KYC Banking and Finance : The legal framework

by | Oct 10, 2023 | Banking & Insurance, Identity verification

When it comes to managing finances and transactions, trust is essential. Financial institutions must ensure that their customers are who they say they are. To achieve this, banking and finance KYC requires continuous monitoring to ensure that customers' activities are legal and comply with current regulations. This is where KYC, or "Know Your Customer", comes in.


Why is KYC essential in banking and finance?


The fight against money laundering


Anti-money laundering plays a central role in the prevention of money laundering. A criminal practice in which illegal funds are concealed by integrating them into the legitimate financial system. Criminals often seek to launder money by carrying out complex transactions and hiding them behind a series of shell companies. KYC procedures enable financial institutions to detect such suspicious activities. This is done by identifying the real beneficiaries of transactions and monitoring their financial behavior.


Preventing financial fraud


KYC is also essential for the prevention of financial fraud. Financial fraud takes many forms, from identity theft to sophisticated online scams. Financial institutions can significantly reduce the risk of fraud. To this end, they should ask every customer to provide solid proof of identity when opening an account or carrying out important transactions.


Government and international regulations


KYC is not just the concern of financial institutions, it is also mandated by government and international regulations. Many countries have passed laws and regulations requiring financial institutions to implement robust KYC policies to combat financial crime and terrorist financing.


At international level, the Financial Action Task Force (FATF) is developing global standards for combating money laundering and the financing of terrorism. These widely accepted standards encourage countries around the world to implement strict KYC regulations.


KYC is therefore much more than a mere administrative formality; it is an essential pillar of the security and integrity of the global financial system. In the following sections of this article, we explore in detail the steps involved in the Banking & Finance KYC process, the documents required, the associated risks and challenges, and the regulations in force. Stay with us to find out more about KYC obligations for Banking & Finance.


Required steps in the KYC process (Banking and Finance)


The KYC process comprises several crucial steps to ensure that financial institutions truly know their customers and their financial activities. These steps are essential to reduce the risk of money laundering, financial fraud and terrorist financing.


Customer identification


Customer identification is the first step in KYC. Customers must provide information such as their full name, date of birth, address and identification number. This step establishes the customer's database and enables us to start monitoring them.


Identity verification


Identity verification is a crucial step in the KYC process. That's why financial institutions use official identity documents, such as ID cards, passports or driving licenses, to confirm their customers' identities. This ensures that customers are not impostors, and that they are who they say they are.


Risk assessment


Risk assessment involves determining the level of risk associated with each customer. This depends on factors such as the nature of the customer's business, their place of residence and their financial history. High-risk customers, such as politically exposed persons (PEPs), are subject to closer monitoring.


Continuous monitoring


Continuous monitoring is an obligation of ongoing vigilance. Financial institutions must monitor their customers' transactions throughout their business relationship. This involves detecting suspicious transactions, atypical operations or any signs of money laundering, terrorist financing or fraud.


Documents required for KYC (Banking and Finance)


To carry out the KYC process, financial institutions require certain documents from their customers. These documents vary according to local regulations and the internal policies of each institution. Documents generally required include:

  • Identification: any ID card, driver's license or passport.
  • Proof of residence: utility bill, for example.
  • Financial information: bank statements or tax returns.


Together, these documents enable financial institutions to ensure that customers comply with legal KYC and AML (Anti Money Laundering) obligations. In addition, these documents help to identify any suspicious or illegal financial activity.


KYC risks and challenges (Banking and Finance)


While KYC is essential to the security of the financial sector, it also entails significant risks and challenges for financial institutions.


Non-compliance risks


Failure to comply with KYC obligations can have serious consequences for financial institutions. They may be subject to sanctions, fines or repressive measures if they fail to comply with anti-money laundering and anti-terrorist financing regulations. Regulators are paying increasing attention to the compliance of financial institutions, and imposing strict standards to prevent breaches.


Managing sensitive data


Collecting and managing sensitive customer data is a delicate aspect of KYC. Financial institutions must ensure that this data is protected against security breaches and information leaks. Customer confidentiality is paramount, and any security incident can have a negative impact on the institution's reputation.


Operating costs


Setting up and maintaining an effective KYC process can represent significant costs for financial institutions. This includes expenses related to :

  • identity verification.
  • staff training.
  • continuous monitoring.
  • data management.


Institutions need to strike a balance between regulatory compliance and cost management to remain competitive.


International KYC regulations (banking, finance and other players)


KYC is closely regulated internationally to ensure the integrity and transparency of the financial sector. Two of the key players in KYC regulation are the Financial Action Task Force (FATF) and the European Union (EU).


FATF (Financial Action Task Force) standards


The FATF is an intergovernmental organization that sets global standards for combating money laundering and the financing of terrorism. The FATF 40 Recommendations define the minimum KYC and AML requirements that member countries must implement. These recommendations cover aspects such as identification of beneficial owners, reporting of suspicions, international cooperation and sanctions in the event of non-compliance.


KYC AML guidelines - 1 to 10


  • National policies and cooperation: Implementation of national policies to combat money laundering and terrorist financing. International cooperation for information exchange.


  • Integration of AML measures into the national system: Integration of AML measures into the national legal framework and the financial sector.


  • Anti-money laundering: Obligation to set up mechanisms to detect and prevent money laundering.


  • Combating the financing of terrorism: Adopt measures to identify and prevent the financing of terrorism.


  • Criminalization of money laundering: Establishment of laws and criminal sanctions for money laundering.


