Prae Venire

Why Do Banks Ask So Many Questions?

Business Risks Natalia Gindler Corsini

Have you dealt with banks in recent years and found yourself surprised at how much personal data they ask customers? There are important reasons behind the request. Financial institutions by law must establish the legitimacy of a customer’s identity and identify risk factors.

What risk factors?

Identity theft, financial fraud and other crimes, money laundering, terrorism financing. Customer identification is the first step to better know with whom an organization is doing business and to prevent fraud.

Note that one of the risk factors mentioned in here is identity theft. Organizations in the financial industry must make sure that their customers are truly who they claim to be. That means questions asked by financial institutions are also important for the security of your own account.

What Kind of Financial Institution Must Ask Such Questions?

It includes banking and non-banking institutions.

According to the title 15 of the U.S. Code Section 6825, “the term “financial institution” means any institution engaged in the business of providing financial services to customers who maintain a credit, deposit, trust, or other financial account or relationship with the institution.”.

In order for financial institutions to assess and monitor their customers’ risk and to verify their identity, laws and regulations impose a set of procedures and KYC is one of them.

What Does KYC Stand for?

  • It means Know Your Customer and sometimes Know Your Client.
  • It is a standard due diligence process.
  • It ensures that a customer is who they say they are.
  • It is part of a compliance program.

Rules and regulations are constantly evolving as well as KYC process coverage. In 2018 the U.S. Financial Crimes Enforcement Network (FinCEN) added a new requirement to improve financial transparency to prevent illegal activity, specifically money laundering. Financial institutions since then have been required to verify the identity of natural persons of legal entity customers who own, control and profit from companies when accounts are opened.

KYC Compliance

KYC is all about risk prevention, detection and correction. It’s called KYC Compliance and it is composed by 3 elements:

  1. Customer Identification Program (CIP)
  2. Customer Due Diligence (CDD)
  3. Enhanced Due Diligence (EDD)

Organizations are required to ask, collect and monitor their potential and current customers’ key information. Whose compliance practices cannot keep pace may face fines, sanctions and reputation damage. Failing to maintain compliance is too costly, so prevention is paramount.

Prevention is Fundamental – Bear With Financial Institutions

KYC is a process that prevents money laundering; it is a component of a Anti-Money Laundering Program (AML) that financial institutions must follow as required by laws and regulatory standards.

All things considered, one being empathetic towards trustful financial institutions he/she aims to work with will help:

  • The process of gathering information to flow smoothly and efficiently;
  • To protect himself/herself from identity theft;
  • To combat money laundering and other crimes related to financial transactions.

At Prae Venire, we explain that an effective program is built around three pillars: prevention, detection, and correction. Let’s look at how these apply to a financial institution as it must develop its internal controls appropriately. For more information about how we can help you maintain compliance despite continuous and ongoing regulatory changes, contact Prae Venire to schedule a consultation.