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There are banking regulations in place that are known as KYC. The definition of KYC is “know your customer,” and these rules provide guidelines for financial institutions to know more about their customers.

This isn’t just a matter of curiosity but of national security and crime prevention. Banks need to protect themselves from unwittingly participating in illicit activities.

For example, if a criminal uses a bank for illicit purposes, such as money laundering, the financial institution could be held accountable. It’s the bank’s responsibility to always know who their customers are. That way, they can help avoid being involved in criminal activity.

KYC plays an important role in financial institutions maintaining accurate information about their clients. KYC procedures and anti-money laundering (AML) laws can work together to minimize risk. Read on to learn more about know your customer regulations.

3 Components of KYC

There are three main parts of a KYC compliance framework, which were instituted under the USA Patriot Act in 2001: customer identification, customer due diligence, and enhanced due diligence. Each phase of the process of this kind of financial regulation gets more intensive according to the estimated risk that the potential client might pose.

Customer Identification Program (CIP)

The first of the three main KYC requirements is to identify a customer. (Incidentally, some people refer to KYC as know your client vs. know your customer.)

Organizations must verify that a potential customer’s ID is valid and doesn’t contain any inconsistencies. The person must also not be on any Office of Foreign Assets Control (OFAC) sanctions lists.

An organization also needs to know if their prospective customer is “politically exposed.” A politically exposed person (PEP), such as a public figure, is thought to be more susceptible to corruption than the average individual, and is therefore considered high-risk, requiring special attention.

As part of their AML/KYC compliance program, all financial institutions are required to keep records of their Customer Identification Program (CIP) as mandated by the Financial Crimes Enforcement Network (FinCEN).

FinCEN works under the guidance of the department of Treasury and is charged with guarding the financial system against illicit activity and money laundering.

The following information will satisfy the minimum KYC requirements for a Customer Identification Program:

•   Customer name (or name of business)

•   Address

•   Date of birth (not required for businesses)

•   Identification number

For individuals, the customer’s residential address must be validated. US Postal Office boxes are not accepted. Individuals with no physical residential address can use an Army Post Office box (APO), Fleet Post Office Box (FPO), or the residential or business street address of their next of kin.

For business banking customers, the address provided for know your customer laws can be the principal place of business, a local office, or another physical location utilized by the business.

The ID number for most individuals will be their social security number or Taxpayer Identification Number (TIN).

For business entities, the number will usually be their Employer Identification number (EIN). Foreign businesses without ID numbers can be verified by alternative government-issued documents.

Recommended: Opening a Bank Account While Living in a Foreign Country

Customer Due Diligence (CDD)

Due diligence includes:

•   Collecting all relevant information on a customer from trusted sources

•   Determining what the customer will be using financial services for

•   Maintaining ongoing surveillance of the situation to further verify that customer activity remains in line with recorded customer information.

The goal of this phase of the know your customer process is to assess the risks a potential customer might pose and assign them to one of three categories — low-, medium-, or high-risk.

Several variables — including the customer’s expected cash transactions, the type of business, source of income, and location — will help determine the customer’s risk level.

Other categories for assessing risk include the customer’s business industry, whether they use a foreign or domestic account, and their past financial history. The customer is also screened against politically exposed persons (PEP) and the Office of Foreign Assets Control’s (OFAC) sanctions lists.

Enhanced Due Diligence (EDD)

Enhanced due diligence (EDD) involves increased monitoring of customers deemed to be high-risk. This may include customers from high-risk third countries, those with political exposure, or those that have existing relationships with financial competitors.

Conducting enhanced due diligence on high-risk business entities requires identifying all beneficiaries of those entities when they open an account. Customers that are legal entities are those that have had legal documentation filed with a Secretary of State or other state office, and include:

•   Limited liability companies (LLC)

•   Corporations

•   Business trusts

•   General partnerships

•   Limited partnerships

•   Any other entity created via filing with a state office or formed under the laws of a jurisdiction outside of the US

On May 11, 2018, a new AML/KYC requirement came into effect. This change to KYC laws states that all banking and non-banking firms subject to the Bank Secrecy Act (BSA) must verify the identity of beneficiaries of legal entity customers when they open an account.

