What is KYC? Why Finance Relies on Know Your Customer for Risk and Compliance

Know your customer (KYC) is the process of verifying someone’s identity. In essence, KYC requirements ensure that individuals are who they say they are. KYC helps lenders, banks, and other financial institutions assess the risk of fraud, catch money laundering, or prevent terrorism financing. 

Without an adequate KYC program, banks and financial institutions could be vulnerable to compliance risk (like fines, sanctions, or license suspension) as well as fraud and the loss of customer trust. KYC protocols are extremely important just about everywhere in the world – but how did KYC arise, and what changes should financial professionals keep abreast of today? 

Why Finance Relies on KYC

Do you know how KYC came to be? In the United States, the Bank Secrecy Act (BSA) emerged after the counterculture, crime, and drug fears pervasive in the late 1960s. As the United States fought on in Vietnam, Nixon’s 1968 campaign focused on creating peace and stability. He signed the BSA into law on October 26, 1970, a regulatory tool designed to create a paper trail. The BSA required financial institutions to keep a record of cash purchases, record cash transactions over $10,000 using a Currency Transaction Report (CTR), and report suspicious financial activity. 

Ironically, these same policies used to track financial flows would prove useful against Nixon’s own administration. While the term “money laundering” likely dates back to antiquity (or at least as far back as Al Capone), its use in modern media can be traced back to Watergate. 

Even post-Nixon, though, there was considerable interest in KYC. In November 1980, a federal task force called Operation Greenback was established to staunch the growth in South Florida’s drug trade. Pop culture hits like Scarface, Miami Vice, and Nancy Reagan’s drug campaign put drug crime and money laundering on the map –  and federal crackdowns like Operation Greenback gave new regulations from the BSA some teeth. In 1986, the Money Laundering Control Act established money laundering as a federal crime, and in 1988, the Anti-Drug Abuse Act expanded the definition of a ‘financial institution’ to cover car dealerships and real estate personnel.

Public fear around terrorism post 9/11 resulted in The Patriot Act, which significantly strengthened KYC and introduced the idea of ‘terrorism financing.’ Heightened fear around terrorism trumped any concerns about privacy and gave birth to the Customer Identification Program (CIP), which beefed up requirements for customer due diligence. The Patriot Act also expanded KYC to cover broker-dealers, mutual funds, futures merchants, and other parties. 

Now KYC was not only standardized, it was mandatory – later, the Financial Action Task Force pushed these standards worldwide. However, by 2018, some regions were divided: new anti-money laundering directives in the EU demanded more disclosure (for shell companies or tax havens) while data protection directives (like GDPR) gave the average person more control around their privacy. The result was a compliance landscape that was more complicated for financial companies. 

The State of KYC in 2025

The tug of war between financial transparency and data privacy is ongoing. While financial institutions must maintain a globally compliant KYC program to minimize risk and prevent fraudulent activity, customers are also wary of data breaches, race or gender profiling, and the loss of their anonymity. 

‍Today, the idea of “risk based KYC” is key. Sophisticated new technologies for KYC may include multimodal biometrics like fingerprint, face, or eye scanning – but they don’t need to be used in every case. FinCEN rules require institutions to tailor their verification requirements by risk, but don’t require every risk profile to be treated the same way. The financial institution still has a considerable amount of discretion around how, and why, they verify. 

As we drive into the ‘age of AI’, keep your eyes peeled for new regulations, changes, and conflicts that could give rise to new changes in KYC. As fraud, money laundering, or other unsavory aspects of moving money evolve, KYC has undergone its own policy evolution – and staying compliant and up to date will keep your financial business (and its customers) safe.