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Table of Contents
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Table of Contents
 * Know Your Client (KYC)
 * Understanding KYC
 * KYC Requirements
 * KYC Compliance
 * AML and KYC
 * KYC and Cryptocurrency
 * FAQs
 * The Bottom Line

 * Laws & Regulations
 * SEC


KNOW YOUR CLIENT (KYC): WHAT IT MEANS AND COMPLIANCE REQUIREMENTS


By
James Chen

Full Bio
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James Chen, CMT is an expert trader, investment adviser, and global market
strategist.
Learn about our editorial policies
Updated August 06, 2024
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Fact checked by David Rubin
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WHAT IS KNOW YOUR CLIENT (KYC)?

Know Your Client (KYC) is a standard in the investment industry that ensures
advisors can verify a client's identity and know their client's investment
knowledge and financial profile.



Three components of KYC include the customer identification program (CIP),
imposed under the USA PATRIOT Act in 2001, customer due diligence (CDD), and
ongoing monitoring or enhanced due diligence (EDD) of a customer's account once
it is established.12





KEY TAKEAWAYS

 * Know Your Client (KYC) is a standard used in the investment and financial
   services industry to verify customers and know their risk and financial
   profiles.
 * Three components of KYC include the customer identification program (CIP),
   customer due diligence (CDD), and enhanced due diligence (EDD).
 * The SEC requires that each new customer provide detailed financial
   information before opening an investment or banking account.3
   

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UNDERSTANDING KNOW YOUR CLIENT (KYC)

The Know Your Client (KYC) rule is an ethical requirement for those in the
securities industry dealing with customers during the opening and ongoing
maintenance of accounts.



It is implemented at the onset of the customer-broker relationship to establish
the essential personal profile of each customer before any financial
recommendations are made. The customer is also made aware of the need to comply
with all the laws, regulations, and rules of the securities industry.4

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KYC REQUIREMENTS


CUSTOMER IDENTIFICATION PROGRAM

CIP requires that financial firms obtain four pieces of identifying information
about a client, including name, date of birth, address, and identification
number.5





CUSTOMER DUE DILIGENCE

CDD is a process in which all of a customer’s credentials are collected to
verify their identity and evaluate their risk profile for suspicious account
activity.




ENHANCED DUE DILIGENCE

EDD is used for customers that are at a higher risk of infiltration, terrorism
financing, or money laundering and additional information collection is often
necessary. 





KYC COMPLIANCE

Two rules governing KYC include Financial Industry Regulatory Authority (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.6



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.7




AML AND KYC

The U.S. Financial Crimes Enforcement Network (FinCEN) requires both customers
and financial institutions to comply with KYC standards to prevent illegal
activity, specifically 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 requires financial institutions to understand the type and purpose of the
customer relationship and develop a customer risk profile, used as a baseline
for detecting suspicious customer activities.89



Financial institutions must also maintain current and accurate customer
information and continue to monitor accounts for suspicious and illegal
activities. When detected, they are required to promptly report their
findings.10




KYC AND CRYPTOCURRENCY

The cryptocurrency market is praised for providing a decentralized medium of
exchange that promotes confidentiality. However, these benefits also present
challenges in preventing money laundering. 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.11


Are your clients interested in crypto? Use this discussion guide.


Most cryptocurrency platforms are considered money services businesses (MSBs)
and must comply with anti-money laundering (AML) laws, which require customer
identification programs and certain reporting and recordkeeping procedures.12



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.13




$60 MILLION

The penalty assessed against Bitcoin mixer Larry Dean Harmon for violating
anti-money laundering laws.14

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. 2024.1516




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.3




WHAT IS KYC IN THE BANKING SECTOR?

KYC in the banking sector requires bankers and advisors 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.17




THE BOTTOM LINE

Know Your Client (KYC) is a set of standards and requirements investment and
financial services companies use to verify the identity of their customers and
any associated risks with the customer relationship. KYC requires customers to
provide a personal identification profile and KYC ensures investment advisors
are aware of their client's risk tolerance and financial position.

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Article Sources

Investopedia requires writers to use primary sources to support their work.
These include white papers, government data, original reporting, and interviews
with industry experts. We also reference original research from other reputable
publishers where appropriate. You can learn more about the standards we follow
in producing accurate, unbiased content in our editorial policy.

 1.  Dow Jones. “Understanding the Steps of a ‘Know Your Customer’ Process.”

 2.  U.S. Securities and Exchange Commission. “Customer Identification Programs
     for Broker-Dealers.”

 3.  Federal Register. “Books and Records Requirements for Brokers and Dealers
     Under the Securities Exchange Act of 1934.”

 4.  Financial Industry Regulatory Authority. “Obligations to Your Customers.”

 5.  Financial Industry Regulatory Authority. “Customer Identification Program
     Notice.”

 6.  Financial Industry Regulatory Authority. “2090. Know Your Customer.”

 7.  Financial Industry Regulatory Authority. “FINRA Rule 2111 (Suitability)
     FAQ.”

 8.  Financial Crimes Enforcement Network. “Information on Complying with the
     Customer Due Diligence (CDD) Final Rule.”

 9.  Financial Crimes Enforcement Network. “FinCEN Guidance,” Pages 1-3.

 10. Federal Deposit Insurance Corporation. “Bank Secrecy Act, Anti-Money
     Laundering, and Office of Foreign Assets Control,” Page 5.

 11. Congressional Research Service. “Cryptocurrency: Selected Policy Issues.”
     Page 19.

 12. Congressional Research Service. “Cryptocurrency: Selected Policy Issues.”
     Page 25.

 13. Cointelegraph. “What Is KYC, and Why Do Crypto Exchanges Require It?”

 14. U.S. Treasury Financial Crimes Enforcement Network. "First Bitcoin 'Mixer'
     Penalized by FinCEN or Violating Anti-Money Laundering Laws."

 15. Federal Register. “Requirements for Certain Transactions Involving
     Convertible Virtual Currency or Digital Assets.” Pages 83840-83847.

 16. Federal Register. “406. Requirements for Certain Transactions Involving
     Convertible Virtual Currency [1506–AB47].” Page 11281.

 17. Federal Deposit Insurance Corporation. “FFIEC BSA/AML Examination Manual:
     Customer Identification Program.” Pages 3-5.

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The offers that appear in this table are from partnerships from which
Investopedia receives compensation. This compensation may impact how and where
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