What Does Know Your Customer Mean?

Intro

KYC – How Does it Impact Me?

Have you ever wondered why is it that you need to provide so many documents to operate a bank account, to apply for a loan or to do business at most financial institutions? As a Jamaican trying to access financial services for the first time, you may wonder for example why you need to show proof of income to open a bank account when you may have never worked before! Someone living in the Diaspora – and is used to the process of being on-boarded to a financial institution being digital, simple and has little to no paperwork – may find the adjustment to doing business in Jamaica stressful!

It has not always been this way, so what changed? I remember when I opened my account at a Building Society (many) years ago, all I needed was an ID and possibly a proof of address. Now, all financial institutions are given the requirement to ‘Know Your Customer’ (KYC) and perform ‘Customer Due Diligence’ (CDD). What does that mean?

Banks and other Financial Institutions are required to collect pieces of information that are specifically outlined in guidance notes provided by their regulators, the Bank of Jamaica or the Financial Services Commission (FSC). The information required by the entity depends on if they are a DTI (Deposit Taking Institution) and/or which industry their operations fall under. The requirements are based on the riskiness and impact of the transactions, as banks would have the most onerous KYC requirements and remittances and cambios may just require an ID and/or Proof of Address.

The entities subject to these requirements, according to the respective Guidance Notes are as follows:

Again, all of these entities, referred to here as Financial Institutions, have varying level of requirements for KYC. According to the BOJ Guidance Notes item 126, banks are required to collect the following documents to satisfy the requirements of Customer Identification:

1. Full true names and other names used
2. Correct Permanent Address (the FI also has to prove this)
3. Date and Place of Birth
4. Full name, date of birth, current and previous permanent address of the joint account holder
5. Nationality
6. Taxpayers Registration Number
7. For new customers – At least two (2) references
8. Contact numbers
9. A photograph of the customer if they a visitor.

There are exemptions to some of the requirements for persons who reside overseas and the requirements differ for sole proprietors or business owners. The Financial Institutions are also required to update records every seven (7) years, so they may ask you for documentation supporting a change to any of the items above if they have expired or if they were sent more than seven years ago. The regulators’ guidance notes can provide more details on what is required by the respective institutions. 

Why So Many?

So now I know you’re wondering why the regulators outlined so many document requirements for transacting business with a bank. According to the World Bank’s Findex database, 70% of the adult Jamaican population have a bank account. The requirements often make it difficult for persons who do not have a means to provide these items to do business with a bank, but the reason for implementing them is valid, based on Jamaica’s history of persons using their bank account to fund illicit transactions like fraud and scamming.

Both the FSC and BOJ first developed Guidelines on Anti-Money Laundering and the Counter-Financing of Terrorism (AML-CFT) in February 2005. The Proceeds of Crime (Money Laundering Prevention) Regulation (POCA) was subsequently implemented in 2007 and the Terrorism Prevention Regulations (TPR) in 2010. POCA and the TPR were subsequently Amended in 2013 and the relative guidlines also updated.

That was a mouthful (or eyeful) but basically there are two key pieces of legislation that govern how institutions need to operate to prevent funds being illicitly used in the proceeds of crime. These uses include but are not limited to: money laundering (including lottery scamming), organized crime, drug trafficking or other criminal activities.

That’s Not All

In addition to all those documents, U.S. residents are required to complete Foreign Account Tax Compliance Act (FACTA) forms so that financial institutions can ensure taxes of U.S. residents are declared in countries outside the United States. This forms a part of an agreement between Jamaica and the United States. 

Some non-financial institutions and individuals be required to report (at some level) under POCA as well. Persons such as lawyers and accountants, as well as Real Estate dealers, Gaming Machine Operators & Casino Operators would have to alert the authorities of certain types of transactions.  

Good Suffer for the Bad

So when you are asked to fill out these forms and provide proof of who you are, it is not just because the Financial Institutions are being harsh and want to frustrate you, but unfortunately as your granny would say, this is a classic case of “the good have to suffer for the bad.” I am hopeful that in the future, with the improvements in technology and innovation spurred through a central identification source (NIDS) that these requirements will  be reduced overtime or disappear altogether. Until then, FIs will have to abide by the rules and protect themselves by ensuring that they are KYC compliant to avoid fines or other sanctions.

I welcome your feedback on what you think can be done to solve this problem.