KYC for dummies I: Do you know your customer?



You’ve heard a lot about the “Know Your Customer” regulation, but is it clear? We bring you the key points to understand KYC from scratch.

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KYC meaning: What is KYC verification?

The KYC or Know your Customer is a type of verification carried out by companies to get to know their customers before embarking on a business relationship with them. Would you start a business with a person you don’t know? Surely not, and companies neither.

Know your customer is a verification process in which companies make sure that (1) their potential clients are using their identity documentation -and not a stolen one- and that (2) their intentions are legitimate.

The KYC is a set of rules and processes that allow companies to identify and verify their potential clients.

From the client’s point of view, the KYC is the process in which a client, let’s call him Fulanito Fulánez, provides proof that he is Fulanito Fulánez.

In KYC online processes, the necessary evidence is usually an official national identity document and a selfie that serves to link the document to the user who is carrying out the process.

In our day-to-day life, we show that we are ourselves all the time, for example, when we receive a package, when we sign up for a course or when we book a hotel. All three are examples in which we verify our identity.
We provide our ID, passport or driver’s license, and another person checks that it belongs to us -mainly, confirms that our face corresponds to that of the photograph on our documentation- and evaluates the validity of the document.


The AML or Anti-money laundering is a general framework that encompasses the set of procedures against money laundering and financial crimes. While the KYC is one of the many procedures that are part of the AML-specifically an identity verification practice.

The AML encompasses the KYC.

Explanation: What is the KYC for?

The KYC works like a giant sieve that companies use to filter between potential clients with good intentions – or legitimate ones – and potential clients with bad intentions – effectively illegitimate.

It serves as a barrier to entry so that companies are aware of the risk involved in welcoming certain users as customers.

At the same time, it is a layer of protection for your other users. Ultimately, KYC protects both entities and end users. In fact, it aims to prevent and protect against fraud on three levels:

  • First of all, to the specific entity, which performs the KYC verification
  • Second, to the clients of that entity
  • And finally, also to society, in general

Imagine that your bank allows anyone to open a bank account, without verifying their identity, without having any idea what they are going to use that account for. It would be irresponsible.
The bank could be involved in illegal activities. In the worst case scenario, the bank could be supporting the financing of terrorist attacks or contributing to all kinds of scams. Extreme cases like these not only damage the reputation of the entity and its assets, but also endanger the rest of its clients.

The KYC collects basic information from potential customers to classify it into legitimate and non-legitimate.

In addition to protecting the companies that carry it out, the KYC is a very valuable source of information. In fact, it provides very specific data on customers, which entities can use to improve their operations.

Security: How does KYC prevent fraud?

KYC prevents fraud and, above all, avoids it because it requires users to identify themselves. People with illegitimate intentions will avoid companies that require this type of verification for fear of retaliation – whether in the form of a fine or jail time-.

Today’s KYC verifications rely on the latest facial recognition and document validation technologies, making forgeries increasingly difficult to carry out. In addition, the information requested is checked with the authorities to avoid any inconsistency – and to maintain control for future investigations.

In summary, the KYC discourages fraud because:

  • Demand real identities
  • Reviews the background and takes them into account
  • Continuously monitor transactions

Origin: Why did KYC processes arise?

You may be wondering, “but who invented the KYC processes?”, “Where do they come from?”

The history of the fight against money laundering goes back more than 50 years, fighting against money laundering, but modern KYC regulations emerged in 2001 as part of the Patriot Act or Patriotic Law -among other regulations-.

The attacks of September 11, 2001 triggered this regulation.

Until then, there were no specific mechanisms to attribute transactions or financing to specific people. Therefore, it was much easier to carry out large capital movements without justifying them. With all the opportunities this posed for terrorists, scammers and various fraudsters.

9/11 was financed with foreign capital and, since there was no verification barrier or no record, it went unnoticed.

The seriousness of this catastrophe made it necessary to implement tools that would allow the interruption of actions of a dubious nature, as well as some control and assignment of responsibilities.

The KYC was born to minimize illegal activities, combat terrorism and improve the ability of governments to provide security to citizens.

Spanish regulation: How are anti-money laundering regulations regulated in Spain?

Spain is governed by European regulations and also has its own legal framework to combat money laundering and financial fraud.

In Europe, KYC is regulated by AML5 and GDPR, binding throughout the EU.

These European directives are fully incorporated into the Spanish legal system, which expands its regulation in Royal Decree Law 7/2021 of April 27 -modification of the 2010 Law on the Prevention of Money Laundering and Financing of Terrorism-.

In addition, they intend to offer standards and methodologies that facilitate the correct fulfillment of user verification.

Specifically, the Spanish body responsible for money laundering is the Executive Service for the Prevention of Money Laundering (SEPBLAC). In addition, the gaming sector is regulated by the General Directorate for the Regulation of Gambling (DGOJ).

Mandatory: Which companies are required to carry out KYC verifications?

Initially, KYC was reserved for banks, but the growth of regulations and the need to offer secure services have begun to extend the use of KYC to various activities.