Firms must also develop risk profiles and continually monitor these customers. This must be done regardless of what risk category the customer falls into.

Due diligence is an ongoing process and requires financial institutions to constantly update customer profiles and monitor account activity.

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5 Key Steps Involved in Know Your Customer?

There are five main steps of complying with the know your customer rule, which is part of how banks are regulated. These include:

1. Customer Identification Program (CIP)

As mentioned above, the first step is to ensure that a prospective client’s ID is valid, real, and consistent. The address and other details must be checked. The applicant must be screened to be sure they are not on any OFAC sanctions list and their PEP status must be investigated.

2. Customer Due Diligence (CDD)

The next step of due diligence involves researching and vetting the customer’s intentions regarding the financial services they are seeking.

3. Enhanced Due Diligence (EDD)

Further scrutiny may determine that some applicants are considered risky. If the customer is deemed high-risk, additional ongoing screening is required to make sure activity doesn’t cross any lines.

4. Account Opening

If verification is successful and a client is eligible, the customer can open a bank account, with some clients requiring closer monitoring than others.

5. Annual Review

Once an account is opened, the institution will conduct an annual review of their activity. The higher the risk category a customer falls into, the more often their activities will be reviewed.

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4 Key Elements of a KYC Policy?

KYC compliance involves four key elements. When gathering KYC information, organizations must:

1. Identify Their Customers

In this step, the financial institution will gather information about the customer’s identity.

2. Verify That the Customer’s ID Is True and Valid

The identification documents will be checked against independent sources to make sure identity theft isn’t occurring

3. Understand Their Customer’s Source of Funding and Activities

In this step, a review of the customer’s activities and background can shed light on how likely it is that the client would do reputational damage or could commit crimes that involve money laundering or the financing of terrorism.

4. Monitor the Activities of Their Customers

Monitoring of customer activities is an ongoing process, particularly for high-risk clients. Most firms review clients based on their level of risk.

Low-risk clients might only be reviewed once every two or three years, moderate-risk clients every one to two years, while high-risk clients tend to be reviewed once a year or even once every six months.

Recommended: Guide to Keeping Your Bank Account Safe Online

Why Does KYC Matter?

KYC procedures matter because they are an important screening step. Their implementation can help verify customers and assess and minimize risk.

The KYC process provides guardrails and can help protect against such crimes as money laundering, terrorism funding, and other illegal activities.

Is KYC Successful?

KYC programs are seen as improving a financial institution’s reputation and integrity, though it can add a layer to a prospective client’s application process and banking life.

As the banking landscape evolves quickly with technological advances, banks are finding new ways to track customers and comply with protective KYC and other guidelines. For instance, the use of artificial intelligence (AI) in banking may be able to perform some of these functions.

AML vs KYC

KYC and AML are both ways that financial institutions comply with regulations designed to inhibit terrorism financing and money laundering.

•   AML is the more general practice of an institution seeking to identify and stop such activity.

•   KYC is one aspect of AML, focusing on customer identification and verification.

The Takeaway

KYC, or know your customer, is a regulation that helps financial institutions prevent fraud by their customers. KYC involves constant check-ups and ongoing measures to ensure customer information and account profiles are kept up-to-date.

Wherever you decide to bank, know that teams are likely to be at work, ensuring compliance with KYC regulations.

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FAQ

What is a KYC procedure in banking?

KYC procedures in banking are regulations that involve a financial institution verifying potential clients’ identities and backgrounds and monitoring their activity if they become customers. This can be one of the ways a bank ensures that it’s not being used in criminal activity such as money laundering.

Do all banks require KYC?

Yes. FinCen, or the US Financial Crimes Enforcement Network, requires financial institutions and their customers to adhere to KYC regulations.

Why is KYC mandatory in banks?

KYC is an important measure as banks work to know their customers and make sure accounts are not being used for illegal purposes. KYC regulations are one way that the government seeks to prevent money laundering and terrorism financing.

Photo credit: iStock/Andrii Yalanskyi

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Investing in a carbon-free future may be a powerful way for individuals to help make an impact on the climate. Studies have shown that investing in climate mitigation efforts and adaptation now may prevent trillions of dollars in potential future losses from disaster relief, GDP decreases, and property losses, and it may cost far less to act now than to deal with future damages.

