Investing Basics · definition
Know Your Customer (KYC)
Know Your Customer is the legally required process by which banks and brokers verify who their clients are, to prevent money laundering, fraud and sanctions evasion.
Know Your Customer (KYC) is the set of identity checks that banks, brokers and other financial institutions must perform before and during a client relationship. It is why opening an investment account involves passport scans, address proof and questions about income and the source of your money.
Key takeaways
- KYC is a legal obligation for financial institutions, not a courtesy or marketing exercise.
- It exists to prevent money laundering, terrorist financing, fraud and sanctions evasion.
- KYC is part of broader anti-money-laundering (AML) frameworks set by national law and international standards.
- Institutions must keep monitoring accounts after onboarding, not just at account opening.
What institutions must check
The core is the Customer Identification Program: verifying name, date of birth, address and an identification number against reliable documents. On top of that sits customer due diligence: understanding what the client does, where the money comes from and what normal account behaviour should look like. Higher-risk clients, such as politically exposed persons, trigger enhanced due diligence with deeper checks.
The rules behind the questions
In the United States, KYC obligations flow from the Bank Secrecy Act and the USA PATRIOT Act, supervised by FinCEN and, for brokers, FINRA Rule 2090 ("Know Your Customer"). In the European Union, successive Anti-Money-Laundering Directives set the framework; in the Netherlands the Wwft (Wet ter voorkoming van witwassen en financieren van terrorisme) implements it. The Financial Action Task Force (FATF) writes the international standards these laws follow.
Why investors encounter it everywhere
Every regulated venue where money changes hands applies KYC: banks, brokers, fund platforms and, increasingly strictly, cryptocurrency exchanges, which were historically a weak point. Suitability questions (about experience and risk tolerance) often arrive in the same onboarding flow but serve a different purpose: they support investor-protection rules rather than anti-money-laundering law.
Frequently asked questions
Why does my broker ask where my money comes from?
Source-of-funds questions are a due-diligence requirement. Unusual or unexplained inflows are exactly what AML monitoring is designed to flag.
Can I refuse to provide KYC documents?
You can, but the institution must then refuse or close the account. Serving anonymous clients is illegal for regulated firms.
Sources
This entry is for education only. Investing Value describes how financial concepts work; it does not provide investment, tax or legal advice, and nothing here is a recommendation to buy or sell any asset.