Before exploring the specific KYC (know your customer) regulations in the United States, it’s vital to set the stage with why KYC is important. KYC regulations prevent fraud, money laundering, and illicit activities. By verifying customers’ identities, businesses ensure that their services are not being exploited for nefarious purposes. Countries worldwide recognize the need for identity verification and have since passed regulations to mandate KYC compliance. Failure to properly conduct KYC can have devastating consequences.
Take the Danske banking scandal, for example. Over many years, this Danish bank lied about its anti-money laundering (AML) systems, of which KYC is an important lynchpin. With inadequate transaction monitoring and a high-risk, offshore customer base, Danske will pay over $2 billion in fines, as well as make significant changes to their KYC processes.
This incident underscores the real-world consequences of lax KYC procedures, leading to severe damage to the bank’s reputation and harsh legal repercussions. It serves as a reminder of why KYC regulations and compliance are both important: they prevent financial crimes.
What is KYC compliance regulation?
KYC regulations are specific mandates for businesses — particularly financial institutions — to thoroughly verify the identities of their customers. These regulations are set by governmental authorities and industry bodies to ensure legal and ethical practices. Companies are required to comply legally and have an ethical responsibility to protect their customers. By achieving and maintaining KYC compliance, businesses ensure their continued financial stability through building customer trust and avoiding fines.
What are KYC regulations in the US?
In the United States, KYC requirements originated with the 1970 Bank Secrecy Act (BSA). The BSA set the first KYC requirement for banks, establishing that these financial institutions must identify customers making transactions and keep diligent records. This legislation is the foundation for KYC regulations in the US and led to KYC requirements for corporations in other industries outside of banking as well.
Other important KYC regulations in the US are as follows:
- The Bank Secrecy Act (1970)
- Money Laundering Control Act (1986)
- Anti-Drug Abuse Act (1988)
- Annunzio-Wylie Anti-Money Laundering Act (1992)
- Money Laundering Suppression Act (1994)
- Money Laundering and Financial Crimes Strategy Act (1998)
- USA PATRIOT Act (2001)
- Intelligence Reform & Terrorism Prevention Act (2004)
- The Anti-Money Laundering Act of 2020 (AMLA 2020)
Key aspects of KYC regulation in the US include:
- Customer identification programs (CIPs) include collecting and verifying customer information like name, address, date of birth, and government-issued identification.
- Customer due diligence (CDD) is the process where each institution must assess the source of funds, purpose of the relationship, and potential risks associated with customers.
- Suspicious activity reports (SAR) involve submitting any transactions or activities that the business suspects may be related to money laundering or other criminal activities to the Financial Crimes Enforcement Network (FinCEN).
- Ongoing monitoring of customer transactions and activities is required so that institutions can identify any unusual or suspicious patterns.
- Keeping records of customer information, transactions, and other relevant information is required for a specified period.
It’s important to note that KYC regulations will evolve over time, and each business is responsible for staying up to date with current requirements and maintaining their compliance.
What is the US FinCEN requirement?
As mentioned above, US FinCEN KYC requirements mandate that financial institutions must file SARs to FinCEN, a bureau of the U.S. Department of the Treasury. This regulation assists with combating money laundering and fraud by providing crucial clues to law enforcement and regulatory authorities.
Achieve and maintain KYC compliance with Onfido
As one of the leading KYC platform providers, here at Onfido you’ll find an end-to-end KYC solution where you can easily build workflows to meet your specific KYC requirements. Using Onfido’s Real Identity Platform, you can detect and prevent fraud quickly, orchestrating a suite of verifications and signals all powered by our award-winning Atlas™ AI. You’ll have the tools you need for KYC at your fingertips — like custom no-code workflows or global document coverage — so your digital onboarding journey will be seamless, scalable, and stay compliant.