Investors with environmental priorities might consider investing in green stocks as a way to help build a strong long-term portfolio. As with all investing, it’s essential to carefully consider the risks involved in your chosen investment strategies. Some, all, or none of the strategies below may be appropriate for you.

How Carbon Impacts Our Planet

Current carbon dioxide (CO2) levels in the atmosphere are higher than they have been for a long time, and likely higher than they have been in the past 3 million years.

Human activities ranging from automobile use and building construction to agriculture results in greenhouse gas emissions. Over millions of years prior to the Industrial Revolution, carbon was removed from the atmosphere naturally through plant photosynthesis and other processes — but by burning fossil fuels like coal and oil, humans have put that carbon back into the atmosphere in just a few hundred years. Once emitted, that CO2 stays in the air for centuries.

Changing the concentration of greenhouse gases in the atmosphere changes the Earth’s carbon cycles and results in global climate change. Some effects of climate change are already visible: rising sea levels, more intense hurricanes and fires, disappearing glaciers, and more. Around half of the CO2 emitted since 1850 is still in the atmosphere, and the rest of it is in the oceans causing ocean acidification, which interferes with the ability of marine life to grow skeletons and shells.

Currently, CO2 emissions continue to increase yearly, so it’s just as important for us to scale up the removal of CO2 from the atmosphere as it is to continue working on reducing emissions.

There are ways companies can do construction, agriculture, and all other industrial activity without emitting greenhouse gases into the atmosphere, but scaling up these solutions will require a massive amount of investment. That’s where individual investors can make a difference: By putting money behind companies that are working to create a carbon-free planet.

Climate-Friendly Industries and Companies to Invest In

Ready to make a difference by supporting climate visionaries? Here are 25+ ways to invest in efforts supporting carbon reduction.

1. Carbon Offsets

Individuals and companies can purchase carbon offsets to zero out their carbon emissions. How they work: You can calculate your estimated emissions from air or car travel or other activities, and invest in local or international projects that contribute to the reduction of emissions. For instance, an individual could invest in a solar energy project in Africa to offset their annual emissions.

Although carbon offsets are controversial because they don’t directly work to reduce one’s emissions, they do help to build out renewable energy infrastructure, regenerative agriculture, and other important initiatives. They are also helpful for offsetting certain activities that are often unavoidable and have no carbon neutral option, such as flying in a plane.

2. Carbon Credits

Carbon credits give a company the right to emit only a certain amount of carbon dioxide or other greenhouse gases.

They create a cap on the amount of emissions that can occur, and then the right to those emissions can be bought and sold in the market. Caps may be placed on nations, states, companies, or industries.

Carbon credits are controversial because larger companies can afford more credits which they can either use or sell for a profit, and some believe the program may lower the incentive for companies to reduce their emissions.

However, companies may be incentivized to reduce emissions in two different ways:

1.    They can sell any extra credits they don’t use, thus making money.

2.    Generally, limits are lowered over time, and companies that exceed their limits are fined — therefore, transitioning to lower emissions practices is in their best interest.

Although carbon credits are used by companies, individuals can invest in carbon credits through ETFs, or consider carbon emissions alternative investments.

3. ESG Indices and Impact Investing ETFs

Individuals can invest in ESG (environmental, social, governance) and impact investing ETFs, which are funds made up of companies focused on socially and environmentally responsible practices. Companies included in these funds may be working on renewable energy, sustainable agriculture, plastics alternatives, or other important areas, such as human rights standards and board policies.

4. Climate and Low-Carbon ETFs

Within the impact investing and ESG investing space, there are ETFs specifically focused on climate change and carbon reduction. These exclude companies that rely on fossil fuels, focusing exclusively on companies deemed as climate-friendly.

5. Carbon Capture, Sequestration, and Storage

There are many ways that carbon can be removed from the atmosphere, including through trees and other plants, or by machinery. CO2 can also be captured at the source of emission before it is released into the atmosphere. Once captured, the carbon needs to be stored in the ground or in long-lasting products, so it doesn’t get leaked into the air. Interested investors might want to consider buying stocks in companies that sequester millions of tons of CO2 each year.

