Bank data & compliance
KYC: Definition & Example
Also called: Know Your Customer
What Is KYC?
KYC (Know Your Customer) is the process financial institutions use to verify a customer’s identity and understand the nature of the relationship, to prevent fraud, money laundering, and terrorist financing.
What does KYC mean?
In the U.S., KYC stems from the Bank Secrecy Act and the USA PATRIOT Act. Banks must run a Customer Identification Program (collecting name, date of birth, address, and ID number, and verifying them), perform customer due diligence, identify beneficial owners of business customers, and apply enhanced due diligence to higher-risk customers.
KYC is ongoing. Institutions monitor activity for unusual patterns and file suspicious activity reports when required.
Outside banking, the term is used more loosely for identity checks in fintech, crypto, marketplaces, and private investment platforms. Identity verification confirms who someone is. It does not tell you what they earn or whether they can afford a payment.
KYC example
A new customer opens an online brokerage account. She enters her name, address, date of birth, and Social Security number, uploads a photo of her driver’s license, and takes a selfie. The platform matches her selfie to the ID and checks her details against databases before approving the account.
Related terms
- Due DiligenceDue diligence is the investigation a buyer, investor, lender, or partner performs before a transaction to verify facts, uncover risks, and confirm what they are getting.
- Gramm-Leach-Bliley ActThe Gramm-Leach-Bliley Act (GLBA) is a 1999 federal law that requires financial institutions to explain how they share customers’ nonpublic personal information and to safeguard that information.
- Accredited InvestorAn accredited investor is a person or entity that meets SEC income, net worth, or professional criteria and may invest in certain private offerings not registered with the SEC.
- Document TamperingDocument tampering is altering a genuine document, such as a pay stub, bank statement, or ID, to change key details like income, balances, names, or dates.
