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Understanding KYC Processes
There was a time when banks had a sacrosanct duty to protect their clients’ confidentiality under any circumstances. However, those days are long gone. We now live in a world with an ultra-centralized financial system, with every bank and financial institution subject to onerous regulation by government authorities who demand to be kept informed of every single detail of their clients’ financial activities.
To justify these regulations, governments argue that they are simply trying to fight financial crime – with “terrorism financing” and “money laundering” being the two most cited examples. Despite the fact that less than 0.01% of all financial transactions are associated with these nefarious and illicit motives, hundreds of millions of completely legitimate transactions are being flagged, reviewed, suspended and blocked, disrupting the legal business activities of innocent people.
In 2024, to even open a bank account, customers have to be subjected to invasive KYC processes simply to satisfy the regulatory requirements set forth by government agencies.
What does a typical KYC process entail?
Generally speaking, a KYC (or “know your customer”) process is intended to establish that a would-be customer of a bank or financial institution is a legitimate, law-abiding citizen whose financial background conforms to established norms. The process typically includes:
KYC for Individuals
Proof of Identity: Customers are required to submit a copy of their passport or government ID. In some cases, notarized or apostilled copies are required.
Proof of Address: The bank needs to know your physical address, in case a law enforcement agency is trying to locate you. Business and mail forwarding address are not allowed. As such, two forms of proof of address are typically required – acceptable documents may include utility bills (excluding mobile phone bills), home ownership deeds, property tax filings, or tenancy/lease agreements. In some cases, notarized or apostilled copies are required.
Source of Funds Declaration: Customers may be required to provide details of how they acquired the funds that they are seeking to deposit in their new account, or that they are seeking to invest in their companies.
Past Bank Statements: Customers may be required to submit 3-6 months of past bank statements from other banks to prove that their source of funds is consistent with what they have claimed. For example, if you stated that your source of funds is salary from your employer, they will check to see that your salary was indeed credited by your stated employer on a monthly basis.
Other Source of Funds Documentation: For customers whose source of funds is a windfall from the sale of an asset or an inheritance, the bank may require you to provide the contract of sale or the note of probate proving this.
Tax Returns: In some jurisdictions, customers may be required to provide their tax returns from the past 1-2 financial years. This is to establish the tax residency of the customer, as well as to prove that they are not engaging in tax evasion.
Detailed CV/resume: Customers may be required to provide a detailed CV/resume stating their educational qualifications and their entire employment history, in order to prove that they have the necessary background required for their current position (whether as a business owner or employee).
Letter of Recommendation from a Bank: This is an especially common requirement in Caribbean jurisdictions. Customers are required to provide a letter of recommendation from another bank, stating that the customer’s accounts are in good order, and indicating the length of the banking relationship.
Letter of Recommendation from an Attorney or CPA: This is also a common requirement in Caribbean jurisdictions. Customers are required to provide a letter of recommendation from an attorney or CPA stating the length of the relationship as well as the attorney or CPA’s license number.
KYC for Companies
Certificate of Incorporation: Certificate of Incorporation from the jurisdiction in which the company was originally incorporated, stating the incorporation date, registration number, and Registered Agent. In some cases, a notarized or apostilled copy may be required.
Memorandum and Articles of Association: This is required in all cases. In some cases, a notarized or apostilled copy may be required.
Resolution Authorizing the Opening of a Bank Account: This is required in all cases. In some cases, the resolution can be signed by the directors. In some cases, the resolution must be signed by every shareholder. In addition, the minutes of the meeting at which the resolution was authorized may also be required.
Register of Directors (or Register of Members, in the case of an LLC): This is required in all cases. In some cases, a notarized or apostilled copy may be required.
Register of Shareholders (or Register of Members, in the case of an LLC): This is required in all cases. In some cases, a notarized or apostilled copy may be required.
Register of Beneficial Owners: This was not a common requirement in the past, but as of 2024, it has become pretty much ubiquitous. Every single natural person who directly or indirectly (i.e. through an SPV, a trust or a fund) owns 10% or more of the company must be named. In the case that a company’s shareholders are corporations, all of the aforementioned documents for that corporation may be required.
Personal KYC Documents for All Beneficial Owners: An entire set of the documents listed in “KYC for Individuals” above may be required for each and every beneficial owner of the company. In some cases, this requirement can be waived, with only directors needing to undergo KYC at the personal level.
Financial Statements and/or Corporate Tax Returns: A company that is already operating will typically be required to submit their financial statements (i.e. balance sheet, P&L statement, cash flow statement) as well as their corporate tax returns for the past 2-3 financial years. A newly-incorporated company may be asked to provide projected financial statements and/or a business plan in lieu of past financial statements.
How long does the KYC process take?
Typically, a bank takes 5 to 10 business days to process your account opening application provided that all of your documents are in order. In addition to reviewing your documents, the bank may also need to conduct an interview with you. In the case of an “offshore account”, some banks allow the interview to be conducted remotely, using video-conferencing software such as Zoom.
However, it is important to note that the timeframe of 5-10 business days assumes that there are no problems with your documents. Firstly, it may take some companies several weeks to get their documents in order. Secondly, it is extremely common for the bank to reject some documents on the grounds that they are incomplete or “incorrect” (e.g. the notary stamp was on the wrong page, or a signature was outside the box). It is not unheard of for the back-and-forth process of submitting and re-submitting documents to take 2 months or more.
Is my KYC information confidential?
Generally, yes. Banks are obligated to keep your KYC information confidential, that is, until a government or law enforcement agency requests it.
One of the main reasons why banks conduct a KYC process is for limitation of liability purposes – in other words, if any of their customers are found to be engaging in illegal activities, they want to be able to show the regulators that they performed extensive checks on the customer, and based on the information provided, they had no reason to believe that the customer was suspicious. As such, it is likely that they will provide the customer’s KYC documents to the authorities as evidence of this.