6. Products and Materials Made from Captured Carbon

Once removed from the atmosphere, carbon can be used to make many products and materials, including carbon fiber, graphene, and cement. The construction industry is one of the biggest emitters of carbon dioxide, so replacing standard materials with ones made from sequestered CO2 could have a huge impact. All of these materials industries are poised to see huge growth in the coming years, and investing in them helps promote market growth, which may lower the cost of materials and help make them more accessible to customers.

7. Tree-Planting Companies and Sustainable Forestry

The business of planting trees has been growing. Newer tree planting companies may currently be private, but investors have the option to buy stocks, REITs (Real Estate Investment Trusts) and ETFs in companies that practice sustainable forestry and land management, as well as companies that allow investors to purchase a tree.

8. Regenerative Agriculture

The way the majority of agriculture is currently practiced worldwide depletes the soil and land over time. This not only makes it harder to grow food, it also decreases the amount of CO2 that gets removed from the atmosphere and stored in the soil. But with regenerative agricultural practices, the quality of soil improves over time. Spreading the knowledge and use of regenerative farming can be extremely important to both food security and greenhouse gas management. Individuals have the option to invest in regenerative agriculture through REITs, or even by investing in individual farms.

9. Green Bonds and Climate Bonds

Green bonds function the same way as other types of bonds, but they are specifically used to raise money to finance projects that have environmental benefits. Projects could include biodiversity, rewilding, renewable energy, clean transportation, and many other areas in the realm of sustainable development. In addition to buying individual bonds, investors can consider buying into bond funds.

10. Blue Bonds

Blue bonds focus on protecting the oceans by addressing plastic pollution, marine conservation, and more.

11. Refrigerant Management and Alternatives

Refrigerants used for cooling are a top emitter, and there are several ways to invest in improvements in the refrigerant industry:

•   Invest in alternative refrigerants such as ammonia and captured carbon dioxide.

•   Invest in companies making new types of cooling devices.

•   Invest in refrigerant management companies that reclaim refrigerants.

Other companies are working to retrofit old buildings and provide new buildings with more efficient HVAC systems.

12. Plant-based Foods

Raising livestock for food has a huge environmental footprint: It leads to huge amounts of deforestation, and cows emit methane when they burp, which is a much stronger greenhouse gas than CO2. Raising cows also uses a lot of water, transportation, chemicals, and energy. Replacing meat and materials with plant-based options can significantly reduce emissions and resource use.

13. Food Waste Solutions

Food waste in landfills does not biodegrade naturally — instead it gets buried under more layers of refuse and biodegrades anaerobically, emitting greenhouse gases into the atmosphere for centuries. Landfills are one of the biggest contributors to global emissions, with food waste contributing 8% of greenhouse gas emissions worldwide.

Some companies are heavily investing in waste-to-energy and landfill gas-to-energy facilities, which turn landfill waste into a useful energy source — essentially making products out of food ingredients and byproducts that would otherwise have gone to waste. One has developed a promising food waste recycling unit that could help reduce the amount of waste that sits in landfills as well.

14. Biodiversity and Conservation

Protecting biodiversity is key to creating a carbon-free future. Biodiversity includes crucial forest and ocean ecosystems that sequester and store carbon while also maintaining a planetary balance of nutrient and food cycles.

Interest in biodiversity investments has been growing, and there is even an ETF focused on habitat preservation.

15. Sustainable Aquaculture

The demand for fish rises every year, in part because eating fish is better for the planet and emissions than eating livestock. But a lot of work goes into making sure fishing is done sustainably to avoid overfishing and species depletion, and prevent widespread disease and wasted seafood. Investors may choose to support sustainable aquaculture by seeking out new and established businesses in the industry, or by investing in ETFs that include companies involved in responsible use and protection of ocean resources.

16. Green Building Materials

Creating construction materials such as steel and concrete results in a significant amount of CO2 emissions. There is currently a race in the materials industry to develop new materials and improve the processes of making existing ones. Both new and established businesses are part of this race. Besides steel and concrete, other key building materials that can help contribute to a carbon-free future include bamboo and hemp.

