Know Your Client, or commonly known as KYC, has become a foundation of financial regulation in the United Kingdom. Whether you work in banking, professional services, property, gaming or any number of other regulated sectors, understanding and implementing robust KYC procedures is no longer optional. It is a legal requirement.
Yet despite its importance, many organisations struggle to get KYC right. Some face significant penalties because they have not taken it seriously enough. Others incur unnecessary costs by over-complicating their processes. The challenge, then, is to strike the right balance: implementing controls that are genuinely effective whilst remaining practical and proportionate to your business.
This article explains what KYC compliance means, why it matters, and most importantly, how to avoid the mistakes that lead to regulatory action and financial penalties.
Key Points Summarised
- KYC compliance requires verifying client identity, understanding their business purpose, and continuously monitoring transactions throughout the relationship
- Identity verification demands certified official documents with complete audit trails, while beneficial ownership must be traced through all corporate structures to identify individuals with 25%+ control
- Risk-based approaches are mandatory, applying proportionate scrutiny based on client profile, transaction patterns, jurisdiction and beneficial ownership complexity
- Ongoing monitoring throughout client relationships is legally required, with transaction alerts actively reviewed and unusual patterns investigated and documented
- Poor documentation means compliance never happened in regulators’ eyes, making comprehensive record-keeping of all checks, decisions and risk assessments critical
- FCA penalties range from hundreds of thousands to hundreds of millions, with directors and MLROs facing personal criminal prosecution including imprisonment for failures
What is KYC Compliance?
At its core, KYC compliance means that you must verify the identity of your clients and understand the nature of their business and the purpose of your relationship with them. You need to understand who you are dealing with before you enter a transaction or an establish any business relationship.
This sounds straightforward. In practice, it involves several interconnected steps.
First, you must identify your client. This means obtaining government-issues documentation such as a passport or driving licence to verify their name, address and date of birth. For businesses, you need identify the Directors, Beneficial owners, Senior management and Authorised person if there is any who is working on behalf of the organisation and to establish the legal structure, ownership, and who controls the company. This gets more complex when clients are complex corporate structures or when beneficial ownership is unclear.
Second, you must understand the client’s background and activities. Where does their money come from? What is their occupation or business? Are they politically exposed? Do they have any criminal history? This information helps you assess the risks associated with the relationship.
Third, you must monitor the client’s activity on an ongoing basis. You need to watch for transactions that seem unusual or inconsistent with what you know about the client. If someone who claims to be a retired pensioner suddenly begins receiving large international transfers, you need to investigate why.
The Legal Framework
In the United Kingdom, KYC requirements are primarily set out in the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, commonly referred to as the MLR 2017. These Regulations give effect to the Fifth Money Laundering Directive and set the standard for the entire regulated sector.
The Financial Conduct Authority, or FCA, supervises most of the financial services industry and has issued detailed guidance on KYC expectations. In some sectors, such as banking, the Prudential Regulation Authority also has a role. Other regulators, including the Gambling Commission, the Law Society, and the Solicitors Regulation Authority, have adapted these principles for their own sectors.
The key principle underlying all this regulation is straightforward: you must not knowingly or suspiciously facilitate money laundering, terrorist financing, or other financial crime. Failing to apply adequate KYC controls puts your organisation at legal risk and can result in serious consequences.
Common Pitfall One: Inadequate Identity Verification
One of the most frequently cited failings in regulatory enforcement action is that organisations have not properly verified client identity at the outset. This often arises in scenarios where businesses have taken a shortcut.
For example, a firm might accept a scan of a passport that is not clear or that contains obvious signs of tampering. Alternatively, they might verify identity but fail to confirm the client’s current address. Or they might accept a client’s verbal confirmation of details without obtaining supporting documentation.
The problem is that these shortcuts defeat the purpose of the exercise. If you cannot be confident that you know who your client genuinely is, then all your subsequent monitoring and assessment is built on an unstable foundation.
How to avoid this: Implement a clear identity verification policy. Require certified copies of official documentation. For high-risk clients, consider using a professional identity verification service that carries out checks against multiple databases. Make sure that the address information you hold is current and that you regularly update it. Document everything you do. If you are later questioned by a regulator, the audit trail matters enormously.
Common Pitfall Two: Failing to Identify Beneficial Ownership
When your client is a company rather than an individual, the stakes get higher. You must identify not just the company itself but also the natural persons who ultimately own or control it. These are known as beneficial owners.
Many organisations make the mistake of stopping their enquiries at the company level. They get the company registration details and assume their work is done. This is where the real investigation often needs to begin.
The issue arises when clients use layers of corporate structure to obscure their identity. Sometimes this is entirely innocent. Sometimes it is designed to conceal involvement in financial crime or sanctions evasion. Your job is to penetrate these layers and identify the real people behind the corporate facade.
Under the MLR 2017, you must identify beneficial owners who hold more than 25 per cent of the shares or voting rights in a company, and those who exercise control through other means, such as contractual rights or influence. You must also identify directors and senior management.
