Services A Guide to “Know Your Customer” (KYC) Compliance for 2025
"Know Your Customer" (KYC) is an essential regulatory requirement for businesses, particularly within the legal and financial sectors, aimed at verifying the identity of clients to prevent illegal activities such as money laundering and terrorist financing. This guide provides a detailed overview of the KYC requirements in the UK for 2025, highlighting key aspects, regulations, and best practices.
What Is KYC?
Know Your Customer (KYC) refers to the process by which businesses can check the identity of their customers and their situations. This is essential to support compliance with anti-money laundering (AML) laws and counter-terrorism financing (CTF) measures, thereby protecting the legal system from misuse.
What Type of Businesses Does KYC Apply to?
KYC regulations apply to businesses that are particularly vulnerable to the facilitation of illegal financial activities due to their involvement in the handling and processing of potentially large financial transactions or cash. Key industries where KYC applies include:
- Legal & professional services
- Real estate
- Banking and financial services
- Insurance
- Fintech and digital payments
- Investment and securities
- Gambling and gaming
- Money transfer services
- Telecommunications
- Dealers in precious metals, gems or high-value goods
These industries often act as intermediaries in transactions, making them susceptible to misuse by clients engaging in illegal activities such as money laundering, tax evasion, or fraud. To prevent this, KYC requirements mandate that businesses verify the identity of their clients, assess risks, and report suspicious activities through SARs (Suspicious Activity Reports).
Within the legal sector, businesses and professionals are required to comply with KYC requirements, in particular for AML concerns, in areas of work including:
- Conveyancing and Property Law Firms: Involved in buying/selling real estate - a high-risk area for money laundering.
- Trusts and Estates Practices: Managing trusts or estates often requires enhanced due diligence owing to the risks of illicit activity.
- Solicitors: Engaged in areas like corporate law, estate planning, and probate, where KYC procedures help ensure transparency and legal compliance.
- Legal Consultants: Providing advisory services in financial or corporate law, they must verify the identities of clients to prevent involvement in illegal financial activity.
- Litigation and Arbitration Practices: Handling large settlements and financial disputes, where KYC is critical to verify clients.
- Tax advice: Advising clients on taxation management activity which often involves large amounts of money, estates and transactions.
What Legislation Does KYC Fall Under?
KYC measures most notably fall under two parliamentary legislations for AML: MLR 2017 and POCA 2002. Let’s take a look at how they apply to each one:
- The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (often referred to as MLR 2017) is concerned with the verification of customer identity and the assessment of money laundering risks, particularly for politically exposed persons (PEPs), clients from high risk jurisdictions, complex matters and other situations where enhanced due diligence (EDD) is needed. Therefore, continuous surveillance of customer transactions to detect unusual activity is required.
- The Proceeds of Crime Act 2002 (POCA) is one of the primary pieces of legislation tackling money laundering in the UK. Under POCA, businesses are required to file SARs with the National Crime Agency (NCA) whenever illegal financial activity is suspected. POCA provides the legal framework for confiscating proceeds of crime if convicted of money laundering or related offences.
Who Regulates KYC?
The UK has a robust regulatory framework governing KYC requirements to ensure compliance with AML and CTF regulations. Let’s take a deeper look at the regulatory bodies related to KYC, and the bodies to which suspicious activities should be reported:
KYC Framework from Regulators and other bodies
The Solicitors Regulation Authority (SRA) is the UK’s regulatory body for the legal sector and mandates that law firms and solicitors implement effective AML procedures as part of their KYC obligations. Law firms must be clear as to who the client actually is so as to provide any legal advice to them and must also verify the identity of clients to prevent involvement in illegal activities. And, they must assess the source of funds in transactions and be alert to source of wealth to ensure they are not facilitating any financial crimes. Legal professionals are required to conduct risk assessments for all clients, focusing on the level of money laundering and terrorist financing risks they may present.
The SRA actively monitors law firms' compliance with AML and KYC obligations through inspections. Firms must have comprehensive policies and controls in place for identifying and mitigating risks related to money laundering, and they must provide regular and appropriate, tailored staff training to drive AML compliance and how to identify suspicious activity. The SRA has the power to impose penalties on law firms and on individuals that fail to meet their KYC and AML obligations, through fines, practice restrictions, and, in severe cases, suspension.
The Legal Sector Affinity Group (LSAG) consists of regulatory and representative bodies for legal services in the UK, such as the Law Society. Approved by the HM Treasury, LSAG provides guidance on AML regulations for firms supervised by the SRA. This guidance is split into two parts; AML guidance for the legal sector, and AML guidance for barristers, company service providers, and notaries.
The Financial Conduct Authority (FCA) is the UK's financial regulatory body and imposes additional KYC and AML obligations on financial firms. The FCA ensures that senior management is responsible for implementing and maintaining effective KYC controls, encouraging businesses to adopt a proportionate risk-based approach to customer verification and due diligence. Much like the SRA, the FCA has the power to impose fines, sanctions, and restrictions on businesses that fail to meet KYC requirements.
Reporting Body
The National Crime Agency (NCA) is the UK’s central agency for investigating serious and organised crime. Under the KYC regulatory framework, businesses must submit SARs to the NCA if they suspect that a customer is engaged in money laundering, fraud, or terrorism financing. In certain cases, businesses must obtain consent from the NCA before proceeding with a particular transaction that they suspect may involve criminal proceeds.
