What is Know Your Customer (KYC)?

Definition of KYC

Know Your Customer (KYC) is required by businesses to verify customer identity and determine risk factors. It helps financial institutions, fintechs, and crypto platforms prevent illegal activities and establish relationships with clients and stakeholders.

What is the Purpose of KYC Compliance?

KYC compliance is essential to reduce financial crime risks and maintain the integrity of global financial systems. Verifying clients and monitoring their activities, organizations can prevent all sorts of illicit activities. Key benefits are as follows:

• It prevents financial crime. This ensures that financial institutions can clearly understand the identity of clients and their financial dealings. This way, they can easily flag activities related to money laundering, terrorist funding, and fraud.
• It supports AML compliance to meet legal standards.
• It establishes trust to build trust in financial institutions.
• It reduces risks that can lead to legal, financial, and reputational harm.

What Are the Requirements of KYC?

1. Customer Identification Program (CIP) helps institutions verify customers before starting a business relationship with them. Key requirements are as follows:

• Full name, date of birth, address, and a government-issued ID from a passport
• Supporting documents such as utility bills and official registries

2. Customer Due Diligence (CDD) is designed to assess customer risk levels and financial behavior. CDD includes:

• Customer background analysis and source of income verification
• Customers’ occupation, their geographic location, and transaction patterns
• Screening customers against sanctions lists, watchlists, and Politically Exposed Person (PEP) databases.

3. Enhanced Due Diligence (EDD) helps institutions analyze high-risk clients. Key EDD measures include:

• Conducting in-depth analysis into Politically Exposed Persons (PEPs), clients from crypto or gambling industries, and those from countries with weak AML detection systems.
• Determining the origin of funds and wealth
• Obtaining approval from senior officers during onboarding
• Monitoring financial activities, large transactions, and deviations from customer profile

4. Ongoing monitoring is essential for full KYC compliance. Key responsibilities are as follows:

• Analyzing transactions and comparing customer behavior to their profile
• Reassessing customers to detect risk levels (low, medium, high)
• Generating Suspicious Activity Reports (SARs) when transactions raise red flags

5. Keeping records for 5-10 years even after the customer relationship ends is an essential part of the KYC compliance process. Organizations must retain the following details:

• Customer identification documents such as passports and IDs
• Transaction history and activity logs
• Risk assessment and due diligence results

6. Sanctions and PEP screening is the process of examining customers against global sanctions lists and PEP databases, which is vital for KYC compliance. This helps organizations avoid high-risk individuals and entities. The key lists are as follows:

• Sanctions lists such as OFAC, UN, and EU include trade restrictions and penalties
• PEP lists identify individuals in high public roles who may pose risks

7. Risk-Based Approach (RBA) is used to determine customer risk levels. Enhanced Due Diligence (EDD) is for high-risk customers, and basic Customer Due Diligence (CDD) is for low-risk customers.

8. Well-trained staff is essential to generate a strong KYC framework. Organizations are required to:

• Conduct regular training and awareness on changing regulations, risk factors, and compliance tools
• Teach staff to identify and effectively respond to red flags
• Ensure employees know how to report suspicious activity

KYC Regulators and Requirements by Country

A brief summary of KYC regulations in different nations as of 2025 is given in the table below. It draws attention to significant variations in documentation, verification techniques, and compliance standards that are impacted by both international and local frameworks. The purpose of this comparison is to assist financial institutions in comprehending and adjusting to the various regulatory environments across the globe.

Types of Documentation Frequently Accepted for KYC

Financial institutions and other regulated organisations usually ask for a set of standard documents to confirm the identity and address of their customers in order to meet Know Your Customer (KYC) regulations. The widely recognised forms of documentation are listed below:

Identity Verification 

• To prove your identity, present a legitimate document. The following are acceptable forms of identification: A passport, which is a government-issued official travel document. 
• A national ID card is a document that contains your personal information and is issued by the government. 
• A driving licence is a picture ID that attests to your driving prowess. 

