This Know Your Customer (KYC) Glossary provides essential terminology for customer verification, due diligence, and anti-money laundering compliance. Understanding these terms is crucial for implementing effective customer identification and risk management processes, whether you’re a financial institution, compliance professional, or business owner.
Table of Contents
A
- AML (Anti-Money Laundering):
Regulations, practices, and procedures designed to prevent criminals from disguising illegally obtained funds as legitimate income. AML efforts are closely linked to KYC processes.
B
- Beneficial Owner:
The individual(s) who ultimately owns or controls a customer account or legal entity. Identifying the beneficial owner is critical for assessing potential risks, even if the account is held under another name.
C
- CDD (Customer Due Diligence):
The process of collecting and verifying information about customers to assess and mitigate the risks of money laundering and fraud. CDD includes identity verification, understanding customer activities, and ongoing monitoring. - CIP (Customer Identification Program):
A set of procedures financial institutions are required to implement to verify the identity of their customers before establishing a business relationship. This typically involves collecting official documents such as passports, driver’s licenses, or other government-issued IDs. - KYC (Know Your Customer):
A regulatory process that requires businesses, especially financial institutions, to verify the identity of their customers, understand their financial dealings, and assess potential risks. This is a cornerstone of AML compliance.
D
- Due Diligence:
The comprehensive process of gathering, verifying, and analyzing customer information and transactions before and during the establishment of a business relationship. It helps institutions understand who their customers are and evaluate the risk they pose. - Enhanced Due Diligence (EDD):
An intensified level of scrutiny applied to high-risk customers (such as politically exposed persons or those from high-risk jurisdictions). EDD involves collecting additional documentation, performing more in-depth background checks, and more frequent monitoring.
F
- Financial Action Task Force (FATF):
An international body that sets standards and promotes effective implementation of legal, regulatory, and operational measures for combating money laundering, terrorist financing, and other related threats. FATF recommendations influence KYC practices worldwide.
O
- Ongoing Monitoring:
The continuous process of reviewing customer transactions and behavior after an account is opened. This helps institutions identify suspicious activities and adjust risk profiles as needed. - OFAC (Office of Foreign Assets Control):
A U.S. government agency responsible for administering and enforcing economic and trade sanctions. Financial institutions screen customers and transactions against OFAC lists as part of the KYC process.
P
- PEP (Politically Exposed Person):
An individual who holds a prominent public position or function (e.g., government officials, senior executives in state-owned enterprises) or their close associates and family members. PEPs are considered higher risk and typically require enhanced due diligence. - Risk Profiling:
The process of assigning a risk level to a customer based on various factors—such as their geographic location, business activity, source of funds, and whether they are a PEP. This helps in determining the appropriate level of due diligence. - Risk-Based Approach:
A strategy that allocates resources and determines the extent of KYC and AML procedures based on the assessed risk level of each customer. Higher-risk customers are subject to more stringent controls and monitoring.
S
- Sanctions Screening:
The process of checking customers, transactions, and counterparties against lists of sanctioned individuals, entities, and countries. This is vital to ensure compliance with regulatory requirements and avoid transactions with prohibited parties. - SAR (Suspicious Activity Report):
A report filed by financial institutions with relevant authorities when they detect transactions or behavior that may indicate money laundering, fraud, or other suspicious activities. SARs are a critical element of the KYC/AML framework. - Source of Funds:
Information provided by a customer detailing where the money used in transactions originates. This helps verify the legitimacy of the funds and assess the potential risk of money laundering. - Source of Wealth:
A broader concept than source of funds, referring to the overall origin of a customer’s wealth. This includes income from business activities, investments, inheritance, or other means, and helps institutions understand the legitimacy and risk of a customer’s financial background. - Suspicious Activity:
Any transaction or behavior that deviates from normal patterns and may indicate money laundering, fraud, or other illicit activity. Identifying suspicious activity is a key objective of KYC and ongoing monitoring.
T
- Transaction Monitoring:
The ongoing review of customer transactions to detect patterns or anomalies that may indicate illicit activities. This process supports the early identification of potentially suspicious behavior.
User Verification:
The process of confirming the identity of an individual seeking to establish a business relationship or access a service. This often involves document verification, biometric checks, or electronic identity verification (eIDV).
