KYC procedure – what is it and why is it important?

• The first objective of the KYC (Know Your Customer) procedure is to ensure financial security for both customers and financial institutions. The procedure allows verification of a customer’s identity and assessment of the risks associated with their activities. This allows banks and other entities to avoid working with individuals or companies suspected of money laundering or terrorist financing.

• The second purpose of the KYC procedure is to minimize the risk of financial fraud. Verification of customer data makes it possible to detect fraud attempts, such as identity theft and document forgery. In addition, by monitoring customer transactions, financial institutions are able to react faster to irregularities and suspicious operations, which can lead to blocking them and protecting funds from loss.

• The final goal of the KYC procedure is to comply with legal requirements under anti-money laundering (AML) and counter-terrorist financing (CFT) regulations. Financial institutions must comply with these regulations to avoid penalties and sanctions from regulators. Implementing a KYC procedure allows compliance with applicable regulations and builds trust among customers and business partners.

As part of the KYC procedure, financial institutions and other entities required to use it must collect and verify information about their customers. The basic data that is required is the full name, date of birth, home address and identification number (e.g. PESEL). In the case of legal entities, it is also necessary to know the ownership structure of the company and the data of the people representing it.

In addition to basic information, depending on the type of services provided by the institution and the customer’s risk profile, additional documents and data may be required. For example, banks often ask to see the source of a customer’s income or assets to ascertain the legitimacy of those funds. In some cases, it may also be necessary to interview the customer to obtain more detailed information about him.

It is worth mentioning that the KYC procedure does not end at the stage of obtaining customer information.

Financial institutions are obliged to monitor the transactions carried out by their customers and regularly update the collected data. This makes it possible to quickly detect possible irregularities, such as suspicious financial operations or money laundering attempts.

All this contributes to increasing security in the financial market and protecting the interests of honest customers.

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• The KYC procedure begins with the customer identification stage, which involves collecting basic personal information, such as name, home address and ID card number. In the case of companies, it is also necessary to know the ownership structure and the people who run the company.

• The next step is to verify this information by checking identity documents and other sources that confirm the veracity of the collected data.

• This is followed by a risk assessment of the customer or transaction in question. It includes an analysis of the customer’s profile, its business activities and the type of financial services it uses. Based on this analysis, the financial institution can determine the level of risk associated with a given customer and adjust its actions to minimize that risk. In practice, this means, for example, more frequent monitoring of suspicious customer transactions or the introduction of additional security measures.

• During the course of a business relationship with a customer, financial institutions are also required to constantly monitor their activity and update the information they have gathered. If irregularities or suspicious transactions are detected, the institution is required to report this to the relevant law enforcement authorities.

Thus, the KYC procedure is an ongoing process to assess customer risks and prevent money laundering and terrorist financing on an ongoing basis.

Adherence to the KYC procedure brings many benefits to both financial institutions and their customers. First, by verifying customers’ identities, banks and other financial entities are able to more effectively prevent money laundering and terrorist financing. As a result, they contribute to increased security in the financial market and build trust on the part of investors and consumers.

Secondly, the use of the KYC procedure allows for a better understanding of customers’ needs and expectations. This allows financial institutions to offer them products and services tailored to their individual preferences and life situations. This, in turn, leads to increased customer satisfaction and increased loyalty to a given company or bank. In addition, carrying out the KYC process can also facilitate the identification of potential risks arising from inadequate risk management by the customer.

Finally, compliance with the KYC procedure also has a positive impact on a company’s image and its relations with regulators. Companies that comply with customer identity verification requirements are seen as responsible and trustworthy. As a result, they can avoid financial penalties and the negative publicity associated with failing to comply with the law. In the long run, compliance with the KYC procedure can also make a company more competitive in the market and increase its value to investors.

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Failure to comply with the KYC procedure can lead to a number of risks, both for financial institutions and their clients.

One of the main risks is the increased risk of money laundering and terrorist financing. Without proper verification of customers’ identities, institutions may unwittingly participate in criminal activities, which can lead to serious legal and financial consequences.

Another risk of failing to follow KYC procedures is loss of trust from customers and other financial institutions. Nowadays, the protection of personal data and the security of transactions are crucial to maintaining a good corporate image. Failure to properly comply with KYC procedures can result in negative reviews of the company, which in turn can result in a decrease in the number of customers and a reduction in opportunities for cooperation with other entities.

Finally, failure to comply with KYC requirements can lead to severe sanctions by regulatory authorities. In Poland, compliance with these procedures is overseen by the Polish Financial Supervision Authority (KNF), which has the right to impose financial penalties on companies that do not comply with current regulations. In extreme cases, this can even lead to the revocation of a license to conduct financial activities, which will definitely affect the operation and profitability of the company.