Proof of Address 

To verify your residential address, submit a document. Among the examples are:

• Utility bills: Current, three-month-old bills for utilities like gas, water or electricity. 
• Bank Statements: These are documents from your financial institution that include your name and address. 
• Lease or rental agreements are formal contracts that are signed by the landlord and the renter. 

Extra Documents (if any) 

• Additional documentation may be required, depending on your circumstances:
• Tax Identification Numbers (TINs): Necessary for financial transactions or tax purposes. 
• Documents required for businesses to verify their legal registration are known as business registration documents. 
• Paystubs or a letter from your employer are examples of employment letters or income proof that can be used to confirm your income or employment status.

Key Differences in KYC by Region

Europe: To guarantee openness and adherence to AML (Anti-Money Laundering) laws, e-KYC, VideoIdent, and UBO (Ultimate Beneficial Ownership) registers are widely used. For easy online identity verification, nations like France and Germany have taken the lead in introducing VideoIdent. 

USA: Due to regulatory updates like the CDD Final Rule (2018), Social Security Numbers (SSN) are a crucial component of identity verification, with a particular emphasis on Customer Due Diligence (CDD). Financial institutions must find and confirm the beneficial owners of their clients who are legal entities.

Asia: Singapore and India are leading the way in digital KYC innovation, with Singapore implementing MyInfo for easy digital identity management and India enabling biometric-based verification through Aadhaar. 

Africa: Mobile onboarding solutions, which are essential in areas with low banking penetration, are driving the steady growth of digital KYC. There are still issues, though, because accessibility and ID coverage differ greatly between nations. 

Brazil: The Central Bank's Open Finance framework now fully incorporates facial recognition and e-consent mechanisms, allowing for quicker and safer financial transactions and boosting consumer confidence in the digital ecosystem.

What is Know Your Customer Software?

KYC Software or KYC Tool is a digital solution that automates the Know Your Customer (KYC) process. It is essential for industries such as banking, fintech, crypto, and insurance. It enables all financial institutions to verify customer identity, assess risk factors, and comply with AML (Anti-Money Laundering) and CTF (Counter-Terrorism Financing) regulations efficiently.

What Does KYC Software Do?

A professional KYC tool reduces onboarding time by up to 90% and improves compliance accuracy. KYC software provides the following solutions:

• Verify identity documents with national IDs, passports, or driver’s licenses.
• Perform biometric checks with selfie verification and liveness detection.
• Screen against sanctions and PEP lists.
• Collect and securely store KYC documents.
• Determine customers' risk levels, whether it is low, medium or high.
• Monitor users continuously to detect status changes like new sanctions.
• Maintain audit trails for regulatory reporting.

What are Global KYC Regulatory Frameworks?

Although KYC regulations vary by region, they share core principles. It is essential to maintain transparency, risk-based assessment, and ongoing monitoring. Below our team has prepared a regional overview of key KYC and AML regulations:

When is KYC Required?

Financial institutions must assess their risk levels before engaging in business with them. They perform additional checks to detect if customer behavior changes in time. Enhanced Due Diligence (EDD) protocols analyze high-risk clients such as Politically Exposed Persons (PEPs) and complex corporate structures. Responding to regulatory alerts is essential in maintaining legal and operational integrity.

What Are the Sectors Subject to KYC?

Why is KYC Crucial in the Banking Sector?

• Banking institutions are involved in large amounts of transactions daily. Therefore, they are targeted for money laundering and fraud.
• If banks strictly follow KYC compliance with FATF, Basel guidelines, and national Financial Intelligence Units (FIUs), they can minimize risks.
• Banks serve individuals and multinational corporations. KYC procedures help institutions manage this diverse client base and determine risk levels.

Regulatory Expectations for Banks

Key Differences: KYC vs. e-KYC vs. Digital KYC

KYC (Know Your Customer) is the process of manually verifying customer identity with official documents that comply with AML regulations. e-KYC (Electronic KYC) is the digital version of KYC that uses automated tools to assess documents online to reduce paperwork and speed up onboarding. Digital KYC (Regulated Digital Verification) is an advanced form of e-KYC that uses biometric checks and facial recognition to verify customer identity.

