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A series of transformations in recent years have made financial transactions easier. The consequent increase in the volume of transactions and the inclusion in the financial system has opened up a huge business opportunity. At the same time, it has increased the need for internal controls to prevent the use of financial institutions for illicit purposes.

KYC stands for “Know Your Customer”, which in free translation means “know your customer”. The acronym KYC is usually linked to the financial sector. However, the same concept can and should be applied to other sectors of the economy, in which case the term “background check” is more commonly used. We often talk about customer knowledge as a way of enhancing credit risk analysis and improving decision-making. However, the meaning of KYC policies goes further. A customer's creditworthiness is part of a broader analysis: you need to know whether the credit operation or any other financial activity serves a legitimate operation.

The size of the global KYC market, which stood at around US$ 1.6 billion in 2021, is projected to reach US$ 2.8 billion in 2030, with an annual growth rate of 21.55% (Facts and Factors Report). KYC processes are made up of a set of compliance procedures adopted by financial institutions, with legal provisions. In Brazil, there are various rules and regulations on the subject, such as the following:

• Money Laundering Prevention Act (9.613/1998);
• Anti-terrorism Law (13.260/2016);
• Law 13.810/2019, which provides for compliance with sanctions imposed by resolutions of the United Nations Security Council, including the unavailability of assets of natural and legal persons and entities;
• Law 9.613/1998, which deals with the crimes of laundering or concealing assets, rights and values;
• BCB Circular 3,978/2020, which provides for the procedures and internal controls to be adopted by institutions authorized to operate by the Central Bank in order to prevent the use of the financial system to commit crimes of laundering or concealment of assets, rights and values;
• BCB Circular Letter 4.001/2020, which publishes a list of operations and situations that may constitute evidence of the crimes of laundering or concealment of assets, rights and values.

BCB Circular 3.978/2020 defines the procedures to be adopted in the process of attracting customers and for the duration of the service relationship. This work must be permanent, in order to ensure that the customer's pattern of financial transactions is compatible with their income and assets. The aim is to prevent money laundering and terrorist financing practices. The customer knowledge guidelines involve:

1. Collecting, verifying, validating and updating registration information in order to get to know clients, employees, partners and outsourced service providers;
2. Registration of transactions and financial services;
3. Monitoring, selection and analysis of suspicious operations and situations;
4. Reporting operations to the Financial Activities Control Council (Coaf).

A practical example of KYC policy is the identification, at the time of registration, of politically exposed persons. The reader has probably already provided this information when opening an account with a financial institution.

Validating the information requires cross-referencing data from various sources. Among these sources are the Internal Revenue Service, state and federal courts, as well as restrictive lists that point out bad practices, especially in relation to legal entities.

The bureaus are also an important source of information for companies and institutions to get to know their customers. The bureaus are fundamental in KYC by providing relevant information and tools for building models that allow for inferring income and billing, calculating credit scores, information on payment history, defaults, registration information, legal actions, politically exposed persons, balance sheet information, protests and commercial registers.

We also have international lists such as the Financial Action Task Force (FATF), the United Nations Security Council (UNSC) list, the European Union list and the Interpol list.

On the operational side, there are other challenges: platforms to integrate information and generate tools, as well as qualified professionals given the specific nature of the subject.

Good KYC practices minimize operational risks for financial institutions and curb illicit practices, contributing to the stability of the financial system. On the other hand, there is a need to invest in policies and instruments to prevent the misuse of institutions, ensuring the integrity of the business and its reputation.

Financial institutions should seek to improve their KYC policies, guaranteeing, as far as possible, maximum security with minimum compromise to their customers' experience.

Faced with the reality of a significant increase in transactions, the hygiene of the financial system, which was already important, has become an imperative: knowing the customer, proposing customized solutions and practicing healthy economics.

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By: Elias Sfeir President of ANBC & Member of the Climate Council of the City of São Paulo & Certified Advisor