What is Know Your Client (KYC)?

Find out what know your client (KYC) is, how it's used by financial institutions, and why you should care about it.

Know your client, also known as KYC's primary goal is to help financial institutions comply with the rule of law.

The Patriot Act, enacted in 2001, mandated that all US Financial Institutions must establish programs for identifying customers or clients who might be breaking the law. As a result several new regulations were put into place, such as The Bank Secrecy Act of 1970 and the USA PATRIOT ACT.

These rules require banks to find out who their customers are and verify that they are not laundering money. Banks must keep records on every customer that checks into a bank to make sure each one is not engaged in illegal business practices. Financial institutions must also verify that each customer or client is not on any list of prohibited individuals, such as the Specially Designated Nationals (SDN) list.

A client may be defined as someone who uses financial services. Or, a client could be an individual or entity with whom a financial institution has done business during the previous year.

The KYC process typically entails the following:

- Know who you are doing business with,

- Verify where they got the money from,

- Check how much money is coming into accounts and what that person does for a living.

KYC ensures financial institutions and regulated entities have a clear understanding of their customers' business practices, source of funds, and purpose for maintaining an account prior to opening the account or conducting a money transfer.

KYC is not only required by law but also good practice. KYC helps institutions to reduce risk exposure from financial crime. This will lead to trust in the business relationship. KYC can be time-consuming, but it protects the business and reduces the risk of fines for non-compliance with regulations. When

Done correctly, KYC is an ongoing process involving up-to-date risk assessment.

Increasingly, governments are enacting KYC rules for cryptocurrency accounts as well. In the USA, account holders have to provide a picture of their face and photo ID. Bittrex, for example, requires proof that you own or control the account cryptocurrency address in order to open an account.

The point is this: KYC protocols are fast becoming the norm in the cryptocurrency industry. To stay afloat, you may have to complete them before sending or receiving any money on your blockchain accounts. Of course, this is just one aspect of staying compliant in an ever-changing regulatory environment.

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