Silicon Valley Legal Bible(26)KYC Know Your Customer
After incorporating companies, founders often face stringent KYC (Know Your Customer) procedures during bank account opening, requiring submission of highly sensitive documents (utility bills, lease agreements, financial statements). This raises three core questions:
What is KYC?
When is KYC required?
Why do Cayman Islands entities face exceptional scrutiny?
The Silicon Valley Codex: 42 Chapters
Legal Encyclopedia for Founders
By Xiaoxiao Liu, U.S. Licensed Attorney
1. Defining KYC
KYC ("Know Your Customer") originated from the 1970 Bank Secrecy Act (BSA). While frequently conflated with AML (Anti-Money Laundering), KYC is a subset of AML frameworks.
Global Regulatory Milestones
1989: Establishment of Financial Action Task Force (FATF) at the G7 Paris Summit, now the paramount AML/CTF (Counter-Terrorist Financing) authority. FATF codified the three-stage KYC protocol (detailed in Section 2).
2001: Post-9/11 USA Patriot Act significantly escalated KYC obligations for U.S. financial institutions.
2. The Three-Tier KYC Framework
2.1 Customer Identification Program (CIP)
Collects: Full name, physical address, date of birth, government-issued ID number.
2.2 Customer Due Diligence (CDD)
Implements risk-tiered verification:
Simplified Due Diligence (SDD)
Standard CDD
Enhanced Due Diligence (EDD)
2.3 Ongoing Monitoring (OM)
Continuous transaction surveillance post-account activation.
3. Cayman Islands' Regulatory Spotlight
Structural Risks
Tax-neutral jurisdiction status historically enabled opaque beneficial ownership structures.
Inherent vulnerabilities to layering and integration phases of money laundering.
Compliance Enforcement Timeline
2019: FATF rated Cayman's AML controls as "Low/Moderate" effectiveness
2021: Added to FATF **"Grey List"** for enhanced monitoring
2022: Included in EU **"Blacklist"** for strategic AML deficiencies
2023: Removed from both lists post-2019 Economic Substance Act reforms
The Silicon Valley Codex: 42 Chapters
By Xiaoxiao Liu, U.S. Licensed Attorney
