The Ultimate Guide to KYC (Know Your Customer)

Know Your Customer, or KYC, is a critical aspect of compliance, risk management and financial crime prevention for all financial institutions and other regulated businesses.

Operating in an increasingly uncertain global economy, battling ever more sophisticated and tech savvy financial criminals, and feeling the pressure of regulatory scrutiny, strong KYC processes are the frontline of defence for organisations seeking to improve risk mitigation, protect themselves against fraud, corruption and money laundering, and ensure adherence to regulatory obligations.

KYC is also an important aspect of customer experience. Strong KYC checks are key to understanding customer needs, opportunities, and pain points, establishing trust, enhancing experience at every stage of the customer lifecycle, and reducing cost to acquire and serve.

This is your ultimate guide to the what, the why, and the how of KYC.

‍What does KYC mean?

Know You Customer (KYC) refers to the policies and procedures put in place by businesses to manage risk and verify the identities of customers at onboarding stage, and for advanced client lifecycle management – acquire, onboard, originate, monitor retain and grow.

‍Why is KYC important?

Without strong KYC processes, financial institutions and regulated businesses can suffer:

• Increased regulatory and operational complexity, which can result in onboarding times of 100 days
• Escalating risks of financial crime and fraud: UK banks and fintech's alone spend £21.4k per hour fighting financial crime and fraud, pushing the UK's annual compliance bill to £38.3bn (equivalent to GDP of Estonia)
• Inability to meet rising customer expectations: 58% of clients are lost because of slow and complex onboarding
• Fines and penalties: The Financial Conduct Authority (FCA) issued three significant fines to financial institutions for critical compliance failings in 2024 totalling almost $65 million, with total global penalties standing at $4.6 billion.

Importantly, KYC is critical to the delivery of superior client lifecycle management.

KYC processes:

• Build trust by demonstrating a commitment to security and risk management
• Improve customer confidence by mitigating and preventing financial crime
• Allow for more personalised experience through a deep understanding of needs
• Ensure frictionless onboarding for faster time to value
• Help build long terms profitable relationships

Is KYC a legal requirement in the UK?

In the UK, compliance with KYC regulations is monitored by a range of regulatory bodies and government agencies including the Financial Conduct Authority (FCA), Prudential Regulation Authority (PRA), National Crime Agency (NCA) and HM Revenue and Customs (HMRC).

Key regulations include:

• The Economic Crime and Corporate Transparency Act 2023
• Financial Services and Markets Act 2023
• Proceeds of Crime Act 2002
• The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017

The UK regulatory environment for KYC compliance is aligned with the global standards set by the Financial Action Task Force (FATF).

What is required for KYC verification?

In the UK, financial institutions and regulated entities must collect and verify a range of documents on business customers during KYC processes:

• Proof of identity
• Proof of incorporation
• Tax identification
• Proof of address
• Identity and address verification of all stakeholders, shareholders, ultimate beneficial owners (UBO), and persons with significant control
• Bank statements, income tax returns, annual reports

Advanced KYC processes also include:

• Adverse media monitoring
• Politically Exposed Persons (PEPs) and sanctions checks
• Group structure - identification and visualisation of parent and subsidiary
• companies
• Digital identity verification - biometric comparison, optical character recognition
• Electoral roll and mortality checks
• Credit reference data

What are 5 steps of KYC?

1. Customer Identification

Financial and regulated business must ensure that the individuals and entities they are dealing with are who they claim to be.  

For individuals this typically involves the collection and verification of a variety of official documentation (proof of address, photo identification, passport, driving license, employment information), biometric authentication, and database checks.

For entities, the process involves collecting and verifying a range of information and documentation, including company registration documents, business licenses, director information, proof of address, nature of business and ownership structure (ultimate beneficial owners, shareholders); as well as database searches for potential AML red flags such as sanctions and Politically Exposed Persons (PEPS) lists, and adverse media screening.  

2. Customer Due Diligence (CDD)

Financial and regulated businesses must next carry out CDD-related KYC checks to gather and evaluate additional customer information. The aim is to better understand the nature of the customer’s business, potential risks they pose, and potential involvement in illegal activity.

When carrying out CDD measures, organisations must verify the customer identity, identify and verify beneficial owners, understand the ownership and control structures, access and obtain information pursuant to the purpose and nature of the business relationship, and build risk profiles based on an understanding of the nature and purpose of anticipated transactions.

3. Enhanced Due Diligence (EDD)

In addition, for customers considered to be of high-risk, businesses should undertake enhanced due diligence (EDD) - a risk-based approach to investigation and the gathering of more detailed intelligence.  

High-risk customers might include, for example, those subject to economic sanctions or operating in countries without adequate AML controls, customers with complex ultimate beneficial ownership structures, companies managed by politically exposed persons (PEPs), businesses operating in countries with significant levels of corruption, criminal or terrorist activity.  

EDD measures include adverse media screening, obtaining additional identifying information, analysing the source of funds, scrutinising Ultimate Beneficial Ownership (UBO) and transaction screening.

4. Ongoing Monitoring

Customer behaviour changes and risk profiles evolve. Ongoing monitoring, sometimes referred to as Continuous Due Diligence, Ongoing Customer Due Diligence (OCDD) or Perpetual Due Diligence (PDD), includes an in-life customer monitoring approach, based upon risk events and triggers for maintaining KYC checks and monitoring customers for the risks they pose related to AML and other financial crimes.

This involves monitoring and evaluating changes in customer profiles, business activities, ownership and organisation structures, legal status as well as sanctions and PEPs watchlists screening, adverse media screening, payment and transaction monitoring.

5. Reporting and regulatory compliance

Financial and regulated businesses have a duty to report suspicious or nefarious activity uncovered during KYC processes. Organisation must submit a Suspicious Activity Report (SAR) to the National Crime Agency (NCA) if they know, suspect, or have reasonable grounds for knowing or suspecting, that a customer or potential customer is engaged in, or attempting, money laundering or terrorist financing. 

It is important for financial and regulated business to stay ahead of all regulatory changes and update their KYC policies and processes accordingly.

What are the different types of KYC?

KYC can be broadly categorised into traditional or digital processes:

• Traditional KYC is typically highly-manual and time consuming, involving in-person verification of physical documents.
• Digital KYC also known as eKYC, is digitised and automated form of KYC verification, with the capability to verify customers remotely in a faster, more accurate way compared to traditional KYC processes.

What software can help with KYC?

There are a range of software solutions that can help ensure KYC policies and processes are implemented and conducted effectively. These include third-party data providers, identity verification tools, AML screening solutions, data analytics, and so on.

By far the best solution is a single end-to-end KYC compliance platform that streamlines and optimises the entire KYC process, from initial customer interaction to ongoing monitoring, including KYC and KYB checks, AML, IDV and anti-fraud tools.  

A single KYC orchestration platform integrates the various KYC processes into a unified workflow across the five steps, to remove friction for legitimate customers whilst increasing scrutiny for higher-risk businesses and individuals.

This approach avoids the headaches associated with multiple integrations and supplier contracts, saving time and money, improving accuracy, enhancing compliance, and minimising risk.  

Ready to take your KYC efforts to the next level?

FullCircl is an award-winning KYC orchestration solution designed for businesses seeking to verify and authenticate the identity of customers in the most streamlined and accurate way possible.

• Seamlessly integrate KYC checks, AML screening, advance identity verification, fraud prevention, and credit risks screening
• Automate real-time decision-making with unified workflows for the ultimate risk-based approach to KYC
• Improve onboarding speeds and customer lifecycle experiences whilst reducing cost to acquire and serve.

Contact us to book a demo.