What is KYC? A Comprehensive Guide to Requirements and Steps

If you work in financial services, fintech, iGaming, cryptocurrency, or any regulated industry, you've likely encountered the term KYC. But what exactly is KYC, why does it matter so much, and how can a business navigate the increasingly complex regulatory landscape?

This guide breaks down everything you need to know about KYC requirements, the step-by-step process, and how it differs from related compliance measures like KYB. Whether you're establishing your first compliance program or refining an existing one, this resource will help you build a practical, audit-ready approach to customer verification.

What is KYC (Know Your Customer)?

Know Your Customer (KYC) is a regulatory requirement and due diligence process in which businesses gather information on their customers to have a safe and confident business relationship. At its core, KYC is designed to prevent money laundering and terrorist financing by verifying customer identities and assessing their risk profiles.

Think of KYC as the foundation of trust in financial transactions. When a bank, payment provider, or cryptocurrency exchange onboards a new customer, they need to confirm that person is who they claim to be and that they're not using the financial system for illicit purposes. This isn't just good practice, it's a legal requirement across the world.

Why KYC Matters for Businesses in the EU

The European Union has established itself as a global leader in financial crime prevention, with KYC compliance serving as the cornerstone of this framework. For businesses operating anywhere in the EU, KYC is not merely a bureaucratic requirement but a fundamental business imperative that protects the integrity of the entire European financial system.

The stakes are substantial. EU enforcement authorities have demonstrated their commitment to compliance through significant penalties. In recent years, European financial institutions have faced fines reaching hundreds of millions of euros for AML and KYC failures. 

Beyond regulatory enforcement, the new Anti-Money Laundering Authority (AMLA), will directly supervise high-risk financial institutions across member states. This centralized oversight means that non-compliance in one jurisdiction can have cascading effects across your entire European operation.

Effective KYC compliance delivers critical business advantages across the EU:

Regulatory certainty and market access: Meeting harmonized EU standards enables seamless operations across all 27 member states, eliminating the need to navigate 27 different compliance regimes and opening doors to the world's largest single market.

Reputation protection in an interconnected market: Financial crime scandals spread rapidly across borders in the digital age. Robust KYC processes protect your brand reputation not just locally, but throughout Europe, where news of compliance failures can instantly impact customer trust and investor confidence.

Operational efficiency through standardization: The EU's push toward harmonized AML regulations through the new AML Regulation (AMLR) creates a single rulebook. Businesses that invest in comprehensive KYC now will benefit from streamlined compliance as these standards take effect.

Competitive advantage with institutional partners: Banks, payment processors, and other financial institutions conduct their own due diligence on business clients. Strong KYC practices make you a lower-risk partner, facilitating better banking relationships, payment processing arrangements, and access to financial services.

Future-proofing against evolving threats: The EU continuously updates its framework to address emerging risks, from cryptocurrency to AI-driven fraud. A robust KYC program built on EU standards positions your business to adapt quickly to new requirements rather than scrambling to catch up.

The Regulatory Framework: Understanding Your Legal Obligations

Before diving into the KYC process, it's important to understand the regulatory environment shaping these requirements in the EU and Malta.

The Sixth Anti-Money Laundering Directive (6AMLD)

The Sixth Anti-Money Laundering Directive came into force for EU member states on December 3, 2020, with implementation required by June 3, 2021. This directive represents a significant expansion in scope, identifying 22 predicate offences of money laundering including terrorism financing, drug trafficking, organized crime, corruption, cybercrime, environmental crimes, and human trafficking.

Key features of 6AMLD:

Harmonized definitions across the EU by introducing a standardized list of 22 predicate offences, ensuring consistent interpretation of money laundering across all member states.

Expanded criminal liability that criminalizes not only direct money laundering but also individuals who aid, abet, incite, or attempt to commit money laundering.

Stricter penalties with a minimum prison sentence of four years for related offences, significantly increased from the previous one-year minimum.

Enhanced cross-border cooperation requiring member states to recognize predicate offences committed in other jurisdictions and coordinate investigations across borders.

