Know Your Customer (KYC) process is taken during onboarding to ensure that customers are being truthful about who they are, and about the business in which they are involved. The identity verification process involves an assessment of a customer’s personal information, and the nature of their business relationships. Where an entity is acting on behalf of an individual, firms should seek to establish the beneficial ownership of that entity.
KYC also take place throughout the business relationship in order to establish that a customer’s risk profile continues to match the firm’s previous assessment of them.
Accordingly, where a customer presents a particularly high risk of money laundering, the KYC process takes Enhanced Due Diligence (EDD). The EDD process may involve:
Money laundering is defined as the criminal practice of making funds from illegal activity appear legitimate. Money launderers attempt to do this by disguising the sources, converting cash to other forms, or moving money to places where it is less likely to attract attention.
Through these stages, funds appear to be proceeds from legal activities.
Placement is the introduction of unlawful proceeds into the financial system. Structuring, which is considered a type of placement activity, is any attempt to evade legal reporting requirements for cash/currency transactions conducted with a financial institution. Examples of structuring may include, but are not limited to:
Layering involves moving funds around in the financial system in order to conceal the origin of the funds. Examples include, but are not limited to:
Integration is the ultimate goal of the money laundering process. In this stage, the illicit funds may appear legitimate and are often used to purchase other assets, for example:
AML (anti-money laundering) is term for the range of measures, controls, and processes that companies must put in place in order to achieve regulatory compliance.
KYC is a component part of AML, and refers specifically to the means by which companies establish and verify their customers’ identities, and monitor their financial behavior.