Core Components of KYC
There are typically three main components (often known as “pillars”) to KYC:
Let’s take a closer look at each component:
1. Customer Identification and Verification
Businesses must collect and verify essential information about their customers, in document or digital form, including:
- Full name
- Date of birth
- Residential address
- Government-issued identification document(s)
Identity verification must be carried out using reliable and independent sources, such as official documents (passports, utility bills) potentially also through electronic verification systems, in order to consider the authenticity of the information provided.
2. Customer Due Diligence (CDD)
Required for most customers, Regular or Standard CDD involves verifying the customer's identity and assessing their risk of involvement in money laundering or other financial crimes, as well as considering the source of funds or source of wealth.
Enhanced Due Diligence (EDD) is applied to high-risk customers, such as politically exposed persons (PEPs). EDD involves more rigorous checks, including:
- Obtaining senior management approval for establishing or continuing a business relationship.
- Conducting more detailed monitoring of the customer's transactions.
Simplified Due Diligence (SDD) permits a lesser range of checks, but can only be applied in a limited set of circumstances, such as when dealing with a client that is a UK PLC.
Ongoing Monitoring
KYC measures are not just one-off checks; R28 of the MLR requires businesses in scope to continuously monitor customers to detect unusual or suspicious activities that may indicate a financial crime. Ongoing monitoring includes periodically reviewing the customer’s profile and transaction history to ensure that the risk assessments remain accurate and up-to-date. Reviews may be triggered by significant changes in a customer’s transaction patterns, new high-risk factors, or legal/regulatory updates.
Digital KYC (eKYC)
Advancements in technology (referred to by the FCA as “RegTech”) have led to the increasing adoption of Electronic ID/Verification, known as “EID/V”. This uses modern IT systems and data to support processes to drive accuracy and efficiency in support of KYC and monitoring, including the following:
- Biometric Verification: Utilising facial recognition or fingerprint scans for identity verification.
- Document Verification: Digital verification of documents through AI and machine learning technologies.
- Video KYC: Conducting real-time video interactions for customer verification.
EID/V processes are becoming increasingly useful for legal firms, allowing contracts or purchases to be concluded quicker due to shorter verification delays, improving customer experience. This, in turn, allows firms to benefit from higher conversion rates. These processes, although not yet as sophisticated as they may well be soon, can help businesses to augment KYC measures, also reducing the risk of penalties and punishments.
Data Privacy and Security
Protecting the privacy and security of customer data is paramount to firms in the legal sector and beyond. Therefore, strict measures must be adhered to regarding GDPR compliance and cyber security measures. Firms are legally required to securely store all customer information and only use it for authorised purposes. In addition, robust security protocols must be implemented to safeguard data from breaches and unauthorised access.
However, data shows not all law firms have sufficiently robust cyber security measures in place. Between January to March 2024 alone, 2,970 incidents were reported to the Information Commissioner’s Office (ICO), 27% of which were cyber incidents (involving a third party with malicious intent).
Challenges and Best Practices of KYC
There are several challenges associated with KYC requirements.
Challenges
- Evolving Regulations: KYC regulations are frequently updated to respond to new threats. Keeping up with evolving laws can be difficult and costly for businesses.
- Onboarding Delays: Lengthy KYC processes can slow down the onboarding of new customers, leading to frustration and potential loss of business.
- Detection Failures: Poorly calibrated systems may fail to detect high-risk customers, leaving businesses vulnerable to financial crimes.
- Data Quality: Poor data quality, such as outdated or incorrect information, can undermine KYC processes and result in regulatory breaches or penalties.
However, as technology develops, and tailored AML training services become more widely available, there are several opportunities for firms to overcome or mitigate these challenges.
Best Practices
- Regular Training: Ensuring that staff are up-to-date with KYC regulations and procedures, for example, knowing what red flags to look out for and who to report to.
- Technology Integration: Leveraging AI and machine learning (ML) for efficient and secure KYC processes, detecting suspicious patterns, and reducing false positives.
- Risk-Based Approach: Tailoring due diligence measures, based on the customer’s risk profile, filtering standard CDD and EDD where appropriate.
- Regulatory Collaboration: Engaging with regulatory bodies to stay informed about changes in legislation and best practices.
- Internal Audits: Conduct regular internal audits to ensure that your KYC processes comply with regulatory requirements and are functioning effectively.
- Data Privacy Compliance: Ensure KYC processes comply with GDPR, by collecting only the necessary information and securely storing it with appropriate encryption and access controls.
The Future Trends of KYC
The future of KYC is expected to be shaped to a significant extent by the adoption, integration and evolution of RegTech solutions, combined with the rising presence of AI. These innovations will enhance automated identity verification, streamline onboarding processes, and improve real-time monitoring of transactions, reducing the burden on businesses while increasing accuracy.
Currently, one of the biggest issues for UK-based firms is facilitating overseas transactions. However, the development of cross-border digital KYC platforms is anticipated to simplify compliance for multinational businesses. As financial crimes evolve, the focus on predictive analytics and biometric technologies will become critical to preventing fraud and enhancing risk management.
Stay Informed about Evolving Regulations
At PDA Legal, our expert services regarding AML are designed to ensure that your firm is thorough with its handling of clients, avoiding the risks associated with weak KYC measures. Our AML services touch upon CDD measures, designated persons, red flags of financial crime and more. To help your firm maintain compliance, get in touch with us today to discuss how we can help you.