The New EU AML Package (2024-2027)

In May 2024, the EU published its newest anti-money laundering package, representing the most significant overhaul of AML/CFT legislation in years. This package introduces three critical components:

The 7th AML Directive (AMLD7) published in the Official Journal of the EU on 19 June 2024, with Member States required to transpose the Directive by 10 July 2027.

The Anti-Money Laundering Regulation (AMLR) creating a single EU rulebook for consistent application across all member states.

The Anti-Money Laundering Authority (AMLA) serving as a new centralized supervisory body. Anticipated to be fully operational by the end of 2025, the AMLA will directly supervise selected obliged entities with cross-border operations.

FATF Recommendations: The Global Standard

The Financial Action Task Force (FATF) provides the global framework influencing EU and Malta regulations. The FATF Recommendations set out a comprehensive and consistent framework of measures which countries should implement to combat money laundering and terrorist financing. These Recommendations form the backbone of KYC requirements worldwide. 

Recommendation 10 of FATF relates to customer due diligence, broadly requiring institutions to perform appropriate due diligence of customers to ensure all customers are properly identified and verified before onboarding.

KYC Requirements: What You Must Collect and Verify

Now that we understand the regulatory framework, let's look at the practical requirements. What information do you actually need to collect during the KYC process?

Core KYC Requirements for Individual Customers

For individual customers, KYC verification typically includes the evaluation of a government-issued ID or registration certificate, utility bills, and other proofs of address.

Essential documentation includes:

1. Government-issued photo identification

   • Identity Card issued by the Identity Cards Units – Identity Malta Agency is the primary source of identification in Malta

   • Maltese Passports issued by the Passport office – Ministry of Interior

   • Driving license issued by the Office of Transport Malta

   • For non-residents: Valid passport or national ID card from their country of residence

2. Proof of address

   • Recent utility bills (electricity, water, gas)

   • Bank statements

   • Government-issued documents showing residential address

   • These documents typically must be dated within the last 3 months

3. Additional information for risk assessment

   • Date of birth

   • Nationality

   • Occupation and employment details

   • Source of funds and source of wealth (for higher-risk customers)

   • Purpose and intended nature of the business relationship

Enhanced Due Diligence (EDD) Requirements

Not all customers present the same level of risk. Financial institutions and businesses must assess the risk associated with their customers and adapt their due diligence measures accordingly.

Enhanced Due Diligence (EDD) is required for higher-risk customers. EDD measures vary from CDD measures in that they're more rigorous and robust, and they require significantly more evidence and detailed information from the customer.

EDD is triggered for:

1. Politically Exposed Persons (PEPs) A Politically Exposed Person is defined as a natural person, or their immediate family members, who is or has been entrusted with prominent public functions. A PEP is someone who holds, or has held, a prominent public position, including government officials, ministers, members of parliament, and ambassadors.

2. High-risk jurisdictions Customers from countries identified by FATF or the EU as high-risk for money laundering or terrorist financing require additional scrutiny.

3. High-value transactions In the UK, CDD might be required for one-off transactions if the amount exceeds €15,000 or more for businesses that aren't considered high-value dealers.

4. Complex ownership structures Businesses with opaque beneficial ownership or those involving multiple jurisdictions.

EDD measures include:

• Collecting additional information from the customer

• Performing additional KYC and anti-money laundering verifications

• Senior management approval for establishing or continuing the business relationship

• Enhanced ongoing monitoring of the business relationship

• Understanding the source of funds and source of wealth

Sanctions and Watchlist Screening

Screening individuals against global sanctions lists and watchlists to detect any involvement in financial crimes, fraud, or terrorism financing is one of the most important aspects of CDD.

Required screenings include:

• Global sanctions lists: EU, OFAC, HMT, Interpol, and other relevant watch lists

• PEP databases: Both domestic and international politically exposed persons

• Adverse media screening: Checking for negative news coverage related to financial crime

• Sanctions by FATF, UN, and OFAC: These must be consulted prior to onboarding

Customers flagged under sanctions may face restricted financial access or enhanced due diligence before onboarding.

