Know Your Client (KYC) refers to the due diligence a financial services firm may perform before taking on a new customer. Internally, it is performed so the company can offer the best service to the client, who may have specific concerns and needs that will need to be addressed. It may also be mandated under government regulations intended to minimize money laundering and other problematic financial transactions. In cases where the company must collect the information for the government, it needs to meet specific requirements covering the type of information collected and how it is reported.
Also known as "know your customer," this process can include a form the client fills out with basic identifying information like name, taxpayer identification number, address, and similar demographics. This information enables the firm to retain contact with the client and it can also be used for an identity or background check. If a client’s name is flagged by the government, this will appear during the know your client review, and the firm may be advised on how to proceed by a government representative. The inclusion of sensitive information on the form means that the firm must keep it in an appropriately secure location.
In addition, a representative may have a conversation with the client, taking some notes along the way. This discussion can include goal setting, to discuss why the client is doing business with the firm and what kinds of investment expectations the client may have. Over the course of the know your client interview, the staff member can determine the client’s risk tolerance, financial position, and needs. Information like this will help the firm offer the customer the best services, ranging from specific recommendations for financial products to reports tailored to the client’s needs.
When the government requires due diligence and reporting, clients may need to be advised of this at the time they establish a business relationship. The know your client form may disclose that the information will be forwarded to the government for use in identity verification and financial tracking. This gives clients an opportunity to opt out of the process if they are not comfortable. Forms should also provide information about privacy policies and information handling to assure customers their data will be handled securely.
During a know your client review, customers can also perform their own due diligence. They may want to ask specific questions about the structure of the organization and its policies, and can request documentation indicating that the firm is fully licensed and regulated. Additionally, they may want to consider outside research to collect information on the company’s reputation in the financial services industry.