Know Your Customer verifications are legally required of all companies that are part of a regulated industry, since they must evaluate and control who they give access to their services. Some examples would be:

  • Banks and credit institutions
  • Fintech, financial services, investment services and payment entities
  • Sports betting and gaming platforms, online casinos
  • Payment service providers
  • Asset managers
  • Pension fund managers
  • Legal professionals
  • Insurance entities
  • Real estate

You can see the complete list here (Article 2. Obliged subjects. Page 4) and here (update of the list).

Process: How does it work?

Broadly speaking, the KYC verification process consists of collecting, analyzing information and keeping it up to date.

There is still no common standard and its regulation and adaptation is an expanding challenge, as regulations vary by country and industry.

However, it is important to understand that KYC verifications encompass much more than basic identity information since they include:

  • Checking in international lists of PEP (“Politically exposed people”)
  • Risks evaluation associated with a particular individual, mainly depending on their economic activity
  • Customer transactions monitoring and tracking

The KYC process in financial services, for example, requires a more complex and specific methodology with more steps that guarantees total reliability and security. KYC regulation in online casinos, meanwhile, is more lax.

In summary, the KYC regulation established as part of the Patriot Act – and whose requirements correspond to the strictest KYC – is usually divided into three steps:

  • The first is known as the Customer Identification Program (CIP) and it is the most basic step of KYC. It identifies common data: name, address, date of birth, ID document, etc. The client provides proof of their identity. It should be remembered here that each entity will develop its own system to carry out the CIP.
  • The second step is known as Customer Due Diligence (CDD), the stage of the KYC in which it is decided whether to trust the potential customer or not. Based on the information collected and its evaluation, the entity accepts or not the user becomes part of its network. Here you will understand how to conduct point-by-point customer due diligence (CDD).
  • And the third, continuous monitoring. Since KYC is a dynamic process, it must
  • And the third, continuous monitoring. Since KYC is a dynamic process, it must be monitored – the lives of customers change, as well as their situation-. At this point, transaction control is included depending on the risk assigned.

Problem: Manual KYC is neither efficient nor productive

In its early days, KYC verification and new customer registration was done manually. An employee used to review one by one all the supporting documents of a potential client, as well as their appearance in international records and lists.

As you might be imagining, “know the customer” translates into many hours of work , since it includes checking information and making sure that all the data matches, that It will depend on the volume, but it may take a person days just to verify a user that they have to locate on AML watch lists, rogue data lists or adverse media, etc.

However, it must be remembered that the verification does not end here, since the user’s data has to be managed throughout the life cycle of the client, with all the updates that this implies.

Performing the KYC manually means:

  • Long verification periods, processing is much slower
  • Human effort, always accompanied by possible errors
  • High costs
  • Racial biases, inherent to all people
  • Inability to scale the process without hiring more staff

On the other hand, in addition to being a long and complex process, KYC requires a great deal of rigor and precision. Something that human work cannot guarantee at all times.

Solution: Why should you automate the verification of your users?

New technologies have revolutionized KYC, in particular, and remote identity checks, in general. Artificial intelligence makes it possible to automate this task and scale the volume of verifications to unimaginable levels .

Imagine how many resources, both human and material, you could save and dedicate to other tasks that add more value to your business.

Automating KYC allows you to efficiently onboard new customers and save a considerable amount of money.

It is an immediate and secure solution that not only reduces time and costs in the KYC workflow, but also improves the customer experience due to the elimination of human error and the immediacy it entails.

The end user only has to capture an image of their identity documents, and the system does the rest.

Automating KYC with a solution like Alice offers benefits like the following:

  • Avoids fraud

As developers of our technology, we are proud to have developed a cutting-edge solution, based on artificial intelligence, capable of matching all types of identity documents and associating it with a selfie.

In addition, we have developed a very accurate liveness detection technology that helps us detect the most advanced mechanisms of identity fraud.

  • Complies with regulation

Our automatic solution is designed to comply with current regulations, both national and international. We access the necessary sanctions lists and we are continually updated.

  • Reduces costs and times

Automation completely reduces waiting and review times, as well as the number of employees, who can dedicate themselves to tasks that do add value to your business.

  • Eliminates human error

Linked to the previous point, since the risk of fines and penalties is reduced, it is important to mention the elimination of human error. Automating a repetitive and monotonous task, such as KYC verification, reduces the margin of error – our system never gets tired or deconcentrated.

  • Improves your customer satisfaction

Your customers are the center of our solution. We have developed a heavy, frictionless onboarding flow for the end user. We are committed to a fast, easy and safe experience, which combines the necessary steps with minimal hassle.

  • It is a scalable solution

We grow with you. Without changes in your infrastructure or in your platform, we adapt completely to your new needs without creating the slightest inconvenience.

P.D.: Can we help you with KYC automation?

Quick questions

Message us on LinkedIn and send us your doubts.

What is a KYC form or format?

A form or KYC format is a document, physical or digital, in which information regarding the identity of a person is collected. Depending on the entity, it will collect the name of the potential client, address, work activity, etc.

What does a KYC analyst do?

A KYC analyst is a person who oversees and controls the customer verification processes.

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