Data Retention Requirements

KYC isn't a one-and-done process. Ongoing monitoring of clients' transactional activity and risk profile is required, along with keeping all compliance documents and customer compliance data current, and in some cases, for a duration after a relationship has concluded.

Generally, businesses must retain KYC documentation for:

• At least 5 years after the business relationship ends (this is the EU standard)

• Longer periods may apply for specific jurisdictions or risk categories

• Records must be readily available for regulatory inspections and audits

KYC vs KYB: Understanding the Difference

While KYC focuses on individual customers, businesses also need to verify corporate customers through a similar but more complex process called KYB (Know Your Business).

What is KYB?

KYB is a verification process used when one business engages with another, as opposed to a business engaging with an individual. The difference between KYC and KYB is in the type of customers that a company is dealing with. KYC regulations and procedures are appropriate when the customer is a named individual, while KYB regulations deal with cases where the customer is any type of business or corporate entity.

Key Differences Between KYC and KYB

Ultimate Beneficial Owners (UBOs)

A critical component of KYB is identifying Ultimate Beneficial Owners (UBOs). Ultimate beneficial owner identification reveals the individuals who ultimately own or control a business. Regulations typically define UBOs as people who hold more than 25 percent ownership or significant decision-making authority.

However, this threshold is tightening. Members of the European Parliament agreed that beneficial ownership means having 15% plus one share, or voting rights, or other direct or indirect ownership interest, or 5% plus one share in the extractive industry or a company exposed to a higher risk of money laundering or terrorist financing.

Once UBOs are identified, you verify these individuals using the same standards applied to KYC checks to ensure the business is not masking undisclosed or high-risk owners.

When to Use KYB

If your business works with:

• Corporate clients or B2B customers

• Suppliers and vendors

• Business partners or investors

• Any legal entity (corporations, partnerships, trusts)

Then you need to implement KYB procedures alongside KYC. For many businesses, especially in the financial sector, compliance with KYB requirements is mandatory.

The KYC Process: Step-by-Step Guide

Now let's walk through the practical KYC process. While the exact steps may vary depending on your industry and risk appetite, the KYC process is performed by following three main steps: Customer Identification Programme (CIP), Customer Due Diligence (CDD), and Ongoing Monitoring.

Step 1: Customer Identification Programme (CIP)

The Customer Identification Programme is the foundation of KYC. Financial institutions start the KYC process by asking customers to provide a range of basic information about their business operations and individuals, including names, addresses, national insurance or social security numbers, and company numbers.

What to do:

1. Collect customer information

   • Full legal name

   • Date of birth

   • Residential address

   • Nationality

   • Contact information (phone, email)

2. Request identification documents

   • Government-issued photo ID (passport, national ID, driver's license)

   • Proof of address (utility bill, bank statement, government correspondence)

   • For businesses: incorporation documents, shareholder registry, UBO declarations

3. Verify document authenticity Nothing can be taken at face value when it comes to financial crime, and that includes documents provided by potential customers. Use document authentication tools, optical character recognition (OCR), and liveness checks to confirm authenticity.

4. Record the information Document all information collected and verification steps taken. This creates an audit trail for regulatory review.

Step 2: Customer Due Diligence (CDD)

Customer Due Diligence goes beyond simple identification. CDD is a systematic approach used by financial institutions to verify the identity of their customers and assess their risk profiles.

What to do:

1. Assess the customer's risk profile: When KYC and AML data checks are carried out, clients will often be given a risk rating from low risk to high risk - helping the bank make decisions about onboarding, off-boarding, and ongoing monitoring. Consider factors such as:

   • Geographic location (is the customer from a high-risk jurisdiction?)

   • Nature of business or employment

   • Expected transaction volumes and patterns

   • Product or service complexity

   • Delivery channels (face-to-face vs remote)

2. Screen against sanctions and watchlists: Screen the customer against global PEP, SIP, RCA, and Sanction lists to assess the risk they pose to your business.

3. Understand the purpose of the relationship: Banks in Malta are required to obtain information on the purpose and the intended nature of the business relationship, with a view to giving the bank sufficient clarity on the business profile of the prospective customer.

