Money Transfers and KYC: Why do currency exchange providers want to know their customers?

As seen on the guide at moneytransfercomparison.com, customers often comment complaints about the signing up process of certain currency brokers. But, they might think twice about this complaint if they realized the importance of KYC.

Financial institutions around the world have to adhere to two fundamental areas of regulation: Anti-Money Laundering (AML) and Know Your Customer (KYC). Being a financial institution that facilitates the transfer of money overseas, currency exchange providers are particularly relevant to such regulations.

As for brokerages, they may have the objective of maximizing profit and transfers, but they cannot simply operate without consideration of regulations, else they will face charges, fines, and harm to their own reputation.

Know Your Customer

Know Your Customer specifically refers to acquiring certain information on a customer before letting them sign up and use the platform. For most regulators, such as the Financial Conduct Authority (FCA) in the UK and the Central Bank of the UAE, this means proving the identity and address of the customer through official documents like a passport, driver’s license, and utility bill.

As per moneytransfercomparison, these are the common KYC requirements for private clients:

• The purpose of your transactions, i.e. are you paying staff, paying overseas suppliers, conducting FX for treasury purposes.
• Details of the type of business and industry you operate in.
• The source and origin of funds that’s used to settle your transfers.
• Copies of articles of association or, if applicable, recent and current financial statements instead.
• The expected level of trading that will take place, usually estimated volumes over a year.
• Identification and verification of 1-3 directors of the business and ultimate beneficial owners (known as UBOs – usually when they own over 25% of the business registering for an account).

Businesses’ main method of approval is to simply check the authenticity of the document. For example, they know what a legitimate government-issued ID document looks like and can spot a fake one. Artificial intelligence is increasingly being used too in speeding up this process of approval, both to the satisfaction of customer and broker.

For instance, Automated identity verification has become beneficial for businesses to prevent online identity fraud. As a result, the streamlined and secure onboarding process ensures a hassle-free experience for customers while safeguarding businesses from potential losses due to fraudulent activities, making the digital world a safer place for all.

Offshore brokerages with certain lax regulators enjoy the freedom of making things more convenient for the customer – faster sign ups and less bureaucracy. However, this has implications on security risks and financial crime. Suspicious activity is more difficult to identify and investigate, for example, without airtight KYC.

If a customer somehow doesn’t meet the KYC requirements and uses a currency exchange brokerage, they will likely face deposit or withdrawal issues. Whilst KYC is required for all financial institutions, requirements and regulations may be more strict in other areas of business like banking.

Very rarely, there are some alternative ways to help with KYC. One might be through social media, in which the customer’s online identity is validated, perhaps through LinkedIn’s employment or business ownership status, for example. And, further bespoke due diligence may also be taken for customers perceived to be of higher risk.

The importance of KYC

Most regulation is done in the name of fighting financial crime. Financing terrorism and money laundering are two primary issues that regulators are concerned about, and this keeps society safe as a whole. Money laundering is essentially the process of transferring illegally obtained funds through legitimate financial institutions, whilst black market and terrorist activities are self explanatory.

On a customer level, it may be that they are victims of fraud and KYC can help identify the unscrupulous culprits. Or, that when selling goods online, funds that are received can be more assured of being legal because they’re financed through a licensed broker.

Ultimately, whilst it’s a costly burden for financial institutions, it’s also in their own best interests. Correcting for financial crimes can be costly and their reputation can be ruined. KYC can help prevent legal action against negligence and boost the number of entities that are happy doing business with them.

Summary

Currency exchange providers implement KYC procedures in order to comply with regulation, prevent financial crime, and protect their own business interests. The process involves collecting and verifying customer information to ensure that people are who they say they are, as this transparency reduces illegal activity.