KYC and Risk-Based Approaches

A risk-based approach to KYC allows financial institutions to adapt their compliance systems based on each customer’s risk level. The aim here is to mitigate operational workload and strengthen focus on high-risk cases in industries like banking and fintech.

KYC Screening Explained: How to Check KYC?

KYC screening includes customer identity verification and risk assessment processes. It's critical to provide AML compliance and prevent illegal activities. Our team explains how it is done in practice:

Step-by-Step: How to Perform KYC Screening?

What are the Tools for KYC Screening?

• Manual KYC is suitable for low-volume onboarding or legacy systems.
• Automated KYC software enables real-time ID verification, checking biometrics, and screening lists.
• API integration embeds KYC checks into onboarding flows, CRMs, and fintech platforms.

How Do Corporate and Legal Entities Use KYC?

Individual customers are not the only ones who must comply with KYC. Before establishing a financial relationship, corporate and legal entities must also go through a rigorous identity verification process.

Documentation Requirements

Authorised Signatories List;

Certificate of Incorporation or Business License; 

Board Resolution for Account Opening; 

Verification of Ultimate Beneficial Ownership (UBO).

The natural persons who ultimately own or control the business (usually those with ≥25% ownership) must be identified and verified by financial institutions.

The FATF advises increased due diligence if UBOs are politically exposed persons (PEPs) or are situated in high-risk jurisdictions. Many jurisdictions require UBOs to be verified through government registers or certified documentation.

Regulatory Example:

UK (MLRs 2017): Companies are required to keep UBO records and update the Companies House PSC Register.

Singapore: A thorough evaluation of the control structure, including indirect ownership layers, is necessary for MAS.

Corporate KYC and UBO screening are particularly important for high-risk industries like offshore companies, cryptocurrency platforms, and international trade.

How Does the KYC Process Work?

In order to confirm customer identities, evaluate risk, and guarantee adherence to Anti-Money Laundering (AML) laws, the Know Your Customer (KYC) process employs a thorough, organised methodology. It is essential for protecting banks and their clients from money laundering, fraud, and other illegal activity. Here's a closer look at the KYC procedure:

Step 1: Onboarding of Customers

When a consumer applies for a service or product through a platform or financial institution, the process starts.

This could entail creating a bank account, registering for a trading or investment platform, requesting a loan, or even starting a business partnership.

Consumers must provide personal information, including their name, birthdate, contact details, and more. In order to verify their identity, they are also asked to upload necessary documents.

Reducing customer drop-offs, guaranteeing greater satisfaction, and increasing conversion rates all depend on a smooth and effective onboarding process. Financial institutions anticipate that by 2025, digital onboarding procedures will be up to 70% quicker and more secure than manual ones.

Step 2: Verification of Identity

Following the submission of customer information, the organisation uses official records and technology to confirm the customer's identity.

Depending on jurisdictional requirements, passports, driver's licenses, social security numbers, and national ID cards are frequently accepted documents.

Additional verification procedures could involve biometric authentication, like fingerprint scans or facial recognition, and proof of address, like utility bills or bank statements.

AI-powered OCR (Optical Character Recognition) tools are now widely used by platforms to automatically extract and validate data from uploaded documents, greatly reducing human error and expediting the process. Until this step is successfully finished, financial institutions are legally prohibited from offering services.

Step 3: Risk classification and due diligence

Following identity verification, the organisation evaluates the client's history and establishes their risk profile. In order to maintain compliance and reduce exposure to possible financial crime, this is an essential step.

The organisation collects additional data about the client, such as their location, job, source of funds, and account purpose.

To find any warning signs, screening is done against watchlists, politically exposed persons (PEP) databases, worldwide sanctions lists, and negative media results.

The customer is classified as low, medium, or high risk based on the results.

