KYC

Also known as: Know Your Customer

framework · governance and compliance · regulatory-standard

Customer due diligence requirements identifying who is doing business with a financial institution.

KYC is the customer identification and due diligence layer of the broader BSA/AML regime, requiring financial institutions to verify customer identity at onboarding, understand the nature and purpose of customer relationships, and conduct ongoing monitoring. US implementation comprises the Customer Identification Program (CIP) under the PATRIOT Act, the FinCEN Customer Due Diligence (CDD) Rule effective 2018 (which made CDD the formal fifth pillar of AML programs and required beneficial-ownership identification for legal entity customers), and Enhanced Due Diligence (EDD) for higher-risk relationships such as foreign correspondent accounts and politically exposed persons. The international baseline is set by the Financial Action Task Force (FATF) Recommendations, particularly Recommendations 10 and 22.

Originators

Financial Action Task Force (FATF) for international standards; FinCEN and US banking regulators for US implementation high

Year / Decade

1990s emergence; 2003 (CIP rule); 2016/2018 (FinCEN CDD rule) high

Primary sources

FATF (2012, updated periodically). International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation, FinCEN (2016). Customer Due Diligence Requirements for Financial Institutions (final rule) high

Core components

Customer Identification Program (CIP)
Customer Due Diligence (CDD)
Enhanced Due Diligence (EDD)
Beneficial ownership identification (25% threshold)
Risk-based approach
Ongoing monitoring
PEP and sanctions screening

Primary use case

Onboarding and ongoing customer review at financial institutions and other regulated entities; foundation for AML transaction monitoring.

Common criticisms

Onboarding friction harms financial inclusion, particularly for refugees, gig workers, and small businesses
PEP screening has high false-positive rates
uneven global standards create arbitrage
beneficial ownership rule effectiveness limited until accessible registry exists
identity verification has not kept pace with synthetic identity fraud.

Lineage

Child of: BSA/AML
Siblings: BSA/AML
Derived from: BSA/AML