KYC (Know Your Customer) is more than just a legal requirement – it’s a fundamental part of protecting businesses, customers, and the financial system as a whole. Fraudsters and criminals are constantly looking for ways to exploit weak identity checks, whether through identity theft, money laundering, or other financial crimes. Without proper KYC procedures in place, businesses risk being used for illegal activities, which can lead to hefty fines, reputational damage, and even legal action.

But KYC isn’t just about preventing crime – it also helps businesses build trust. Customers are more likely to feel confident using a service that takes security seriously. When people know their financial information is protected, they’re more willing to engage, whether they’re opening a bank account, applying for a loan, or signing up for an investment platform. In a world where data breaches and fraud are increasingly common, strong KYC processes aren’t just a compliance requirement—they’re an essential part of creating a safe and trustworthy business environment.

What does Know Your Customer (KYC) mean?

Before we get started, it’s important to cover what KYC means.

KYC stands for “Know Your Customer,” which is a process implemented by businesses and financial institutions to verify and gather information about their customers. The purpose of KYC is to prevent fraudulent activities, money laundering, identity theft, and other illegal practices. 

What is KYC in practice?

The KYC process commonly involves the same several steps and requires customers to provide certain documents and information to establish their identity and credibility. While the specific details of the KYC process may vary across different jurisdictions and industries, the general steps involved are as follows:

Customer identification: Identify the customer by collecting their personal information, such as name, address, date of birth, and contact details. This information helps establish the individual’s identity.

Document verification: Customers are required to provide valid identification documents, such as a passport, driver’s licence, or national ID card. These documents are verified to ensure they are genuine and belong to the person claiming the identity.

Address verification: Customers may be asked to provide proof of address, such as utility bills, bank statements, or rental agreements. This helps confirm their residential address and ensures they are not using fraudulent information.

Risk assessment: Businesses assess the risk associated with each customer based on factors like their occupation, source of income, and financial transactions. Higher-risk customers may undergo more rigorous checks and additional scrutiny.

Enhanced due diligence (EDD): In some cases, when dealing with high-risk customers, such as politically exposed persons (PEPs) or individuals from high-risk jurisdictions, enhanced due diligence measures are employed. This may involve gathering more detailed information, conducting background checks, and assessing the purpose of the customer’s transactions.

Ongoing monitoring: KYC is not a one-time process. Financial institutions and businesses are required to monitor their customers continuously. Any suspicious or unusual activity must be investigated and reported to the appropriate authorities as per legal requirements.

Why do businesses need to do KYC checks?

To ensure that KYC and AML checks are performed thoroughly, companies need to undertake due diligence on new clients. Due diligence is the process of taking steps to identify your customers and verify that they are who they claim to be in order to ensure compliance and to guard against financial crime scandals.

As part of the due diligence process, a thorough KYC audit serves to accurately verify customers and to help flag any warning signs of unusual activity. During the process, personal information and business data, such as the name, date of birth, residential address and photo identification of the customer, should be recorded and evaluated, and transactions examined to detect possible issues.

In cases where an individual is acting on behalf of another party in a transaction, or you need to establish the ownership structure of an organisation, you will also need to identify the ‘beneficial owner’. This will be the person behind the customer or the person on whose behalf the transaction is carried out.

When you establish a new business relationship with a customer and before any exchange of money, you must perform the appropriate client due diligence to ensure AML compliance. There are four primary objectives when gathering KYC information, using a risk-based approach:

• Identify the customer
• Verify the client’s true identity
• Understand the customer’s activities and source of funding
• Monitor the customer’s activities

While there are a number of high-quality free sources of information, such as search engines or public databases, finding exactly what you need from this vast range of resources is incredibly time-consuming. This simply isn’t a feasible long-term approach for any business that values speed, efficiency and scalability, which is why many regulated firms invest in Regulatory Technology (RegTech) to help deliver improved operational efficiency.