4. Apply Enhanced Due Diligence if needed: If the customer's details match any Sanction or PEP lists, enhanced due diligence must be performed - this is an additional level of checks performed if adverse information is linked to the customer.

5. Make an informed decision: Should a prospective client be unable to provide the necessary documentation for compliance with the KYC procedures, the banks may not continue to carry out transactions through accounts or funds held by their institutions.

Risk-based approach:

Implement risk-based approaches to KYC compliance, where an enhanced due diligence checklist is applied selectively to high-risk customers while low-risk customers undergo more straightforward verification procedures. This ensures you allocate resources efficiently while maintaining compliance.

Step 3: Ongoing Monitoring

KYC compliance doesn't end at onboarding. Customer due diligence for banks and financial institutions is not a one-time process that can be done and forgotten about. Rather, it's an ongoing risk assessment and management process that needs to be regularly revisited.

What to do:

1. Monitor transactions continuously: Watch for unusual patterns, sudden changes in transaction volumes, or activities inconsistent with the customer's profile.

2. Conduct periodic reviews: Schedule KYC re-reviews based on the customer's risk profile. The highest-risk customers are often screened annually or sometimes more frequently, medium-risk customers are typically screened every three years, and the lowest-risk customers are usually screened every five years.

3. Update customer information: Customer information changes over time, including addresses, ownership structures, and operational details. Ensure your records remain current.

4. Screen against updated watchlists: Sanctions lists and PEP databases are updated regularly. Re-screen customers against these lists to catch any changes.

5. Investigate and report suspicious activity: To meet BSA/AML regulations, financial institutions must keep records of all checks and monitor all customers in their database for any changes to the level of risk they pose.

Tip: Explore Perpetual KYC:

Many institutions are moving toward "perpetual KYC", a dynamic process where technology is the key enabler, and periodic reviews give way to continuous monitoring. This approach uses:

• Real-time data feeds

• Automated adverse media screening

• AI and machine learning for pattern detection

• Continuous risk scoring

Step 4: Record-Keeping and Reporting

The final component of the KYC process is maintaining comprehensive records and, when necessary, reporting suspicious activities to authorities.

What to do:

1. Maintain detailed records: Document every step of the KYC process, including:

   • Initial identification and verification

   • Risk assessment rationale

   • Ongoing monitoring activities

   • Any suspicious activity investigations

2. Ensure data accessibility: Comprehensive access to information of beneficial ownership of legal entities, trusts or similar arrangements (including access by persons with a legitimate interest) must be guaranteed.

3. File Suspicious Activity Reports (SARs): If you identify potentially suspicious transactions or behavior, you're legally obligated to report them to your country's Financial Intelligence Unit. In Malta, this is the FIAU.

4. Prepare for audits: MFSA conducts regular and unscheduled checks, analyzes companies' internal policies and reporting, and holds interviews with compliance officers. Ensure your documentation is organized and readily accessible.

Best Practices for Effective KYC Compliance

Based on regulatory guidance and industry experience, here are key best practices for building a robust KYC program:

1. Adopt a Risk-Based Approach

High-risk customers, such as politically exposed persons (PEPs) and offshore companies, require higher due diligence. Don't apply one-size-fits-all procedures. Tailor your approach to the risk level.

2. Invest in Training

Adequate training and awareness programmes are essential for employees to understand and comply with KYC regulations. Employees should be able to identify and report suspicious activities.

Your team should understand:

• Current regulatory requirements

• How to identify red flags

• When to escalate to senior management

• How to use your KYC technology effectively

3. Balance Compliance with Customer Experience

Finding the right balance between following the rules and keeping customers happy is key. Customers want quick, simple onboarding, but you must maintain compliance standards.

Strategies to achieve this balance:

• Use digital onboarding for efficiency

• Communicate clearly about why information is needed

• Minimize friction for low-risk customers

• Provide real-time status updates during verification

4. Stay Current with Regulatory Changes

The regulatory landscape is constantly evolving. With Member States required to transpose the new Directive by 10 July 2027, now is the time to prepare for upcoming changes.

