Know Your Client (KYC) is an important tool used by the investment and financial services industry to mitigate the risk of fraud and identify customers’ risk and financial profiles. KYC involves three components: customer identification program (CIP), customer due diligence (CDD), and enhanced due diligence (EDD).

The customer identification program (CIP) is a process whereby investment and financial institutions utilize identity verification services to ensure the customer is who they say they are. CIP requires a customer to provide their name, address, Social Security or taxpayer identification number, and other identifying information. Investment firms may also request additional information, such as a copy of a government-issued ID or proof of residence, to cross-check the accuracy of the customer’s submitted information.

Customer due diligence (CDD) is a process that involves financial institutions monitoring their customers’ transactions to identify potential suspicious activity. CDD will include gathering background information on customers, including their occupations and other sources of income, as well as their investment history. Institutions will review customer activity for large or unusual transactions, or activity that appears to be outside the scope of an individual’s normal investing habits.

Enhanced due diligence (EDD) is the process of gathering additional information throughout the customer relationship. This includes more comprehensive customer background checks, such as reviews of business and financial records. Institutions may also conduct more in-depth research into a customer’s sources of income or lifestyle. EDD is typically reserved for customers that are deemed to be increased risk, such as politically exposed persons (PEPs), or those residing in countries of higher risk countries.

The SEC requires that each new customer provide detailed financial information before opening an investment or banking account. Applicants must disclose a detailed description of their financial history and provide compelling evidence of their identity. Financial institutions are also required to conduct their own due diligence to ensure the accuracy of the customer data and to identify any red flags.

KYC is integral in helping investment and financial services industries mitigate the risk of fraud and better serve customers. By gathering information on a customer’s financial history and identity, financial firms are able to better identify potential fraudulent activity and adjust customer risk profiles accordingly. Financial institutions can also offer tailored financial services based on a customer’s risk profile and financial history. KYC is also important in helping financial institutions comply with applicable legal requirements and ensure they are not involved in any criminal activities.