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Thread: Understanding the basics of KYC

  1. #1
    Join Date
    Aug 2014

    Default Understanding the basics of KYC

    What is KYC?

    In order to go into the full details of KYC, it is first important that you understand the phrase ‘Know Your Customer’ means and signifies, and the core elements of the KYC policy. It is highly imperative for the financial sector, gambling, and bullion sectors, along with other regulated companies and institutions to ‘Know their Customers well’.

    It is important that regulated financial entities should in essences have a complete and thorough understanding of who they deal with (their customers) in order to adequately assure their KYC requirements. It is just as important for a company’s employees to be trained in accordance to the KYC policies related to their company.

    Moreover, KYC policies are considered to be vital for a variety of other reasons. For instance, if a certain business has the proper knowledge of the customer it deals with, it may very well be able to defend itself against potential losses in the form of fraud and/or dealing with something that has a tremendous amount of risk associated with it and the customer involved.

    According to the AML/CTF legislation, the KYC policy involves a series of thorough documentation that defines a company’s modus operandi to affirm that it can indeed validate, confirm, track, and monitor its client/customers and how they conduct their financial transactions. This allows companies to reduce the risks of money laundering or a funding to promote terrorists.

    The Core Objectives of a KYC

    • Making sure that only confirmed and genuine customers are dealt with
    • Making sure that all clients and customers are identified to avoid a risky predicament
    • Confirming the identity of the customers through the efficient use of documents
    • Tracking and monitoring of customer’s accounts in order to eliminate any possibility of illegal activity
    • Taking the correct measures to adequately manage the risks associated with the misuse of facilities
    • The Risks Mitigated by KYC

    There are five different types of risks which a KYC policy can help alleviate:

    1. reputational
    2. operational
    3. legal
    4. financial
    5. concentration

    Here is a brief analysis of each of the five risks:

    Reputational Risk:

    There is no doubt that a business thrives on the basis of its reputation. Who you hire, how much business you do, and how much funding you receive mainly depends on how reputable your business is. A KYC policy can help you prevent doing business with a defaulter and can also prevent you from being used for illegal proceedings.

    Operational Risks:

    This is the risk of losing money from a problems encountered in internal processes, inadequate management, and business systems. Today, the operational efficiency of a business is its life blood. If you want to stay in the game you have to be productive and consistently productive. An inadequate implementation of a KYC policy can lead to your operational resources sinking down the drain, and this gives an opening for criminals to use your resources illegally.

    Legal Risk:

    If a company is used as a vehicle with a criminal intent by any customer, it faces the threat of being heavily fined, punished with various legal penalties and prosecuted. The business may also be legally ordered to close down. A KYC policy can reduce your chances of facing complications.

    Financial Risk:

    Failing to identify your customers and providing verification of their credibility, you may run the risk of unintentionally permitting your customer to falsify their identity. The results of their illegal actions can lead to them making it overly complicated for you to collect the money owed to you by your genuine customers who they are posing as.

    Concentration Risk:

    Concentration risk deals with the assets of a company. If another company gains considerable access or exposure to another company’s clientele, that company could end up authorizing the transfer of large amount of money in funds from that company. By effectively implementing the KYC policies a business can recognize the overall asset and liability risk in correspondence to each customer and a larger group of customers.

    All in all, if you want to ensure topnotch customer be sure to implement the best KYC policies. This will enable you to boost sales and increase profits while at the same time retaining customers.

  2. #2


    Yes its a very important for documentation and it has made mandatory in many banking and finance related sectors to prevent scams.

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