How to avoid this: Ask questions and verify the answers. When a company first becomes your client, insist on a complete shareholding structure. If there are any intermediate companies, keep digging until you reach natural persons. Use company search tools, such as Companies House records, to verify what you are being told. For higher-risk clients, consider instructing a professional due diligence provider to carry out beneficial ownership verification. Maintain a file record that clearly shows who you have identified as beneficial owners and how you verified that information.
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Common Pitfall Three: Insufficient Client Risk Assessment
Not all clients present the same level of risk. A long-established British company operated by a single individual with no criminal history presents a much lower risk profile than a newly formed shell company owned by a politically exposed person from a jurisdiction with known corruption issues.
Yet many organisations apply a one-size-fits-all approach to KYC. They apply the same level of scrutiny to all clients regardless of risk. This is not efficient, and it is not required by regulation. The regulations explicitly require a risk-based approach.
Conversely, some organisations apply insufficient scrutiny to clients they perceive as low risk. They might apply minimal checks to established clients or to those sectors they deem safe. This can be dangerous. An established company can become a vehicle for financial crime. A client’s risk profile can change.
How to avoid this: Develop a written risk assessment framework. Document the factors that increase or reduce risk, such as the nature of the client’s business, their location, the size and nature of transactions, and their beneficial ownership structure. Apply this framework consistently to all new clients. Assign clients to risk categories such as low, medium or high. Adjust the intensity of your due diligence accordingly. For high-risk clients, gather more comprehensive information and consider using professional verification services. For low-risk clients, simpler checks may be proportionate. Crucially, do not assume that risk remains static. Periodically reassess your clients, particularly if their transaction profile changes.
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Common Pitfall Four: Inadequate Ongoing Monitoring
Many organisations invest significantly in verification and assessment when a client first joins. They then assume that their work is complete and move on. This is a serious mistake.
The regulations require ongoing monitoring throughout the client relationship. You must keep their information up to date and look for transactions or patterns that seem unusual or inconsistent with what you know about them.
The Financial Conduct Authority (FCA) has found that many firms have weak ongoing monitoring procedures. Some do not monitor at all. Others maintain monitoring systems but do not actively review the outputs. Warning flags are raised by automated systems but then ignored.
A real-world example illustrates the danger. A property management company accepted a landlord who appeared legitimate on the surface. The company did not closely monitor the transactions. It later emerged that the landlord was using the company’s systems to launder the proceeds of investment fraud. Regulators questioned why the company had not noticed that the landlord was receiving large sums from multiple sources and then transferring them overseas within hours of receipt.
How to avoid this: Build monitoring into your regular business processes. Define what transactions or activities would be considered unusual for each client based on their profile and the nature of your relationship. Use technology to flag transactions that fall outside expected patterns. Establish a clear process for reviewing these alerts and deciding whether further investigation is needed. Do not allow alerts to pile up without review. Maintain records of decisions made and the reasons for them. Periodically meet with clients to confirm their contact details, understand any changes in their business, and reassess their risk profile.
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Common Pitfall Five: Poor Record Keeping and Documentation
Regulatory action often reveals that organisations have failed to maintain adequate records of their KYC processes. They have carried out checks but have not documented them. They have made decisions but have not recorded the reasoning.
From a regulatory perspective, if something is not documented, it is almost as though it never happened. If you cannot show the regulator a clear record of what you did, when you did it, and why you did it, you will struggle to defend yourself if your procedures are questioned.
This is especially problematic when staff members leave or when time passes. Two years after verifying a client, if you are asked to explain what checks you carried out, you will not remember the details. Your documentation must provide that information.
How to avoid this: Create a document retention policy and stick to it. Keep copies of all identity verification documents you obtain. Record the dates on which you obtained them, and any manual checks you carried out. Document your risk assessment and the factors that influenced it. Maintain a file of any correspondence with the client relating to their business and profile. Record the dates and nature of any monitoring reviews you undertake. If you decide not to proceed with a client or to terminate a relationship because of concerns, document that decision and your reasons for it clearly. Use a client management system that maintains an audit trail of all documents and dates.
Common Pitfall Six: Inadequate Training and Governance
Regulation requires that organisations put in place adequate governance and that all staff involved in client acquisition or monitoring understand their obligations. Yet many organisations neglect to invest in training.
Staff who do not understand the purpose of KYC procedures or the risks associated with inadequate controls are less likely to apply them rigorously. They may take shortcuts or fail to escalate concerns they should have escalated.
Regulators have also noted instances where senior management has not been sufficiently engaged with KYC compliance. It becomes seen as a compliance tick box rather than a core business responsibility.
How to avoid this: Implement a mandatory training programme for all staff involved in client acquisition, account management, and transaction processing. Training should explain the legal obligations, the risks of non-compliance, real-world examples of failures, and the specific procedures expected within your organisation. Deliver training on induction and refresh it annually. Keep records of who has completed training and when. Ensure that senior management and the board understand the KYC obligations and the organisation’s KYC framework. Designate a Compliance Officer with clear responsibility for KYC compliance.
