In previous posts, we explained what the acronym AML means, which legal acts regulate this matter, which entities are obligated to implement AML procedures, and the consequences of non-performance or improper performance of AML obligations. We also highlighted the application of AML regulations to virtual currencies (cryptocurrencies). In today's article, we would like to familiarize you with the topic of KYC (Know Your Customer), which is a component of security policies in the area of money laundering and terrorism financing prevention.
What is KYC?
The abbreviation KYC, derived from the name Know Your Customer (in some publications you can find the term Know Your Client), is translated into Polish as PSK, i.e. Know Your Client.
Broadly speaking, KYC/PSK is a due diligence process that financial institutions and other legally defined entities must conduct to identify their clients and beneficial owners and obtain the relevant information required to conduct business with the interested party. In practice, this procedure involves, among other things, verifying the client's identity and business activity, and assessing their credibility. Typically, this process involves three sequential stages:
- CIP (Customer Identification Program) – at this stage, the initial identification of the customer is carried out by obtaining basic data from him, such as: name and surname, date of birth, address, PESEL number (for individuals), in the case of entrepreneurs – company name, registered office address and NIP number;
- CDD (Client Due Diligence) – This stage involves obtaining the documents and information necessary to build a client risk profile. The documentation gathered at this stage will allow for the implementation of the appropriate procedure depending on the risk level – a simplified procedure (for low-risk situations), a standard procedure, or a more stringent procedure (for higher risk situations). Each of these levels requires different documentation;
- monitoring – the KYC process begins before establishing any business relationship and continues also after its establishment because it involves continuous monitoring of the client.
Before commencing cooperation, we have the opportunity to get to know our client, determining whether they are not affiliated with an organized crime group or involved in financial fraud, attempting to launder money, or financing terrorism. Using this procedure, we have a real opportunity to avoid high-risk transactions and accusations of involvement in illegal activities.
It's worth emphasizing that the KYC/PSK procedure, unlike AML, doesn't verify transactions between entities or verify the source of funds, but focuses on identifying the specific customer. It could be argued that Know Your Customer is only a preliminary step toward implementing procedures related to the disclosure of suspicious transactions.
Who is obliged to implement the KYC procedure?
As mentioned in previous posts on AML, the Anti-Money Laundering Act stipulates that all obligated institutions must have and implement an internal AML procedure. Given that the KYC procedure is an element of the security policy in the area of money laundering prevention (in accordance with the 4th and 5th AML Directives), it should be noted that KYC obligations apply to the same obligated institutions listed in Article 2, Section 1 of the Act on Combating Money Laundering and Terrorist Financing.
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