Set up processes to:

• Monitor regulatory updates from FIAU, FATF, MFSA, and EU authorities

• Review and update policies regularly

• Participate in industry forums and training

• Subscribe to regulatory newsletters

5. Implement Continuous Monitoring

Rather than periodic reviews, move toward continuous monitoring. Perpetual KYC means shifting to a radically new way of doing KYC in which periodic reviews give way to a dynamic process where technology is the key enabler.

6. Maintain Comprehensive Documentation

The entire EDD process must be documented in detail, and regulators must be provided with immediate access to EDD reports. Document:

• Your KYC policies and procedures

• Risk assessment methodologies

• Individual customer due diligence decisions

• Ongoing monitoring activities

• Any deviations from standard procedures and why

7. Leverage Technology Appropriately

Many companies are adopting advanced technological solutions like SpeedyDD to streamline their KYC processes. These solutions can improve efficiency, accuracy and compliance with the latest regulations.

However, technology is a tool, not a replacement for human judgment. Use automation for:

• Routine verification tasks

• Initial risk scoring

• Watchlist screening

• Document authentication

But maintain human oversight for:

• Complex risk assessments

• Enhanced due diligence decisions

• Suspicious activity investigations

• Final approval decisions

Common KYC Challenges and How to Overcome Them

Even with the best systems in place, businesses face ongoing challenges with KYC compliance.

Challenge 1: Cross-Border Complexity

Customers and businesses that operate internationally rely on registries with varying levels of accessibility, formatting, and language requirements.

Solution: Work with global verification providers or third-party services that specialize in retrieving, translating, and validating international corporate and identity documents.

Challenge 2: High Volume of False Positives

Automated screening systems can generate numerous false positive alerts, overwhelming compliance teams.

Solution: Implement AI and machine learning to refine screening algorithms. AI algorithms reduce false positives by 70%. Also, tune your risk parameters to your specific customer base.

Challenge 3: Keeping Data Current

Customer information changes over time, including addresses, ownership structures, and operational details, which makes manual updates difficult to maintain.

Solution: Implement automated triggers for periodic re-verification. Set up customer portals where clients can update their information. Use continuous monitoring tools that flag changes in real-time.

Challenge 4: Balancing Costs and Compliance

Completing KYC checks on all customers and entities puts a costly burden on financial institutions.

Solution: Although implementing perpetual KYC solutions has up-front cost implications, the benefits outweigh the costs in the long run, including resource optimization, lower manual intervention, reduced rework, process consistency, and effective compliance.

Focus on:

• Automating routine tasks

• Using risk-based approaches to allocate resources efficiently

• Investing in scalable technology

• Calculating the true cost of non-compliance (fines, reputational damage, customer churn)

About speedyDD: Your Partner in Audit-Ready Compliance

Navigating the complex world of KYC compliance doesn't have to be overwhelming. At speedyDD, our mission is to help complex and regulated businesses maintain audit-readiness through streamlined, intelligent compliance solutions.

We understand the unique challenges facing businesses, from evolving regulatory requirements to the practical difficulties of balancing compliance with customer experience. Our platform is designed to help you:

• Automate routine KYC tasks while maintaining human oversight where it matters

• Stay current with changing regulations through regular updates and guidance

• Scale efficiently as your business grows without compromising compliance

• Reduce false positives with intelligent screening algorithms

• Maintain comprehensive audit trails that regulators expect

Whether you're a fintech startup, an established financial institution, an iGaming operator, or a crypto exchange, speedyDD provides the tools and support you need to build a robust, future-proof KYC program.

Frequently Asked Questions

What is the difference between KYC and AML?

KYC (Know Your Customer) is a component of AML (Anti-Money Laundering). While KYC focuses on verifying customer identities during onboarding, AML is broader, involving transaction monitoring and reporting suspicious activity to combat financial crimes. KYC is the foundation that enables effective AML compliance.

How long does the KYC process take?

Standard verification typically processes within 15 minutes to 48 hours with an average completion time of one hour for digital/automated processes. Manual reviews or enhanced due diligence can take several days to weeks, especially for complex corporate structures.

