is to identify the client, assess risks and prevent money laundering (AML), fraud and terrorist financing .

3 Main Steps of KYC​

1. Customer Identification Program (CIP)​

Verifying the client's identity using documents:

• Individuals:
  • Passport/driver's license + selfie/video verification (biometrics).
  • Proof of address (receipts, statements).
• Legal entities:
  • Extract from the Unified State Register of Legal Entities/register of companies.
  • Data of beneficiaries (ultimate owners).

Technologies:

• OCR (document recognition, for example in Revolut).
• Face Recognition (comparison of a photo in a document and a selfie).
• Checking through state registers (for example, international databases like Dow Jones).

2. Risk assessment (Customer Due Diligence, CDD)​

The client is assigned to one of the risk categories (low/medium/high risk) based on:

• Professions (e.g. PEP - Politically Exposed Persons).
• Countries of residence (sanctions lists, offshores).
• Source of income (suspicious transactions).

For high-risk clients, Enhanced Due Diligence (EDD) is used - an in-depth check:

• Analysis of connections (for example, through social networks or databases like WorldCheck).
• Proof of origin of funds (e.g. statements from other accounts).

3. Ongoing Monitoring​

KYC does not end after verification. Banks and companies constantly monitor clients:

• Suspicious transactions (for example, large transfers to offshore companies).
• Change of data (change of passport, address, beneficiaries for legal entities).
• Updating sanctions lists (for example, if the client is included in the OFAC SDN List).

Example: If a client suddenly starts receiving millions from the nominal director of a shell company, the AML/KYC system will raise an alert.

Technologies in KYC​

• AI and machine learning (behavior pattern analysis).
• Blockchain analytics (tracking cryptocurrency transactions, such as Chainalysis).
• Integration with databases (e.g. PEP sheets, Interpol).

Where is KYC applied?​

• Banks (opening accounts, loans).
• Crypto exchanges (Binance, Bybit).
• Fintech (PayPal, Revolut).
• Gaming industry (betting, online casinos).

What happens for KYC violation?​

• Fines for the company (for example, in 2023, Binance paid $4.3 billion for KYC deficiencies).
• Blocking of customer accounts.
• Criminal liability (if money laundering occurs through poor KYC).

Careers in KYC/AML​

If you are interested in this area:

1. Start with courses (CAMS, ACAMS, CFE).
2. Get a job as a KYC specialist in a bank or fintech.
3. Master the tools (WorldCheck, Oracle FCCM, SQL for reporting).

Conclusion​

KYC is not just a "checkbox" but a complex process that protects the financial system from criminals. Technology makes it smarter, but specialists are still needed for analysis and decision-making.

Want more information about a career in KYC? I'm ready to tell you!