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What is KYC and Why is it Important?

What is KYC and Why is it Important?

PlusMarkets Analysis21/04/2021

KYC stands for Know-Your-Client or Know-Your-Customer. As the name suggests, KYC is a process that requires financial institutions to get to know everything about their client’s identity and financial position.  

The term represents an industry standard in the finance sector, which guarantees that investment advisors collect detailed information about their clients’ risk tolerance, financial position, investment knowledge, and others. KYC is designed to protect both the clients and the investors.  

What is KYC exactly? 

KYC compliance requires you to verify your customers and identify the beneficial owners, as well as their risk and financial profiles. These procedures go hand in hand with the AML (Anti Money Laundering) policies set out by governments globally. In other words, as a financial services provider, you play a critical role in ensuring that your clients are not engaged in money laundering or any other criminal activities.  

As part of the KYC process, customers are required to provide detailed due diligence in order to conduct business with financial institutions. Due diligence is the exercise of care that a reasonable business is expected to take before entering into any agreement with another party. It is essentially a comprehensive appraisal of a business or an individual. Due diligence involves examining all documents, financial statements or positions, a declaration of the source of funds, a risk analysis, and many more. 

All investment and financial services institutions are obligated to employ the KYC practices, including banks, insurers, creditors, brokers, and others. 

Why is KYC necessary? 

KYC enables all the participants of the contract to audit each other. The objective of the process is to confirm the accuracy of the information given. If you’re verifying a company, you would need documents such as incorporation papers, taxes, and others. On the other hand, in the case of individuals, you would want documents such as proof of identity, lease agreements or title deeds, and others. 

All financial services institutions are obliged to subject their onboarding customers through the KYC process. In the case of brokers, they will typically require the following documents: 

  • National ID or passport to verify the client’s identity 
  • Date and place of birth  
  • A recent utility bill to confirm the registered residential address 
  • Contact information such as phone number and email  
  • Sample signature 
  • Financial information to verify the source of funds 

The Bottom Line 

KYC standards exist to protect all parties. Businesses require their clients to submit their financial information so as to gauge any risk associated with that client relationship. Clients aren’t compelled to perform KYC as it is implied that if a business is registered, it is regulated by some governmental authority. 

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Aviso de riesgos: los CFDs son instrumentos complejos y cuentan con un alto riesgo de perder dinero de forma rápida por el apalancamiento. 79.06% de las cuentas de inversores minoristas pierden dinero al invertir en CFDs con este proveedor . Deberías considerar si entiendes cómo funcionan los CFDs y si puedes permitirte el riesgo de perder tu dinero.

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