To continue to ensure you meet compliance regulations, it is integral that you monitor changes in your clients’ risk status on an ongoing basis. Changes include:

• New adverse media
• New legal events, ie. the appointment of administrators
• Change in credit rating
• New beneficial ownership
• Appointment of new directors

Common KYC challenges

Despite its importance, KYC comes with challenges – both for businesses and their customers. One of the biggest complaints from customers is that the process can feel slow and frustrating. Being asked to submit documents, wait for verification, and go through multiple steps just to open an account can be off-putting, especially if the process isn’t streamlined.

For businesses, the challenges are just as significant. KYC compliance often requires investment in technology, staff training, and ongoing monitoring to keep up with regulatory changes. Smaller businesses, in particular, can struggle with the costs and resources needed to implement effective KYC procedures. And if KYC checks aren’t done properly, businesses risk hefty fines from regulators.

Another challenge is finding the right balance between security and a smooth customer experience. If KYC checks are too complex, customers may abandon the process altogether. On the other hand, if businesses make verification too easy, they risk opening the door to fraudsters. Striking the right balance is key to making sure businesses stay compliant without driving customers away.

Types of KYC checks

The type of KYC check undertaken can vary depending on the level of risk associated with the customer and the industry in which the business operates. Here are a few common types of KYC checks:

Simplified KYC: This type of KYC is generally applicable for low-risk customers, where minimal information and verification are required. It is commonly used for basic banking services or small transactions.

Enhanced KYC: This involves more thorough verification processes and additional information gathering. It is used for high-risk customers, large transactions, or when mandated by regulatory requirements.

Corporate KYC or KYB: This type of check is specific to corporate entities, where the identification and verification processes extend to the company’s structure, ownership, and key personnel.

Ongoing Due Diligence: This involves continuous monitoring of customer accounts and transactions to identify any suspicious activities or changes in risk profile over time.

KYC requirements and regulations may differ based on the country, industry, and specific legal frameworks in place. Businesses and financial institutions must comply with local regulations and implement robust KYC procedures to mitigate risks and ensure the integrity of their operations.

Importance of KYC verification

KYC verification is a critical process for financial institutions and businesses in various industries, with primary importance lying in its role in preventing financial crimes, protecting financial institutions, and ensuring compliance with regulations.

Playing a vital role in mitigating the risk of financial crimes such as money laundering, terrorist financing, fraud, and identity theft, KYC verification is vital. By verifying the identity and background of customers, businesses can identify and flag suspicious activities or individuals who may be involved in illegal financial activities. This helps prevent criminals from using the financial system for illicit purposes, safeguarding the integrity of the financial ecosystem.

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KYC also works to protect financial institutions from reputational damage, financial losses, and regulatory penalties. By conducting due diligence on customers, financial institutions can identify potential risks and ensure that they are dealing with legitimate individuals or entities. This reduces the likelihood of being unknowingly involved in illegal activities and helps maintain the trust and confidence of customers and stakeholders.

Complying with regulations is a legal and regulatory requirement in most jurisdictions. Financial institutions are obligated to comply with anti-money laundering (AML) and counter-terrorist financing (CTF) regulations, which often mandate the implementation of robust KYC processes. In addition, KYC verification brings other benefits, such as reducing the risk of fraud, improving customer due diligence, and facilitating customer onboarding and ongoing monitoring. It helps businesses establish a comprehensive understanding of their customers, enabling them to offer personalised services and detect any changes in risk profiles over time.

How do KYC checks work?

Overview of the KYC process:

The KYC process typically involves collecting customer information, verifying identities, conducting due diligence, and monitoring customer activity. The overall goal is to prevent financial crimes, ensure regulatory compliance, and protect the institution and its customers.

KYC onboarding software:

KYC onboarding software refers to specialised software solutions designed to streamline and automate the KYC process. This software helps businesses digitise and optimise their customer onboarding procedures, making the process more efficient, accurate, and convenient. It may include features such as electronic document collection, identity verification using biometrics or AI technologies, integration with external data sources for screening and risk assessment, and workflow management to track the progress of KYC checks.