Step 4: High-Risk Clients' Enhanced Due Diligence (EDD)

Enhanced Due Diligence (EDD), a more comprehensive level of scrutiny, is carried out for clients who have been classified as high-risk.

Politically exposed persons (PEPs), those working in high-risk sectors like gambling or cryptocurrency, and those hailing from countries with lax AML regulations and high levels of corruption are examples of high-risk clients.

In many cases, senior management approval is needed before relationship onboarding or account activation for such customers. 

Other checks may include confirming the customer's source of wealth or income, acquiring documentary evidence to support claims, and performing adverse media screenings to identify potential reputational risks.

A closer examination and subsequent action are frequently prompted by alerts triggered by unusual transactions or departures from typical patterns of behaviour. By adding a layer of security, EDD makes sure that organisations are not unintentionally subject to increased risks of terrorist financing, money laundering, or reputational harm.

Step 5: Continued Observation and Documentation

KYC is a continuous requirement to guarantee ongoing compliance and risk reduction, not a one-time event.

Real-time or recurring monitoring of customer transactions is done to look for questionable trends or departures from typical behaviour. Examples include unusually large transfers, frequent international transactions, or payments to high-risk jurisdictions.

The institution is legally required to file a Suspicious Activity Report (SAR) with the appropriate Financial Intelligence Unit (FIU) for investigation if suspicious activity is discovered. 

Customer profiles are reviewed and updated on a regular basis to reflect changes in the customer's risk status, occupation, or transaction behaviour.

Institutions can more efficiently identify and handle possible risks when sophisticated systems and automated tools, these guarantee proactive compliance. Continuous monitoring keeps organisations ahead of changing compliance issues and it also preserves customer trust and openness.

What is Due Diligence in the KYC Process?

Due diligence is a risk-based approach that is used for customer identity verification and financial behavior assessment.

What Does Customer Due Diligence (CDD) Include?

• Identity verification with the following details: customer name, birth date, address, and official ID
• For companies, ownership and control structures, especially UBO (Ultimate Beneficial Owner) information
• The reason for opening an account and the purpose of their relationship with the financial institution
• Ongoing monitoring to review transactions, determine customer behavior, and regularly update their profiles

When is Enhanced Due Diligence (EDD) Required?

Enhanced Due Diligence (EDD) is essential for customers who pose higher financial crime risks. Some of the high-risk individuals are as follows:

• Politically Exposed Persons (PEPs)
• Clients from high-risk or sanctioned regions
• Companies with complex ownership or shell structures
• Crypto-related businesses and offshore trusts
• Large, unusual, or suspicious transactions

EDD measures may involve:

• Additional identity verification
• Proof of source of funds and wealth
• In-person meetings or interviews
• Adverse media screening
• Detailed transaction reviews

Why is Due Diligence Critical in KYC?

• Ensures compliance with global AML laws, including FATF, EU AMLD, FinCEN
• Prevents fraud, corruption, and terrorist financing
• Flag suspicious behavior early
• Provides a documented audit trail for regulatory and internal controls

Step-by-Step Guide: How to Build a Compliant KYC Framework

An effective Know Your Customer (KYC) framework is mandatory to comply with AML regulations and establish operational trust. Whether you are a fintech, bank, digital bank, or a traditional financial institution, following this step-by-step guide will help you build a compliant and risk-focused KYC program.

Step 1. Define Scope and Regulatory Requirements: The first step is to identify regulations that are relevant to your business. Each country may have different obligations and some of them are as follows:

• FinCEN (USA): CIP Rules under the BSA
• FCA (UK): MLR 2017 and CDD guidelines
• RBI (India): Aadhaar-based eKYC regulations for certain sectors
• FATF (Global): Risk-based approach (Recommendation 10, 22, 24)

Tip: Generate a compliance system considering the requirements of each region and product.

