Exploring Identity Verification and KYC (Know Your Customer)
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This time, I would like to take the time to explain to you what KYC is, the historical background of its creation, and why it is needed. There is too much to cover in one article, so I will divide it into three series.
Today, we will learn about G7 and FATF, which are the background to the first international KYC.
Year of 1989, G7 meeting and launch of FATF
The G7, which began with the need for the international community to jointly deal with the global economic crisis, was an official and high-profile meeting where finance ministers from countries with high influence on the global economy gathered to discuss and coordinate solutions to global issues. As time passed and the importance of the meeting grew, it was upgraded to a summit.
Year of 1989, G7 was a very important summit for KYC perspective.
As the economy develops globally, a keynote meeting was held on the need to eliminate risk factors while continuously developing policies to improve economic efficiency and flexibility.
Below is the introduction to the economic declaration.
We, the Heads of State or Government of seven major industrial nations and the President of the Commission of the European Communities, have met in Paris for the fifteenth annual Economic Summit. The Summit of the Arch initiates a new round of Summits to succeed those begun at Rambouillet in 1975 and at Versailles in 1982. The round beginning in 1982 has seen one of the longest periods of sustained growth since the Second World War. These Summits have permitted effective consultations and offered the opportunity to launch initiatives and to strengthen international cooperation.
This year's world economic situation presents three main challenges:
The choice and the implementation of measures needed to maintain balanced and sustained growth, counter inflation, create jobs and promote social justice. These measures should also facilitate the adjustment of external imbalances, promote international trade and investment, and improve the economic situation of developing countries.
The development and the further integration of developing countries into the world economy. Whilst there has been substantial progress in many developing countries, particularly those implementing sound economic policies, the debt burden and the persistence of poverty, often made worse by natural disasters affecting hundreds of millions of people, are problems of deep concern which we must continue to face in a spirit of solidarity.
The urgent need to safeguard the environment for future generations. Scientific studies have revealed the existence of serious threats to our environment such as the depletion of the stratospheric ozone layer and excessive emissions of carbon dioxide and other greenhouse gases which could lead to future climate changes. Protecting the environment calls for a determined and concerted international response and for the early adoption, worldwide, of policies based on sustainable development.
View the 1989 G7 Summit economic declaration
At this G7 summit, it was decided to establish a task force to prevent money laundering using financial institutions internationally, and this task force was launched under the name of FATF (Financial Action Task Force).
40 recommendations
In April 1990, less than a year after its establishment, the FATF published a report containing '40 Recommendations', which provided a comprehensive action plan to prevent money laundering, laying the foundation for an international standard for anti-money laundering. It's possible. These recommendations are continually being refined and strengthened.
These 40 recommendations are divided into seven subareas below.
AML/CFT Policies and coordination
Money laundering and confiscation
Terrorist financing and financing of proliferation
Preventive measures
Transparency and beneficial ownership of legal persons and arrangements
Powers and responsibilities of competent authorities and other institutional measures
International cooperation
View the latest (2023) FATF recommendations
Just by looking at the table of contents of the recommendations, you can see what the FATF is all about.
The goal is to "systematically block the flow of illicit financing for terrorism, narcotics, and other purposes from each jurisdiction, and then to fully control it through international cooperation.
FATF Membership Status
Europe-Middle East(21 countries, 1 organization) | United Kingdom, Ireland, Iceland, Germany, France, Netherlands, Belgium, Luxembourg, Austria, Switzerland, Italy, Spain, Portugal, Greece, Sweden, Norway, Finland, Denmark, Russia, Israel, Saudi Arabia, European Commission |
|---|---|
Americas-Other (6 countries, 1 organization) | United States, Canada, Mexico, Brazil, Argentina, South Africa, Gulf Cooperation Council |
Asia-Pacific (10 countries) | South Korea, Australia, New Zealand, Japan, Turkey, Hong Kong, Singapore, China, India, Malaysia |
The recommendations issued by the FATF are recognized as international standards by about 180 countries around the world. The recommendations are based on a country-by-country basis and must be applied in consideration of the situation in each country. In addition, the recommendations are secured through mutual evaluation of member countries to ensure de facto binding.
Currently, 37 countries, including the United States, South Korea, the United Kingdom, China, and Japan, and two international organizations, the European Commission and the Gulf Co-operation Council, are members. The FATF is actively working to establish international anti-money laundering standards and strengthen international cooperation.
Customer Due diligence (CDD)
The FATF's recommendations, No. 10 and 11, "Customer due diligence and record keeping" are fundamental to what we now call know your customer (KYC).
In particular, No. 10 states that financial institutions should be required by law to verify the identity of their customers.
Financial institutions should be prohibited from keeping anonymous accounts or accounts in obviously fictitious names.
The principle that financial institutions should conduct CDD should be set out in law. Each country may determine how it imposes specific CDD obligations, either through law or enforceable means.
eKYC sloutions with ARGOS
In this article, we've told the story of KYC for financial institutions, from the G7 to the FATF's CDD.
Next time, we'll talk about how the FATF's CDD recommendations are applied by national jurisdictions and how the "recommendations" evolve into legislation and mandatory regulations.
ARGOS will continue to strive to make your authentication journey more convenient and secure. Join us in making your online world safer and more convenient!