Understanding Know Your Customer (KYC) Requirements for Banks

Banks must implement robust KYC processes to verify client identities, assess risk, and comply with anti-money laundering (AML) regulations. Core KYC requirements include customer due diligence (CDD), enhanced due diligence (EDD) for high-risk clients, continuous monitoring, and accurate recordkeeping — all designed to prevent financial crime and ensure regulatory compliance.

KYC Requirements for Banks  

KYC requirements are essential for banks to prevent financial crime and meet regulatory obligations. These include verifying customer identities, assessing risk profiles, and continuously monitoring financial activity to detect suspicious behavior. In an increasingly complex regulatory environment, banks must implement robust, data-driven KYC processes that go beyond basic identity checks—ensuring a deep understanding of client behaviors, affiliations, and financial histories.

What is the KYC Process in Banking? 

Banks engage in KYC procedures to ensure that the financial activities they facilitate are legitimate and secure.

The KYC process is designed to protect banks from money laundering, terrorist financing, and other economic crimes. This process is pivotal for banks as it involves meticulous verification of a client's identity, the legitimacy of their funds, and a comprehensive risk assessment. 

This mandatory process is integral to the new client onboarding in banks and is not a one-time event; it extends throughout the entire duration of the client-bank relationship. 

The frequency and depth of KYC checks are tailored based on each client’s risk profile. For instance, clients presenting a higher risk profile necessitate more frequent and thorough KYC evaluations compared to those with lower risk profiles.

By conducting thorough KYC procedures, including identity verification, biometric analysis, and rigorous KYC document scrutiny, banks play a crucial role in thwarting financial threats such as identity theft, money laundering, and the financing of terrorism.

Breaking Down the KYC Process in Banks  

The KYC process can broadly be broken down into three constituent parts: pre-requisites, identification, and ongoing monitoring. 

Setting the foundations with KYC pre-requisites

One of the fundamental elements of any KYC process is its pre-requisites; a set of criteria that banks can use to define their ideal customer profile(s) and separate the customers that they want to work with from those they want to avoid.

By collecting sufficient information about a prospective customer when going through KYC onboarding, banks and financial institutions can ensure that they’re only working with customers who are unlikely to expose them to an unacceptable amount of risk as per their internal risk policies. Using customer pre-requisite criteria is useful for this purpose because it filters out obviously unsuitable customers prior to the identification stage.

KYC identification and customer due diligence

Prospective customers who ‘pass’ the initial filter will proceed to the identification stage, which is the first step in customer onboarding.  

The KYC identification stage helps banks to ensure that customers are who they say they are by verifying their identity and the nature of their business. This involves verifying information provided by a customer using identification documents as well as third-party data sources. 

The KYC identification process will usually involve: 

• Verification of official government ID documents.
• Customer authentication using biometric technologies.
• Building an understanding of the nature of the customer’s activity.  
• Assessing risks associated with doing business with the prospective customer.  

When a prospective customer’s identity has been verified, the next step is to carry out due diligence to determine what risk, if any, they carry, and whether this fits the business’s risk appetite.  

Customer due diligence (CDD) highlights risk factors by analyzing data from a variety of sources, such as:  

• Information provided by the prospective customer.
• Information from sanctions and politically exposed persons (PEPs) lists.
• Publicly available data, such as company listings and media.
• Private data sources from third parties. 

Where CDD highlights a prospective customer as high risk, enhanced due diligence (EDD) checks, such as credit record and adverse media searches, may be carried out. 

Ongoing KYC monitoring in banking

KYC is not a one-and-done process. It’s important to maintain and update customer information throughout the lifecycle of the customer relationship because customer risk profiles are susceptible to change with the passage of time (this is otherwise known as Perpetual KYC). 

Ongoing monitoring involves carrying out periodic checks to inform risk status by monitoring for things like: 

• Sudden, unusual fluctuations in transactional activity.
• Unusual cross-border activity.
• Adverse media references.
• Unusually large deposits and withdrawals.
• Transactions involving sanctioned entities or those on watchlists. 