KYC lifecycle:

The KYC lifecycle refers to the different stages involved in managing customer due diligence throughout their relationship with a business or financial institution. It encompasses the following key phases:

Customer onboarding: The initial stage where customer information is collected, identities are verified, and risk assessments are conducted to determine the level of due diligence required.

Customer due diligence (CDD): After a customer is onboarded, ongoing due diligence is performed based on the assessed risk level. This includes monitoring customers, reviewing their activity for suspicious patterns, and updating customer information as necessary.

Enhanced due diligence (EDD): In cases where higher-risk customers are identified, such as politically exposed persons (PEPs) or customers involved in certain industries, enhanced due diligence measures are applied. This involves conducting more extensive research, verifying additional information, and applying stricter monitoring procedures.

Ongoing reviews: As part of the KYC lifecycle, periodic reviews are conducted. These reviews are triggered by significant changes in customer circumstances, such as becoming a PEP, changes in beneficial ownership, mergers or acquisitions, or regulatory updates. They ensure that the customer’s profile remains up to date with the latest information.

KYC remediation:

KYC remediation refers to the process of addressing any deficiencies or issues identified during the KYC process. It involves rectifying gaps in customer information, updating documentation, conducting additional due diligence, or re-verifying customer identities. Remediation is typically required when there are changes in regulatory requirements, weaknesses in existing KYC practices, or when discrepancies or inconsistencies are identified during periodic reviews. 

Overall, the KYC process is a continuous and evolving effort to establish and maintain a comprehensive understanding of customers, minimise risk, and meet regulatory obligations. KYC onboarding software can significantly streamline and automate these processes, while the KYC lifecycle ensures ongoing compliance and risk management. Remediation ensures that any issues or gaps are addressed promptly to maintain the integrity of the KYC data and customer relationships.

What is the risk of getting KYC wrong?

Failing to carry out the required AML and KYC checks can result in penalties by the Financial Conduct Authority and His Majesty’s Revenue.

The Financial Conduct Authority is the UK’s main financial services regulator with authority over banks, building societies, credit unions and other firms engaging in financial activities. The FCA oversees compliance with AML regulations in the UK and has the power to investigate money laundering and terrorism financing offences in conjunction with other law enforcement agencies and authorities, such as the Crown Prosecution Service (CPS). All banks and financial institutions in the UK must register with the FCA.

His Majesty’s Revenue and Customs shares the responsibility to investigate money laundering offences with the FCA. In addition to the FCA and HMRC, the power to enforce money laundering regulations in the UK is shared by the National Crime Agency (NCA) and the Serious Fraud Office (SFO), both of which have the power of arrest and can seek warrants and court orders. UK AML/CFT authorities also have the power to freeze and confiscate assets that they suspect are involved in money laundering, terrorism financing or other criminal activities.

The future of KYC: What’s changing?

KYC is evolving rapidly, with new technologies making the process faster, more secure, and less frustrating for both businesses and customers. Traditional manual checks are being replaced by AI-powered identity verification, biometric authentication, and automated data analysis. These innovations are helping businesses verify identities more accurately and spot potential fraud in real time.

One of the biggest developments is the use of biometric technology – such as facial recognition and fingerprint scanning – to confirm identities instantly. Instead of manually uploading documents, customers can verify themselves in seconds using a selfie or fingerprint scan. This not only speeds up onboarding but also reduces the risk of identity fraud.

Regulations are also changing, with governments and financial regulators introducing stricter compliance requirements to combat financial crime. Businesses need to stay ahead of these changes to avoid fines and maintain customer trust. The future of KYC is all about using smarter technology to make the process quicker and more secure while ensuring businesses remain compliant with ever-changing regulations.

Last updated: Tuesday 15th July 2025