‍What is meant by ‘Know Your Customer’ (KYC)?

‘Know Your Customer’ refers to the process financial institutions and regulated businesses use to verify the identity of their clients and assess potential risks of illegal intentions, such as money laundering or fraud. The goal is to prevent financial crime and ensure compliance with legal regulations.

Given that many art dealers or professionals had worked with customers long before obligations under legislation increased, there can be the assumption that this only applies to new customers. The reality is that the obligations are applied to every customer and transaction, regardless of pre-existing familiarity.

‍

History and Evolution:

‍

KYC originated in the 1970s as governments worldwide tightened controls on money laundering and terrorist financing. Initially voluntary, a wave of legislation followed, with the USA’s Bank Secrecy Act [1970], the UK’s Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017) UK’s Proceeds of Crime Act [2002] and the EU’s first Anti-Money Laundering Directive, of 1991.

‍

Meaning and Importance:

‍

At its core, KYC ensures businesses know who their customers are, reducing risks of illicit activities. It’s a critical part of broader Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) efforts. For customers, it means providing documents and information to prove identity and source of funds.

‍

Key Steps in KYC:

‍

1. Customer Identification Program (CIP): Collecting and verifying official identification (passport, driver’s license).

‍

2. Customer Due Diligence (CDD): Assessing the risk profile of the customer through background checks and understanding the purpose of the relationship.

‍

3. Enhanced Due Diligence (EDD): For higher-risk customers, more detailed investigations are conducted.

‍

4. Ongoing Monitoring: Transactions and customer behaviour are regularly reviewed to detect suspicious activities.

‍

A range of terminology:

The UK’s Financial Conduct Authority (FCA) governs KYC practices, while the EU follows directives through the European Banking Authority (EBA). For example, in the UK, a Suspicious Activity Report (SAR) is filed to report suspicious transactions. Whilst, in the EU, a similar report is called a Suspicious Transaction Report (STR) — essentially the same, just different terminology depending on jurisdiction.

‍

What does it actually mean, in practice, for an art business?

‍

For an art business—whether a gallery, auction house, or dealer—applying KYC is essential to ensure transparency and protect against fraud or money laundering. Here are some practical ways to turn KYC principles into everyday practice:

‍

1. Establish Clear Customer Onboarding Procedures:
   Require all clients to provide valid identification (passport, driver’s license) before any transaction, especially for high-value sales. Maintain secure records to comply with data protection laws.

‍

2. Implement Risk-Based Customer Due Diligence:
   Assess customers based on their risk profile. For instance, new clients from high-risk countries or those making unusually large purchases should be subject to enhanced checks, including verifying source of funds.

‍

3. Train Staff on Compliance and Red Flags:
   Educate your sales and administrative teams about KYC requirements and suspicious behaviours—such as unusually complex ownership structures or reluctance to provide information—to ensure early detection of potential risks.

‍

4. Monitor Transactions Continuously:
   Keep track of transactions over time. For example, repeat purchases by the same client or payments via unusual methods should prompt a review.

‍

5. Report Suspicious Activity:
   Be prepared to file SARs (UK) or STRs (EU) with the relevant authorities if suspicious behaviour or transactions are detected. Establish clear internal protocols for reporting.

‍

6. Leverage Technology:
   Use digital identity verification tools and secure databases to streamline KYC processes while maintaining compliance with privacy regulations.

‍

To ensure you are meeting your obligations and keeping sales moving, use Arcarta. Book your complimentary consultation today.

‍