Why Know Your Customer (KYC) — for organizations

Know Your Customer (KYC) regulations are part of the first line of defense against illegal money laundering and terrorist financing. They play a key role in global efforts to prevent terrorist and other criminal organizations from earning, moving and storing illicit funds.

Criminal organizations can be involved in a wide range of illicit activities such as cybercrimes, arms trafficking, kidnapping, extortion, drug trafficking, human trafficking and smuggling, domestic terrorism and international terrorism. All banks have a responsibility to know their customers and understand how transactions from illegal activities might flow through their institution.

Why is KYC important?

Since the terrorist attacks of Sept. 11, 2001, and as early as the 1980s, banks and regulators have focused on limiting terrorist funding and money laundering related activities through the U.S. financial system. It’s hard to move funds around the globe and within a country without using a financial institution, therefore banks have continually been asked to increase their efforts to prevent, detect and report potentially suspicious financial transactions indicative of money laundering and terrorist financing. KYC regulations are a critical component of anti-money laundering efforts.

KYC includes knowing an individual acting on behalf of an organization

In 2016, the U.S. government issued a KYC rule requiring banks to verify the identities of beneficial owners of legal entity clients such as corporations, LLCs, partnerships, unincorporated non-profits and statutory trusts. Beneficial owner information is required for an individual with an ownership stake of 25 percent or more equity interest, and for an individual who exercises significant authority to control the affairs of the legal entity.

If you’re a beneficial owner of a legal entity, KYC compliance requires you to  provide personal information that includes:

• Full legal name
• Date of birth
• Current residential address
• Social Security number or other government-issued identification number
  

Banks and other financial institutions must collect this information because it’s a regulatory requirement. But more importantly, the KYC process helps assist in efforts to prevent, detect and report money laundering and terrorist financing activity.

For example, while opening a new account and asking for KYC information, a bank may discover through open-source record checks that an individual or business has previously defrauded innocent investors or was previously connected to a global criminal network. This KYC information may indicate that this potential customer could pose an elevated money laundering risk.

Maintaining a good reputation can be a key to success

Gathering KYC information and discovering potential money laundering risk can help limit exposure to financial risk for banks and their business clients. This helps protect all parties from potential reputational damage, which can be just as important as safeguarding financial assets.
 

Global expansion of trade, travel and financial systems compounds the threat

Today, we live in a global economy with transcontinental trade and travel spanning the world. We have an expansive and sophisticated global banking network and there’s an increased ease to global communications.

From the internet to intercontinental air travel, local crime has become transnational crime that crosses our borders and poses an even greater risk to our nation. This makes KYC even more critical than ever before.

The more financial institutions understand about their customers, the more proactively they can identify activity that’s unusual for a customer type or a customer in a particular location or region, for instance. Having the information to recognize expected patterns is fundamental in identifying potential money laundering and/or terrorist financing.

We hope this helps explain the Know Your Customer rules and why banks ask for your personal information.

U.S. Bank partners closely with clients to fulfill all federal KYC requirements. In doing so, our aim is to support the government’s law enforcement efforts and meet our compliance duties, as well as to protect our clients’ reputations and support their risk management efforts. Contact your treasury representative for more information on how to safeguard your business and effectively meet KYC obligations.