# Know Your Client (KYC): Key Requirements and Compliance for Financial Services

![Know Your Client (KYC): Standards used in the investment services industry to verify customers and their risk and financial profiles.](https://www.investopedia.com/thmb/CFyJXp4AotoYxnPddiXdzKX3DMM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/know-your-client.asp-Final-05d7296a7d0242be985169322a7a17db.jpg)

*— Investopedia / Yurle Villegas*

## What Is Know Your Client (KYC)?

Know Your Client (KYC) is a vital standard in investment and financial services, designed to verify client identities and assess financial profiles. Its implementation through components like the Customer Identification Program (CIP) and other due diligence measures ensures compliance and helps mitigate risks in customer relationships.  

### Key Takeaways

*   Know Your Client (KYC) is an essential standard in investment and financial services, crucial for verifying customers' identities and financial profiles.  
    
*   KYC involves three main components: Customer Identification Program (CIP), Customer Due Diligence (CDD), and Enhanced Due Diligence (EDD) for high-risk accounts.  
    
*   Financial institutions must adhere to KYC standards to prevent money laundering and illegal activities, with specific regulations outlined by FINRA and FinCEN.  
    
*   Cryptocurrency platforms, considered Money Services Businesses, are subject to KYC and AML regulations to avert money laundering through decentralized exchanges.  
    

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## Key Principles of Know Your Client (KYC) Guidelines

The KYC rule is an ethical standard for those in the securities industry working with customers to open and maintain accounts.

This rule starts when a customer-broker relationship begins, setting up a customer's essential profile before giving financial advice. The customer is also made aware of the need to comply with all the laws, regulations, and rules of the securities industry.

## KYC Requirements

### Customer Identification Program

CIP requires financial firms to get four key pieces of client information: name, date of birth, address, and ID number.  

### Customer Due Diligence

CDD involves gathering a customer's credentials to confirm their identity and assess their risk for suspicious activities.

### Enhanced Due Diligence

EDD applies to customers at high risk of infiltration, terrorism financing, or money laundering, needing extra information collection.  

## Regulatory Rules for KYC Compliance

Two rules governing KYC include [Financial Industry Regulatory Authority](https://www.investopedia.com/terms/f/finra.asp) (FINRA) Rule 2090 (Know Your Customer) and FINRA Rule 2111 (Suitability).

FINRA Rule 2090 requires every broker-dealer to use reasonable diligence when opening and maintaining client accounts and to know and keep records on the profile of each customer, as well as identify each person who has the authority to act on the customer’s behalf.

FINRA Rule 2111 notes that a broker-dealer must have a reasonable basis to believe that a recommendation is suitable for a customer based on the client’s financial situation and needs. This rule assumes that the broker-dealer has completed a review of the current facts and profile of the customer, including the customer’s other securities and investments before making any purchase, sale, or exchange of a security on the client's behalf.

## The Relationship Between Anti-Money Laundering (AML) and KYC

The U.S. Financial Crimes Enforcement Network (FinCEN) mandates that customers and financial institutions follow KYC standards to prevent illegal activities, like money laundering. AML, anti-money laundering, is a term for the range of measures and processes used to achieve regulatory compliance. KYC is a component of AML.

FinCEN says financial institutions must know the type and purpose of customer relationships and create risk profiles to spot suspicious activities.

Financial institutions must also maintain current and [accurate customer information](https://www.investopedia.com/corporate-transparency-act-8413903) and continue to monitor accounts for suspicious and illegal activities. When detected, they are required to promptly report their findings.

## How KYC Standards Impact Cryptocurrency Markets

The cryptocurrency market offers a decentralized exchange promoting confidentiality, but this also makes preventing money laundering challenging. Criminals see cryptocurrency as a vehicle to launder money and as a result, governing bodies are looking for ways to impose KYC on cryptocurrency markets.

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Most [cryptocurrency](https://www.investopedia.com/terms/c/cryptocurrency.asp) platforms are seen as money services businesses (MSBs) that must follow AML laws requiring [customer identification](https://www.investopedia.com/news/why-new-know-your-customer-project-crucial-blockchain/) and specific reporting.

Fiat-to-crypto exchanges facilitate transactions involving fiat currencies and cryptocurrencies. Since fiat currency is the official currency of a nation, most of these exchanges employ a measure of KYC and financial institutions would have vetted their customers according to KYC requirements.

### $60 million

The penalty assessed against [Bitcoin](https://www.investopedia.com/terms/b/bitcoin.asp) mixer Larry Dean Harmon for violating anti-money laundering laws.

In Dec. 2020, FinCEN proposed that cryptocurrency and digital asset market participants submit, maintain, and verify customers' identities. This rule classifies certain cryptocurrencies as monetary instruments, subjecting them to KYC requirements. The proposed rule is slated for final action in Feb. 2024.

## What Is KYC Verification?

The Know Your Client (KYC) verification is a set of standards and requirements used in the investment and financial services industries to ensure brokers have sufficient information about their clients, their risk profiles, and their financial position.

## What Is KYC in the Banking Sector?

KYC in the banking sector requires bankers and [advisors](https://www.investopedia.com/terms/f/financial-advisor.asp) to identify their customers, beneficial owners of businesses, and the nature and purpose of customer relationships. Banks must also review customer accounts for suspicious and illegal activity and maintain and ensure the accuracy of the customer accounts.

## What Are KYC Documents?

Account owners generally must provide a government-issued ID as proof of identity. Some institutions require two forms of ID, such as a driver's license, birth certificate, social security card, or passport. In addition to confirming identity, the address must be confirmed. This can be done with proof of ID or with an accompanying document confirming the address of the client.

## Final Thoughts on KYC Standards

KYC (Know Your Client) is a crucial standard in the financial services industry, aimed at verifying customer identities and assessing the associated risks of their financial profiles. This process involves three key components: the Customer Identification Program (CIP), Customer Due Diligence (CDD), and Enhanced Due Diligence (EDD).

Financial institutions, including banks and investment services, must comply with regulations like FINRA rules, ensuring they know their clients well to provide suitable financial advice and prevent illegal activities. As regulatory standards evolve, all parties involved must remain vigilant and proactive in their KYC compliance to support secure financial transactions and trust in the system.

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