Step 2. Categorize Customer: Classify clients based on risk levels: low, medium, or high. Consider the following criteria:

• Country of origin
• Being listed by the Financial Action Task Force (FATF) as a high-risk client
• Customer type: individual business, or trust
• Product analysis
• Crypto and cross-border transactions
• Financial behavior

Tip: Apply Customer Due Diligence (CDD) to low-risk profiles and Enhanced Due Diligence (EDD) to high-risk ones.

Step 3. Customer Verification: Before engaging in business, confirm important data with Customer Identification Program (CIP). Below are the details: 

• Full name, birthday, address, ID number from a government-issued ID
• Utility bills and business licenses
• Manual checks, eKYC tools, biometric scans, or official databases
• Clear guidance to identify  suspicious profiles

Step 4. Screen for Sanctions and PEPs: Use automated KYC tools and consistently follow these sources:

• Global sanctions list OFAC, UN, EU, and HM Treasury
• PEP databases
• Adverse media sources and watchlists

Step 5. Ongoing Monitoring: After onboarding, keep checking customers to detect if there is any change in risk levels. Cover the following details:

• Suspicious behavior detection based on STR/SAR reporting procedures
• Periodic KYC reviews depending on risk level
• Checking high-risk clients annually
• Reviewing customer information updates

Step 6. Keep Records: Refine KYC data for 5 to 10 years after ending a customer relationship. This process includes:

• Identity documents and verification records
• Due diligence and risk scoring reports
• Transaction monitoring alerts
• Communication with customers

Step 7. Train Your Team: Make sure your employees are trained on:

• Latest regulations and risk factors
• Screening, risk scoring, and reporting tools
• Data privacy and customer protection
• Suspicious activity detection

Step 8. Use Smart Technology: Consider RegTech solutions using:

• KYC APIs for customer verification during digital onboarding
• AI and machine learning tools for assessing risks
• Biometrics tools for facial recognition
• Centralized dashboards for tracking activities

Step 9. Continuously Improve: For a strong KYC framework, it is mandatory to maintain refinement. Establish a feedback framework for:

• Internal and external audits
• Regulator feedback and findings
• Emerging fraud trends and risk typologies
• Customer experience and onboarding insights

Tip: Conduct periodic policy reviews and update procedures to align well with evolving regulations and threats.

Technologies Used in KYC

Modern KYC solutions help with advanced technologies to improve speed, accuracy, and compliance.

• Real-time sanctions and PEP screening checks customers against global sanctions and Politically Exposed Persons (PEP) lists.
• eKYC APIs with facial matching systems are essential for digital onboarding. The process includes the use of customer selfies with their submitted ID documents.
• Behavioral biometrics analyzes user behavior and detects suspicious activity.
• AML compliance integration connects KYC processes with Anti-Money Laundering (AML) systems for end-to-end regulatory compliance.

What are the Challenges in KYC Compliance?

• False positives increase the need for manual labor, reducing efficiency.
• Due to strict KYC systems, onboarding takes longer than usual, which upsets customers.
• As the customer data is in multiple platforms, verification lasts longer, which slows down the decision process.
• Compliance costs for advanced technology and professional staff are high.
• Cybercriminals adopt advanced methods, which makes institutions constantly update detection systems.

How Can Sanction Scanner Help?

Sanction Scanner offers professional compliance solutions that are designed to follow KYC and AML processes with advanced technology. Whether you are a bank, fintech, crypto exchange, or insurance company, our tools ensure you stay fully compliant. Our services include:

• Instant Screening: Screen individuals and entities against more than 3000 global sanctions, PEP, and watchlist sources.
• AI-Powered Risk Detection: Use our professional machine learning system to reduce false positives.
• API Integration: Integrate with your existing onboarding and CRM systems.
• Audit-Ready Reports: Maintain a full audit trail and meet all regulatory expectations.
• Global Coverage: Comply with FATF, EU AMLD, FinCEN, FCA, and MAS.

Ready to Simplify KYC Compliance?

Request a demo now with Sanction Scanner, and our team will provide you with full compliance at speed and 100% accuracy.