Trading financial instruments can be a lucrative business, especially if you’re experienced and well-informed enough. But there are also risks involved to traders. The risk of fraud, for example, is sadly ever-present – while the prospect of making an error of judgment lurks around every corner. For brokers, meanwhile, one of the main risks is that they will get into legal trouble if people attempt to launder money using their site. For that reason, “know your customer” – or KYC – tools are there to help brokers combat this risk and keep their sites safe for all. This blog post will explore what KYC tools are and look more closely at how brokers use them.
The goal
KYC tools are in place for a simple reason: to prevent crime on the broker’s site. This crime could take one of many forms, like fraud or identity theft. Commonly, however, it’s money laundering: the practice of scrambling the traceability of the proceeds of crime by investing it or running it through another system. In broker speak, the term often used is “compliance”: this indicates the reality of the motivations behind KYC, which is to reduce the risk that the broker could be accused of failing to adhere to the protection laws in place in the jurisdiction in which it operates.
In practice
Perhaps the most obvious example of a KYC tool from a trader’s perspective is the identity verification process they usually need to go through. A broker can ask for everything from copies of documents to detailed information about your life and finances, and this is usually to satisfy one KYC requirement or another. But there’s also a whole suite of KYC options out there, such as activity monitoring tools that automatically refer suspicious cases – and it’s likely that most traders will never see the full extent to which brokers investigate or monitor their clients.
For traders
While KYC tools are often instituted for the legal protection of the broker, it’s also the case that legitimate traders have an interest in using them too. Suppose a broker platform that you were using was being investigated by the authorities for potential money laundering. In that case, you could find your financial affairs being looked over even if you had nothing to hide – or, worse, the broker with which you’ve built up a relationship could be shut down.
For that reason, it’s always worth heading over to a trusted site like We Compare Brokers and checking out broker reviews like this Trade Nation Broker Review in advance – and reading up on exactly what sort of KYC tools the broker has in place.
In short, KYC tools are an essential part of keeping the trading ecosystem safe – especially in this age of potential terrorism financing and money laundering risks. And while KYC systems are there primarily to keep the broker legally protected, they’re also there to look after you as a trader and ensure that your contributions to the trading ecosystem you’re a part of are also being safeguarded.