17. Water

Clean water systems are essential to the health of the planet and human life. As the population grows, there will be more demand for water, which requires increased infrastructure and management. Proper water management can have a huge impact on emissions as well.

There are three main ways for individuals to invest in the future of water. One is to invest in public water stocks such as water utilities, equipment, metering, and services companies. Another is to invest in water ETFs or in ESG funds that focus on water.

18. Green Shipping

The transportation of goods around the globe is a huge contributor to greenhouse gas emissions. In order to improve shipping practices, a massive shift is underway. The future of green shipping includes battery-operated vessels, carbon-neutral shipping, and wind-powered ships. Other technologies that play into green shipping including self-driving vehicle technology and AI. Investing in any of these areas can help the shift towards a carbon-free future.

19. Electric cars and bicycles

The use of electric cars and bicycles can significantly reduce the amount of CO2 emissions that go into the atmosphere. Interested investors might want to research stocks in the electric vehicle, charging, and battery space.

20. Telepresence

As proven during the pandemic in 2020, the reduction of work-related travel can significantly reduce global CO2 emissions. Video conferencing and telepresence tools continue to improve over time, which reduces the need for people to fly and drive to different locations for business meetings. Investing in companies working on these technologies may help solidify and continue the trend of remote work.

21. Bioplastics

Bioplastics include plastics that are completely biodegradable as well as plastics that are made partially or entirely out of biological matter. Currently bioplastics make up a very small portion of global plastic use, but increasing their use can greatly help to reduce waste and emissions.

22. Energy Storage

One of the biggest hurdles to scaling up renewable energy is creating the technology and infrastructure to store the energy, as well as reducing the costs of energy storage to make it more accessible. Investing in energy storage can help develop and improve the industry to help hasten the transition away from fossil fuels.

23. Green Building

Making the construction industry carbon-free goes beyond the creation and use of green building materials to include LED lighting, smart thermostats, smart glass, and more. These technologies can drastically reduce the energy used in buildings. There are many companies to invest in in the green building industry, as well as ETFs that include green building stocks.

24. Recycling and Waste Management

As the world’s population grows and becomes more urbanized, waste management and recycling will become even more important. Preventing waste from going to landfills is key to reducing emissions, as is the reuse of materials. For interested investors, there are many companies to invest in within waste management.

25. Sustainable Food

Food production is heavily resource-intensive, with many moving parts. In addition to companies working to improve soil health, refrigeration, plant-based foods, and food waste, there are also companies working on sustainable fertilizers, pesticides, irrigation, seeds, and other areas. One way to invest in sustainable food is through an ETF.

26. Sustainable Fashion

The fashion industry is one of the world’s worst polluters. In fact, the fashion industry produces about 10% of global carbon emissions, in addition to its huge water use and polluting the ocean with plastics. Several of the world’s most well-known sustainable fashion brands are privately held, but increasingly, public companies are also making big strides in sustainability. Individuals can also help support sustainable fashion by investing in material companies and agricultural producers that make bioplastics, bamboo, hemp, and sustainable leather alternatives.

27. Renewable and Alternative Energy

Energy is another important area to invest to help support a carbon-free future. Within the renewable and alternative energy space, individuals can invest in companies working on wind, solar, biomass, hydrogen, geothermal, nuclear, or hydropower. There are many companies and ETFs to invest in within renewable energy.

Recommended: How to Invest in Wind Energy for Beginners

The Takeaway

Every industry around the world needs to make big shifts in the coming years in order to reduce emissions and help and build a carbon-free future. As an individual, investors can make their voices and their choices heard with their dollars, by investing in companies leading the way in sustainability.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

FAQ

What are green stocks?

Green stocks are shares of companies that are focused on sustainability, or that are working on technologies or in industries that are looking to help decarbonize the planet.

What does ESG stand for?

ESG stands for “environmental, social, governance,” and is a broad qualifier for certain investments that qualify for certain activities. That may include, for example, sustainable agriculture, renewable energy, fair executive pay ratios, and labor rights.

What is green building?

Green building refers to construction projects that utilize low-carbon or carbon-free resources, such as LED lighting, smart thermostats, smart glass, and more. These can also reduce energy usage in buildings.