In today’s digital age, Financial Institutions (FIs), Virtual Asset Service Providers (VASPs) and other transaction-focused businesses are more vulnerable than ever to money laundering, terrorist financing, and other financial crimes. Put simply, the digital economy has created enormous new opportunities to grow a business — and has also created many new ways for criminals to exploit those businesses.
In order to combat these threats, governments around the world have implemented various regulations and measures to ensure that FIs, VASPs and other regulated businesses know exactly who they are doing business with. Collectively, the various protocols and processes of gathering and verifying the identity of who a business is transacting with have been termed “Know Your Customer” (KYC).
KYC is part of a wider system of Anti-Money Laundering (AML) checks, protocols and approaches, which are in turn closely related to Counter-Terror-Financing (CTF).
We’ve been covering the various approaches taken by regulators across the world in our ongoing Regulatory Focus Series.
The United Kingdom (UK) is no exception to the global trend towards more regulation, and has implemented its own set of KYC and Anti-Money Laundering (AML) regulations to protect against financial crimes. These regulations not only help to prevent illegal activities but also ensure the integrity of the UK’s financial system.
As one of the world’s most innovative digital economies that has been at the forefront of the FinTech and digital finance revolution, regulators in the UK have taken a leading approach to regulation of the burgeoning space.
While there are several regulators in the UK that cover issues related to financial and tax crimes, including HM Revenue & Customs (HMRC) and the National Crime Agency (NCA), the Financial Conduct Authority (FCA) is the UK’s main regulatory authority when it comes to KYC and AML compliance for obliged entities.
In this article, we provide an overview of the FCA’s KYC and AML regulations including their purpose, scope, and key requirements for regulated businesses — and how businesses operating in the UK and/or regulated by the FCA can comply with them.
Scope of KYC and AML Regulations in the UK
In the UK, KYC and AML regulations apply to a wide range of FIs, including banks, other financial and credit businesses, independent legal professionals such as accountants, tax advisers, auditors and insolvency practitioners; unions, investment firms, insurance companies, and money service businesses.
In addition to these conventional FIs, the UK’s AML regime has also expanded over recent years to regulate a wide range of digital asset-focused businesses, including:
- Real estate companies
- Cryptoasset businesses
- Gaming companies and casinos
- High-value dealers, such as those trading art, antiques, jewelry and luxury goods
- Independent legal and professional service providers, such as lawyers and other professionals who offer consultancy services related to transactions.
KYC/AML regulations also cover a variety of financial products and services such as deposit accounts, loans, electronic transfers, and currency exchange.
KYC/AML regulations also apply to a wide range of customers including individuals, corporations, partnerships, trusts, and other legal entities. This means that regulated businesses and other obliged entities must conduct due diligence on all of their customers, regardless of their size or type.
The FCA is the conduct regulator for financial services firms and financial markets in the United Kingdom. It was established to promote effective competition and ensure fair treatment of consumers in the financial sector.
The FCA is responsible for regulating tens of thousands of businesses in the UK, including banks, credit unions, insurance companies, financial advisors, and investment firms. Its main objective is to ensure that these businesses operate with integrity, provide fair outcomes for consumers, and maintain the stability of the UK’s financial system.
FCA KYC/AML Regulations
One of the key responsibilities of the FCA is to enforce KYC and AML processes and regulations. These regulations require financial institutions to verify the identity of their customers and assess the potential risk of money laundering or terrorist financing.
KYC is a process by which financial institutions collect identifying information from their customers, such as name, address, and date of birth. This helps them to establish the true identity of their customers and ensure they are not engaged in any illegal activities.
AML, on the other hand, is a set of measures and regulations aimed at detecting and preventing money laundering and terrorist financing activities. It requires financial institutions to have robust systems in place to monitor and report any suspicious transactions or activities.
The FCA’s regulatory approach to KYC/AML and due diligence is informed by several pieces of legislation and regulatory recommendations developed by the intergovernmental AML watchdog the Financial Action Task Force.
These include the EU’s Anti-Money Laundering Directives (AMLD), which are now in their sixth iteration, 6AMLD.
The UK also has several pieces of key legislation that inform the country’s AML/CTF laws. These include:
The FCA also maintains the FCA Handbook for FCA regulated firms – a handy and comprehensive guide for how businesses regulated by the authority can reach compliance with its rules.
How to comply with FCA rules
Regulated businesses in the UK are subject to the KYC/AML regulations set forth by the FCA. These regulations aim to prevent money laundering and terrorist financing, as well as promote financial transparency. In order to comply with these regulations, regulated businesses must follow strict guidelines for customer due diligence and ongoing monitoring.
To comply with the FCA’s KYC and AML regulations, financial institutions and other regulated businesses are required to implement certain measures and procedures. These include:
- Customer Identification and due diligence: Financial institutions must collect and verify the identity of their customers before establishing a business relationship with them. This includes obtaining documents such as government-issued IDs, proof of address, and business registration documents.
- Risk Assessment: Financial institutions must assess the potential risks associated with their customers based on factors such as their geographic location, industry, and business activities. This helps to identify high-risk customers who may require enhanced due diligence measures.
- Transaction Monitoring: Financial institutions must monitor their customers’ transactions for any suspicious activity that may indicate money laundering or terrorist financing. This includes reporting any large or unusual transactions to the appropriate authorities.
- Record-Keeping: FIs and other regulated entities must maintain accurate records of their customers’ identities, transactions, and business activities for a certain period of time as mandated by the regulations. This not only helps with compliance but also assists in investigations and audits.
Complying with KYC and AML regulations is not just a legal requirement, but also a crucial step in protecting the UK’s financial system from criminal activities. It helps to create a safer environment for businesses and individuals to conduct financial transactions, as well as maintain the integrity and reputation of the financial sector.
Non-compliance with these regulations can result in severe penalties, such as fines and sanctions, as well as damage to a financial institution’s reputation. Therefore, it is essential for financial institutions to have robust KYC and AML compliance programs in place to safeguard themselves and their customers from potential risks.
Are you regulated by the FCA or looking to do expand into the UK market? Get in touch and we can tell you more about how KYC-Chain can be your Automated KYC provider. Our end-to-end workflow solution allows for full compliance with all of the UK’s KYC/AML requirements and regulations.