A guide to KYC and why it could apply to you

Setting up a new business isn’t easy. Nor is being an entrepreneur and keeping an SME running. There is a never-ending pile of paperwork to get through, reports to file, accounts to finalize, and of course, regulatory and compliance matters to attend to. Unfortunately, you cannot escape from your obligations under the law, particularly in terms of compliance. Rules and regulations such as KYC are put in place to protect you and the rest of society from illicit activity and financial crime.

KYC (Know Your Customer)

bullet What is KYC?

KYC is the acronym for Know Your Customer or Know Your Client. It refers to a set of guidelines and processes which must be followed when working with customers in certain industries. It is prevalent in regulated or high-risk industries such as:

  • Finance and Banking
  • Trading and Investing
  • Online Gambling
  • Real Estate
  • High-Value Goods
  • Money Services and Crypto
  • Alcohol and Food
  • Transportation and Travel Agencies

In these sectors, there is a heightened risk of fraud and financial crime. As such, businesses are required to establish the identity of their customers before conducting transactions, and throughout the relationship. This typically includes verifying their identity, address, and in some cases, source of funds. It also covers subsequent transactions that are monitored for any suspicious activity. 

bullet What is the purpose of KYC?

Its core objective is to prevent businesses from becoming unwittingly involved in illicit financial activity such as money laundering and the financing of terrorism. Therefore, KYC processes are often a component of a broader AML/CFT policy. These policies are regulated and enforced by industry regulators, national lawmakers, and in the case of EU member states, the EU itself.

Previously, these laws and policies were only intended for financial institutions, but as society has become increasingly digitized, its scope has grown to include fintech, crypto and blockchain, and even eCommerce. Getting to know your customer is extremely important. You need to know how to manage your business relationship with them and also how to ensure you are protected.

bullet Why is KYC important? 

KYC is important for several reasons. Firstly, as it is a legal requirement in many sectors, failing to comply with the requirements can land you in hot water. This can include fines, license revocation, and even criminal charges. Furthermore, your reputation will take quite a hit, causing immeasurable damage to your brand. But KYC is also extremely important in protecting you, your company, and society.

In 2019, some 14.4 million people worldwide were victims of identity fraud. This means, a criminal took their details and used them to open accounts and carry out certain activities. Fraud costs companies more than $5.1 trillion during the same year. 

In terms of money laundering, it’s estimated that up to $2 trillion is laundered annually around the world. Much of this money comes from the proceeds of drugs, human trafficking, weapons, smuggling, and corruption. A large portion of it ends up in the hands of criminal groups or terrorists who use it to continue funding their illicit and harmful activities.

If your company falls foul of fraudsters, it can cost you a significant sum. If you haven’t obliged by your KYC requirements, you can find yourself liable for damages as well. Not only is it incredibly important to protect yourself and your business, but you have a responsibility to protect your customers as well. By maintaining a system of thorough checks and balances, you are also contributing to the global fight against organized crime, money laundering, corruption, and terrorism.

bullet KYC Documentation

KYC Documentation

When setting up your business, you need to understand which rules apply to you. Additionally, you may need to consider regional and international laws as well as those of where your clientele is based. While each jurisdiction can have different standards of KYC, the core elements remain the same:

  • A copy of their government-issued photo ID such as a passport
  • Proof of address such as a recently issued utility bill
  • Sometimes information relating to the source of the funds
  • Other documents might be requested including company documents, VAT number, information on Directors and Shareholders, and social security number.

bullet To whom does it apply? 

You might think that small businesses can get away with it or don’t need to undertake it. You might also think that because you aren’t a bank or investment fund, it doesn’t apply to you. But guess what? This isn’t the case. KYC typically applies to:

  • Financial institutions
  • Payment providers
  • Processors
  • Online gambling sites
  • Brokers
  • Exchanges
  • Law firms
  • Corporate service providers
  • eCommerce
  • Networking sites
  • Any business where funds or stores of value are being deposited, withdrawn, stored, traded or exchanged.

There are also cases where KYC can apply in non-regulated industries if the customer is a PEP.

bullet What happens if I don’t implement it?

As you’ve probably gathered by now, KYC is important. As such, the consequences of non-compliance are severe.

At a national level, you can receive large financial penalties. You may also find yourself being investigated by the national financial conduct authorities. This can also result in suspension or even revocation of licenses. In some cases, this can preclude you from carrying out similar activities in that jurisdiction or others in the future. Criminal charges can also be filed against employees and company owners, as well as administrative charges.

Not only will you have to deal with all of these issues, but you will have to manage the reputational fallout. Serious breaches and issues will likely be made public and reported in the media. This means your name will be forever linked to the problem and you will be considered as being complicit in criminal activity.

In other words, noncompliance with KYC and other money laundering regulations just isn’t worth it. Any supposed benefit of cutting corners does not outweigh the harm that fines, restrictions, sanctions, and reputational damage will cause you and your business.

bullet KYC in different legislations

Your KYC obligations will vary a lot, depending on where you are based or licensed, where your target audience is, and what market you’re operating in.

bullet Contact Fast Offshore

It doesn’t matter how big or small the company is, KYC still applies. To be sure that you are implementing KYC correctly, it’s a good idea to seek advice from an experienced service provider such as Fast Offshore. They will understand the full requirements for KYC both in your industry, and jurisdiction. Staying on top of your compliance obligations can be tough, but don’t be tempted to cut corners because it’s just not worth it.

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