Know Your Customer (KYC)

Protecting Your Business

One of the most important responsibilities of any business is enacting protocols to prevent financial crime. In the United States, the regulations required by law are known as Know Your Customer (KYC). KYC sets forth a number of procedures for verifying a customer's identity before or while doing business. By following these guidelines, we are able to help prevent money laundering, fraud, and terrorism financing.

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How does KYC impact you?

Before we get into the details of what KYC is, it's important to understand how this can affect your company and your clients. When processing ACH transactions on behalf of your clients, it's important to understand that you may be liable for any transactions that cannot be recovered due to an NSF or fraudulent activity. It's imperative to know your customer well enough to ensure they can cover the transactions. If you are unsure of your client's financial status, please reach out to our Risk Department for processing options.

Why is KYC necessary?

KYC was first introduced during the 1990s but stricter laws were passed in the wake of September 11th, 2001 in order to restrict illegal financial activity. Title III of the Patriot Act holds financial institutions accountable for two things: The Customer Identification Program (CIP) and Customer Due Diligence (CDD).

The Customer Identification Program (CIP) is a requirement to verify the identity of individuals wishing to conduct financial transactions. For individuals this can be a social security number, for businesses it can be the EIN or TIN number.

The Customer Due Diligence (CDD) involves verifying the identity of customers and the beneficial owners of companies. A Beneficial owner is an individual who owns 25% or more equity interest in the company. Learn more about beneficial ownership here.

Know Your Customer requirements help prevent identity theft, money laundering, and other forms of financial fraud. They are required for all financial institutions where customers can open and maintain accounts. Banks also must pass down the requirements to the organizations with whom they do business.

What kind of information should you collect from your customers?

A vital step in Knowing Your Customer is identifying and verifying the business is legitimate and its owners are financially stable. It's important to know who you're doing business with. If the company runs away, you may be liable to cover those funds.

A few things you can obtain for identification and verification are (but not limited to):

  • Tax ID Verification
  • Articles of Incorporation
  • Business License
  • Owners Driver's license
  • Voided check and bank statement or bank letter of the company's business account

Not all customers will be a good fit for ACH. Ask yourself the following questions to help determine if they are a good candidate for ACH:

  • Are they a financially stable company? Maybe request past tax returns if they are a new entity.
  • Does the client have a good business history with your company?
  • What processes or policies does the client have in place to ensure funds are available for payroll?


Financial Crimes Enforcement Network (FinCEN)