Can I use the same KYC process for all customers?

No. Malta's risk-based approach requires financial institutions to assess customer risk and adapt due diligence measures accordingly. Low-risk customers may undergo simplified due diligence, while high-risk customers require enhanced procedures.

What happens if a customer refuses to provide KYC information?

You cannot onboard or maintain relationships with customers who don't complete KYC. Should a prospective client be unable to provide the necessary documentation for compliance with KYC procedures, banks may not continue to carry out transactions through accounts or funds held by their institutions.

How often should I update customer KYC information?

The highest-risk customers are often screened annually or more frequently, medium-risk customers typically every three years, and lowest-risk customers usually every five years. You should also re-verify whenever there's a material change in the customer's circumstances or risk profile.

What is a Politically Exposed Person (PEP)?

A PEP is someone who holds, or has held, a prominent public position, including government officials, ministers, members of parliament, and ambassadors. Since PEPs often have greater access to public funds and financial influence, KYC verification requires additional scrutiny through Enhanced Due Diligence.

Can I outsource my KYC process?

Yes, many businesses use third-party KYC service providers. However, you remain ultimately responsible for compliance. Ensure your provider meets EU and Malta regulatory standards, provides comprehensive audit trails, maintains appropriate data security, and allows you to oversee and audit their processes.

What are the penalties for KYC non-compliance in Malta?

Penalties can be severe. The EU's new AML package allows maximum financial penalties up to 10 percent of the entity's previous annual turnover or €10 million. Beyond fines, non-compliance can result in reputational damage, loss of banking relationships, and in serious cases, criminal prosecution.

How does KYC apply to cryptocurrency and virtual assets?

The new KYC 2025 standards require mandatory electronic identification of clients using digital onboarding and remote verification. For crypto businesses specifically, companies must obtain CASP authorization with stricter requirements including local substance in Malta, minimum capital, AML/KYC obligations, and client asset safeguarding.

What is beneficial ownership and why is it important?

Ultimate beneficial owner identification reveals the individuals who ultimately own or control a business. EU regulations are tightening thresholds to 15% plus one share for ownership interest, or 5% plus one share for high-risk sectors. Identifying UBOs prevents money launderers from hiding behind complex corporate structures.

Do I need different KYC procedures for business customers?

Yes. Individual customers undergo KYC, while business customers require KYB (Know Your Business). KYB delves into operational and structural setup to verify that a company is authentic and not fraudulent, involving higher volumes of checks due to the nature of corporate structures.

Can I use customer data collected during KYC for marketing purposes?

This is strictly regulated under GDPR. While you collect customer data for compliance purposes, using it for other purposes requires separate consent and must comply with data protection regulations. It's best to keep KYC data separate from marketing databases and only use it for compliance, risk management, and regulatory reporting.

What should I do if I discover a customer is on a sanctions list after onboarding?

You must immediately freeze their assets and cease all transactions. The UNSC regulations require that member states freeze the funds and assets of listed individuals and groups immediately. Report the situation to the FIAU and follow their guidance. This is why ongoing monitoring is critical; sanctions lists are updated regularly.

What are Ultimate Beneficial Owners (UBOs) and how do I verify them?

UBOs are individuals who ultimately own or control a business. The threshold has been lowered to 15% plus one share for most businesses, or 5% plus one share for extractive industries or high-risk companies. Once identified, verify UBOs using the same KYC standards applied to individual customers to ensure the business is not masking undisclosed or high-risk owners.

Are there exceptions to KYC requirements?

Very limited. Malta's PMLFTR Regulations prohibit individuals or companies from keeping anonymous accounts or accounts in fictitious names. While simplified due diligence exists for very low-risk situations, complete exemptions are extremely rare in the EU regulatory framework.

Need help implementing or improving your KYC program? Contact speedyDD to learn how we can help your business maintain audit-ready compliance while scaling efficiently in Malta and across the EU.

P.S. This guide is for informational purposes only and does not constitute legal advice. Regulations change frequently; always consult with qualified compliance professionals and legal advisors for your specific situation.