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The Regulatory Approach to Enforcement
When the Financial Conduct Authority or other regulators identify KYC failures, they pursue enforcement action. The consequences can be severe.
The FCA has the power to issue unlimited fines. Recent years have seen substantial penalties imposed for KYC failures. These have ranged from hundreds of thousands of pounds for small firms to hundreds of millions for large institutions.
Beyond financial penalties, regulators may require firms to remediate past client relationships, re-verify clients who were not adequately checked, and implement enhanced controls going forward. These remediation exercises can be expensive and disruptive.
In serious cases, regulators can suspend a firm’s authorisation or even revoke it entirely, which effectively ends the business.
There are also criminal consequences. Directors and Money Laundering Reporting Officers can face prosecution under the Money Laundering Regulations if they have failed to exercise reasonable care. Criminal convictions carry prison sentences and personal fines.
Finally, there are consequences for your business reputation and relationships. A regulatory finding often attracts media attention. Clients and partners may lose confidence. Banks and insurers may be less willing to work with you.
Designing an Effective KYC Framework
So, what does good KYC compliance look like?
Start by creating a written policy document that sets out your KYC obligations, your approach to risk assessment, and the specific procedures staff must follow. This policy should reference the relevant legislation and be tailored to your business sector and the types of clients you work with.
Establish clear processes for client identification and verification. Define what documentation you will accept, how you will verify it, and how you will confirm the client’s address. Be specific. Generic procedures are easier to bypass.
Create a client risk assessment framework that reflects the genuine risks in your business. What factors would genuinely increase the risk of a client being involved in financial crime? For a solicitor handling property transaction, would you care more about the source of funds or the client’s nationality? For a betting shop, would you care more about large round-sum transactions or transactions to countries associated with money laundering? Your framework should be based on real risk, not on a generic template.
Implement a client due diligence process that is proportionate to risk. This does not mean applying minimal checks to all clients. It means that a client assessed as very high risk should undergo significantly more thorough checks than a client assessed as low risk.
Build ongoing monitoring into your normal business operations. Do not treat it as a separate exercise. If you use a client management system, make sure it contains all the information needed to assess whether a client’s transactions are unusual.
Establish clear escalation procedures. Staff should know when to raise a concern and who to raise it with. You should have a designated Money Laundering Reporting Officer responsible for reporting suspicious activity to the Financial Conduct Authority or National Crime Agency as required by law.
Train your staff so that they understand not just the rules but the reasons for them.
Finally, review your procedures annually. Look at the results of any regulatory audits or inspections. Consider whether your risk assessment framework remains appropriate or whether the business has changed in ways that affect it.
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Practical Implementation Tips
Consider the following practical steps to strengthen your KYC compliance.
If you are small or lack internal expertise, consider engaging a compliance consultancy to help you design your framework. It is far better to invest in preventive measures now than to face regulatory action later.
Use technology appropriately. Client management systems can help you maintain records and track due diligence completion. Automated monitoring tools can help you identify unusual transactions. However, technology is not a substitute for human judgment. You still need experienced staff to interpret alerts and make decisions about what they mean.
Maintain strong relationships with compliance and legal advisers who understand your business and your regulatory obligations. When you encounter complex client situations or unusual circumstances, get advice.
Do not make exemptions or exceptions for clients unless there is a clear policy-based reason for doing so. Staff will often find reasons why a particular client should not have to complete all the usual steps. Resist these pressures unless there is a legitimate exemption under the regulations.
Build a compliance culture. Make clear that KYC compliance is not the responsibility of the compliance team alone. It is part of normal business practice, and everyone has a role to play.
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Want to streamline your client verification process and avoid common mistakes? Our guide reveals 7 expert tips that will help you conduct KYC checks more efficiently while maintaining the highest compliance standards.
Additional Resources
- Financial Action Task Force (FATF): High-risk and other monitored jurisdictions
- Money Laundering Regulations 2017: The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017
- AML & ID Verification Guide for Accountants: 2025 Anti-Money Laundering ID Check Guide for Accountants in the UK – FigsFlow
- KYC Vs AML Explained: Difference Between KYC & AML: What You Need to Know | FigsFlow
- Complete KYC in Minutes: Complete KYC in Minutes! | Complete Guide For Accountants | FigsFlow
Conclusion
KYC compliance is not bureaucratic box ticking. It is a genuine obligation designed to protect the financial system and to prevent money laundering and terrorist financing. Organisations that take it seriously invest appropriately in staff, systems and procedures. Over time, this investment pays dividends through reduced regulatory risk, enhanced reputation, and cleaner client relationships.
By contrast, organisations that treat KYC as a nuisance or that cut corners to save costs risk substantial regulatory penalties and reputational damage. The approach you take should be conscious and deliberate.
Start with a clear, written framework tailored to your business. Apply it consistently. Invest in staff training. Maintain good records. Monitor your clients throughout your relationship with them. And when you are unsure, seek professional advice.
This approach will not guarantee you will never face a regulatory question. However, it will mean that if you are questioned, you can demonstrate that you have acted reasonably and in accordance with your legal obligations. That is as good as it gets in compliance.
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