Why Is KYC Important? The Crucial Piece of Due Diligence That Keeps Us and Your Clients Safe

Across the financial industry, from accounting to hedge fund management, companies must engage with “know your customer” (KYC) checks and processes. KYC falls within the wider Regulatory obligation of Customer Due Diligence (CDD) which includes identifying (and where appropriate) verifying the identity of customers and ultimate beneficial owners of corporate customers. CDD/KYC can sometimes also be referred to as Know Your Client, and involves the mandatory process of identifying and verifying a customer’s identity, source of funds and source of wealth, background, and situation when establishing a business relationship such as opening an account for them, or otherwise welcoming them and onboarding them into a business.

While many of the CDD/KYC checks are done at the beginning of this relationship, it also involves periodical reviews too. But, why is KYC important for both providers and consumers? Well, financial firms need to ensure the clients they work with are who they say they are, and they have a full picture of their circumstances and ultimately that they are not allowing would be criminals to use their products and services to launder the proceeds of crime, or fund acts of terrorism.

How to Achieve KYC?

While this does concern service levels – it’s important to know a client’s circumstances and needs to match them to an appropriate product or service, and this information can also be a valuable source of CDD/KYC, however CDD/KYC is more centred around mitigating money laundering and preventing other financial crimes such as fraud[1].

As Lexis Nexis[2] explains: “To achieve CDD/KYC compliance, banks and other financial services companies need to have in place stringent CDD/KYC policies incorporating the following four key elements:

• A customer acceptance policy: The criteria for determining whether a customer or client can be accepted to open an account – or if the level of risk requires additional due diligence.
• Risk management: The criteria for classifying customers as low, medium or high risk.
• A Customer Identification Program: The verification of documents to effectively know your customer.
• Ongoing monitoring: Monitoring of client or customer accounts for any unusual or unexpected financial transactions that might require their risk profile to be reassessed. To be compliant with CDD/KYC rules, financial services companies need to have in place stringent CDD/KYC policies incorporating the following four key elements”

In financial services, much of this will revolve around a “fact find”. This is a common term used to describe the process of gathering information from a client. It’s usually split into hard facts, such as name, age, financial assets etc, and soft facts, which includes the client’s immediate aims, and long-term goals.

Why Is KYC Important?

Simply put, CDD/KYC processes are crucial for the protection of clients/customers, and the financial firms servicing them. Safeguarding against crimes such as money laundering and fraud is paramount in our modern, digitally advancing economy. CDD/KYC also helps firms protect their customer from becoming the victims of fraud, ultimately the more a firm knows about their customers, the more readily capable they are to identify when a bad actor either attempts to defraud their customers, or impersonate them in order to gain access to their accounts and finances.

According to Experian, financial crime costs the UK economy alone an estimated £290 billion annually. Furthermore, individual firms can spend up to £100 million on remediation action every year.

Specifically, CDD/KYC helps with a few key areas within financial services. As QContact[3] explained, CDD/KYC serves as the first line of defence against money laundering, as well as countering the financing of terrorism (CFT). More than that though, it helps build trust and foster positive relationships between financial firms and their customers.

Who Is Affected by It?

As mentioned, most of the financial landscape will be affected by CDD/KYC, at least in some capacity. It’s why CDD/KYC is so important in the first place. But, iDenfy[4] broke down how individual sectors are affected:

• “Banks and financial institutions. The financial sector is at the forefront of CDD/KYC compliance in the UK. Banks, credit and investment firms, electronic money institutions, money service businesses, financial institutions and payment companies are mandated to perform thorough identity verification and due diligence on customers.
• Cryptoasset businesses. With the rise of digital currencies, the need for CDD/KYC protocols has grown exponentially. Cryptocurrency exchanges, crypto wallet providers, peer-to-peer crypto transfer service providers, or initial coin offerings (ICOs) must follow CDD/KYC requirements in the UK.
• Real estate. Real estate firms, agents, letting agents or businesses that are dealing with buying or selling property in the UK are subject to CDD/KYC regulations. Verifying those who are involved in real estate transactions and ensuring that both buyers and sellers are accurately identified helps maintain transparent financial activities.
• Gaming and casinos. In the UK, the gaming and gambling industry faces strict CDD/KYC requirements. Operators must verify amongst other things the identity and age of the customer to prevent underage gambling and illicit financial activities.
• High-value dealers. Recognizing the potential risk of exploiting these transactions for money laundering and illicit activities, the UK has also established CDD/KYC requirements for high-value dealers. Antiques, jewellery, luxury goods, and art dealers must conduct CDD/KYC checks.
• Independent legal and professional services. Even legal and professional services are not exempt from CDD/KYC obligations. Lawyers, accountants, and other professionals who offer real property transactions or financial services are required to conduct due diligence on their clients to prevent their services from being exploited for illegal purposes.”

What Is Causing CDD/KYC Delays?

While everyone involved can understand why CDD/KYC is important, some consumers may lament how long all the checks take. This may especially be the case in the property investment market, where time is of the essence.

Due diligence takes time but with how complicated the world has become, delays can occur. In late 2023, research from Fenergo[5] found that, on a global scale, banks took an average of 95 days for a CDD/KYC review, an increase from 84 days in 2022. In the UK, the delay was more pronounced, with the process taking 17 additional days compared to the year prior.

What’s more, the average cost to complete a CDD/KYC review for a corporate client also rose. In 2023, this figure stood at $2,598, 17% higher than the previous year. British banks were particularly impacted, incurring an average cost of $2,613 per CDD/KYC review, up by 19% year-on-year.