KYC Regulations for Banks 

In short, because there’s a legal requirement for banks and other financial services firms to conduct KYC checks- failure to meet KYC requirements can result in severe penalties, including large fines and potentially prison time.   

EU KYC Regulations 

In the European Union, KYC is primarily governed by the Financial Action Task Force (FATF) Recommendations, which are enforced through the Anti-Money Laundering Directives (AMLD).  

The FATF Recommendations set out a comprehensive and consistent framework of measures that countries should implement to combat money laundering and terrorist financing. Although the FATF Recommendations are exactly that—recommendations—virtually all EU Member States, and a total of 200 jurisdictions, treat them as law. Although not every jurisdiction is currently able to meet these recommendations.  

The AMLD, which was first introduced in 1991 and, as of 2021, is in its sixth iteration (6AMLD), is a set of regulatory requirements intended to prevent money laundering and terrorist financing and establish a consistent regulatory environment across the EU.  

US KYC Regulations 

In the United States, KYC requirements are legally mandated under the Bank Secrecy Act (BSA) and enforced by the Financial Crimes Enforcement Network (FinCEN). These regulations were further strengthened by the USA PATRIOT Act, which expanded due diligence obligations for financial institutions to detect and prevent money laundering and terrorist financing.

Under US law, banks must establish a Customer Identification Program (CIP) and perform Customer Due Diligence (CDD), including Enhanced Due Diligence (EDD) for high-risk customers. Failure to comply with these KYC obligations can result in significant penalties, including multi-million-dollar fines and criminal prosecution for institutions and individuals.

Advancements in Automated KYC for Banks

Manual KYC processes can no longer keep pace with growing regulatory demands and data complexity. To meet AML and KYC obligations effectively, banks must embrace automation. Automated KYC streamlines onboarding, enables continuous transaction monitoring, and ensures accurate, real-time risk profiling—all while reducing compliance burden.

Fenergo’s Client Lifecycle Management (CLM) platform delivers a centralized, automated KYC solution that empowers banks to create a single source of truth, screen customers against sanctions and PEP lists, and automate manual tasks—driving operational efficiency and regulatory compliance at scale.

KYC Requirements for Banks FAQs 

What is the KYC procedure for banks?

The KYC procedure typically involves collecting and verifying customer identification documents, assessing risk levels, and continuously monitoring transactions. Banks are also required to update customer records regularly to ensure information remains accurate and compliant.

What should a KYC policy include?

A strong KYC policy should outline the procedures for customer identification, due diligence, EDD for high-risk customers, recordkeeping practices, and ongoing monitoring. It should also align with regulatory requirements in the jurisdictions where the institution operates.

What are the KYC guidelines for banks?

KYC guidelines for banks are set by regulatory authorities and often include requirements for identity verification, risk-based customer classification, transaction monitoring, and reporting suspicious activities. In the EU, these are informed by AMLDs; in the US, by the BSA and FinCEN regulations.

What are the Know Your Customer rules for banks?

Bank KYC rules mandate that institutions must verify customer identities, understand their financial behavior, and monitor for suspicious activities. These rules are a core part of AML frameworks and are legally enforceable.

How is KYC applied in financial institutions?

Financial institutions apply KYC during onboarding and throughout the client lifecycle. This involves gathering identity documents, conducting background checks (such as PEP and sanctions screening), and continuously assessing risk to ensure compliance with AML regulations.

Is KYC a legal requirement?

Yes, KYC is a legal requirement in most jurisdictions. Regulatory bodies enforce strict penalties for non-compliance, including fines and legal action. Institutions are required by law to implement KYC as part of their broader AML programs.

TL;DR Banking KYC Requirements 

Banks are legally required to perform KYC checks to verify client identities, assess risk, and prevent financial crimes. These requirements are governed by regional regulations such as the AMLD in the EU and the Bank Secrecy Act in the US. Traditional, manual KYC processes are no longer sufficient—banks must adopt automated, centralized solutions to stay compliant, reduce risk, and improve operational efficiency. Fenergo’s CLM platform offers a robust, automated KYC framework that helps financial institutions meet global regulatory obligations while enhancing the client experience.