  • Confiscation and seizure measures: Enable the confiscation of proceeds of crime and the seizure of assets linked to money laundering.


  • Confiscation of proceeds of crime: Confiscation of proceeds obtained through criminal activities.


  • Combating currency counterfeiting and related offences: Preventing counterfeiting and other financial crimes.


  • Combating the financing of terrorism: Identifying, tracking and preventing the financing of terrorism.


  • Combating circumvention of asset freeze measures: Prevent attempts to circumvent asset freeze measures.


Know Your Customer guidelines - 11 to 20


  • Declaration of suspicion and other reports: Obligation to report suspicious transactions and to file suspicious activity reports.


  • Requirements and powers of competent authorities and other institutions: Granting authority and powers to regulatory bodies to implement and enforce AML rules.


  • International money transfers: Monitoring of international money transfers to detect suspicious transactions.


  • International assistance: Cooperation with other countries to combat money laundering and the financing of terrorism.


  • Non-profit organizations: Monitoring the activities of non-profit organizations to prevent their misuse.


  • Financial professionals: Obligation for financial professionals to implement AML measures.


  • Precious metals dealers: Monitoring transactions involving precious metals to prevent money laundering.


  • Real estate services: Monitoring of real estate transactions to detect suspicious activity.


  • Gaming services: Implementation of AML measures for gaming establishments.


  • Offshore and corrupt banking sector: Increased monitoring of activities in offshore jurisdictions and of banks linked to corruption.


FATF Guidelines - 21 to 30


  • Business relationships: Assessment of business relationships to determine AML risk.


  • Compliance with international standards: Adoption of international standards to combat money laundering.


  • Risk assessment and proportionate application: Risk assessment to adapt AML measures proportionately.


  • Preventing money laundering and the financing of terrorism: Implementing measures to prevent money laundering and the financing of terrorism.


  • Deterrence: Deterrence of money launderers through criminal sanctions.


  • Financial results: The obligation for financial institutions to know their customers and monitor their transactions.


  • Account and register of beneficial owners: Establishment of registers of beneficial owners of legal entities.


  • Powers and independence of competent authorities: Assigning powers and independence to the authorities responsible for implementing AML rules.


  • Powers of control over professionals: Authorization of powers of control over professionals by competent authorities.


  • National competence standards: Establishment of national standards to guarantee the competence of AML professionals.


Guidelines 31 to 40


  • Casino licensing and supervision: Licensing and supervision of casinos to prevent money laundering.


  • Financial results: Obligation to know customers and monitor financial transactions.


  • Administrative and criminal penalties: Imposition of administrative and criminal penalties for violations of AML rules.


  • Confidentiality: Establishing confidentiality rules to protect AML information.


  • Implementation control mechanisms: Regular monitoring and evaluation of the implementation of AML rules.


  • Statistics: Gathering statistics on AML activities.


  • Reporting: Obligation to report suspicious transactions and activities linked to money laundering.


  • Recommendations on transnational organized crime: Recommendations.


  • Economic crime: Specific measures to combat economic crime, such as financial fraud.


  • Internal controls, policies and procedures: Establishment of robust internal controls, policies and procedures to prevent money laundering and the financing of terrorism.


These FATF Recommendations provide a global framework for combating money laundering and terrorist financing, with specific obligations for the banking and finance sector to ensure compliance and financial security.


The EU Anti Money Laundering (AML) Directive


The European Union has adopted a series of AML directives aimed at harmonizing regulations within its member states. The Fourth AML Directive and the Fifth AML Directive have strengthened KYC obligations, notably by introducing the notion of beneficial owner and broadening the scope of activities subject to AML. These directives oblige financial institutions to implement more rigorous KYC procedures and to report suspicious transactions to the competent authorities.


Here is the list of directives


Directive 91/308/EEC

  • Customer identification and verification.
  • Records kept for at least 5 years.
  • Staff training to detect suspicious transactions.



  • Reinforcement of customer identification obligations.
  • Broadening the definition of money laundering.


2005/60/EC - Third AML Directive

  • Reinforcement of Know Your Customer (KYC) requirements.
  • Requirement to report suspicious transactions to the competent authorities.
  • Introduction of enhanced due diligence measures for politically exposed customers (PEP).
  • Obligation to identify the beneficial owner.



  • Amendment of the Third AML Directive to clarify and strengthen certain provisions, in particular the definition of PEP.


Directive 2007/64/EC

  • Know-your-customer (KYC banking) obligations for payment service providers.
  • Monitoring and reporting requirements for suspicious transactions.



  • Application of AML requirements to electronic money institutions.
  • Customer identification and verification for e-money transactions.


2015/849/EU - Fourth AML Directive

  • Reinforcement of AML obligations for financial institutions, especially banks.
  • Expanded scope of activities subject to AML.
  • Requirements for data retention and personal data protection.
  • Measures to combat terrorist financing and money laundering via crypto-currencies.
  • Obligation to set up registers of beneficial owners.


Directive (EU) 2018/843 - Fifth AML Directive

  • Reinforcement of AML obligations, particularly for crypto-currencies.
  • Transparency requirements for registers of beneficial owners.
  • Measures to prevent circumvention of AML rules via third countries.
  • More stringent requirements for electronic transactions and prepaid payments


These EU directives aim to harmonize AML regulations within the European Union, strengthen the fight against money laundering and terrorist financing, and adapt to new threats and developments in the financial sector. They impose specific obligations on European financial institutions to ensure compliance and financial security.


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