Know your customer (KYC)

A legal obligation rather than a commercial preference. Under the international standards set by the Financial Action Task Force and enacted in national anti money laundering and counter terrorist financing law, a regulated financial firm has to identify each customer and verify that identity from a reliable and independent source before establishing a business relationship. Know your customer is the common name for that requirement, and it sits inside a broader duty usually called customer due diligence, which also covers identifying any beneficial owner behind a company or trust, recording the purpose and intended nature of the relationship, and monitoring the relationship afterwards so that activity which does not match what was recorded at the outset is noticed. In the United Arab Emirates those duties sit in federal anti money laundering legislation and in the rules of the licensing regulator, which for a securities firm is the Securities and Commodities Authority.

What is asked for follows from a risk rating rather than from a fixed list. In ordinary retail cases the documents fall into two groups, proof of identity from a government issued photo document and proof of address from a recent bill, bank statement or official correspondence, with evidence of the source of funds or of wealth added where the rating calls for it. Simplified due diligence is permitted in the narrow circumstances the law defines. Enhanced due diligence is mandatory in others, among them a customer who is a politically exposed person, a relationship connected to a higher risk jurisdiction, and any arrangement whose structure obscures who ultimately owns or controls it. Screening against sanctions lists runs alongside all of it and repeats for the life of the relationship, because a list can change after an account has been opened, and records have to be retained for a period the law sets rather than for as long as the account exists.

The most common confusion is with a different obligation that arrives in the same online form. An appropriateness or suitability assessment, the set of questions about trading experience and understanding of a complex product, comes from conduct of business rules, not from anti money laundering law, and it exists to establish whether a product is appropriate for a particular customer rather than to establish who that customer is. The two are assessed separately, are supervised under different rules, and can reach different conclusions on the same application.

Three practical points follow. A regulated firm cannot waive the requirement by agreement, so an incomplete file is a legal blocker rather than a negotiable one. Verification is generally required before the relationship is established, which is why a delay at onboarding is usually documentary. And what a firm may explain about a specific check is limited by law: tipping off provisions restrict disclosure of a suspicion or a report, so silence on a particular case is a legal position rather than a service failure. None of this concerns where money is held once it arrives, which is the separate subject of client money segregation.