Verification Requirements in Financial Institutions of the UAE

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Banking Secrecy and KYC Standard

KYC is a fundamental principle of financial institutions, requiring them to verify a client's identity before conducting a transaction. This serves the purposes of fighting corruption and fraud and reduces risks. However, KYC does not support the maintenance of client anonymity and carries risks of unintentional disclosure of personal information to third parties.

What is KYC

Know Your Customer (KYC) is a mandatory identity verification procedure carried out by financial institutions such as banks, investment funds, stock exchanges, insurance companies. Without KYC, the opportunity to use the services of a financial institution will be denied.

In the UAE, KYC rules are applied to both foreign investors who want to start a business or place capital in the banks of the United Arab Emirates and local residents.

The main goal of KYC is to combat illegal activities, tax evasion, obstructing crimes, and identifying potentially suspicious behavior at early stages to prevent money laundering, financing of terrorist organizations, etc.

Usually, information for identity verification is required during registration, i.e., when opening an account, buying and selling securities, concluding an insurance contract, etc. If personal details change (name, surname), information for KYC must be provided.

How KYC Works

KYC acts as a kind of database, information for which is collected from different sources. Specialized software in real-time monitors data and assesses the risk level on several parameters, minimizing the probability of false responses.

The procedure involves obtaining personal information from different sources and analyzing it in several stages. Software sends requests to a number of third-party organizations (depending on the depth of the check). These institutions compare the received data with existing information to establish the truthfulness of information on all parameters.

Advantages and Disadvantages of KYC

Adherence to KYC principles is necessary, although not welcomed by users who value their privacy and seek to maintain anonymity. KYC ensures security, especially in the case of irreversible transactions (for example, in blockchain). Other advantages include:

  • The system promotes more responsible lending and risk management for financial institutions;
  • Trust from various institutions – parties using KYC work directly with international payment systems and major banks;
  • Low transaction costs (for example, for crypto exchanges and online exchangers, this is ensured by working directly, without intermediaries).

For clients, the main advantage of KYC is security. If someone tries to withdraw money from the card, the suspicious operation will be blocked, and funds will be returned to the lawful owner. This even works with crypto exchanges, as most of them now adhere to KYC standards (whereas earlier, tracking fraudulent transactions in crypto was impossible).

The disadvantages of implementing KYC for financial institutions include the need to pay for setting up and supporting a large amount of specialized software, hiring additional staff, regularly spending money on training, and following all updates in the regulatory field. Also, due to following KYC, there are costs for data storage and the need to regularly undergo security audits.

KYC requirements must be observed every time a person interacts with a new financial institution – a bank, a financial exchange, an insurance company, etc. However, there is no data exchange related to KYC between different institutions – this complicates interaction.

For clients, the main disadvantage is the discomfort of financial institutions having access to personal data. Furthermore, clients are forced to spend time on verification in the crypto industry and other financial institutions. This can take from 10 minutes to several hours.

KYC in Crypto Transactions

International KYC and AML requirements do not support anonymity, including when dealing with cryptocurrencies. For example, in the UAE, cryptocurrencies with enhanced anonymity (Verge, Monero, Dash, Zcash) are prohibited altogether. When working with others, KYC rules apply.

The UAE authorities are concerned about the risks associated with the circulation of virtual assets: fraud, which cannot be investigated, financing of terrorist and extremist organizations, the legalization of money obtained illegally. The result is a desire to tighten supervision over the activities of companies conducting transactions with crypto.

In Dubai, the Virtual Asset Regulatory Authority (VARA) operates, which regulates crypto services registered in the emirate. The structure appeared as part of the initiative to create a favorable space for the active development of cryptocurrencies.

Financial institutions planning to work with cryptocurrencies in the UAE must also obtain special permission from the Central Bank of the UAE (CBUAE) and identify the identities of all clients in accordance with AML requirements.

Besides general client verification, before establishing any relationships, virtual asset providers (banks, exchange points, insurance companies, cryptocurrency exchanges) must understand the nature of the client's business. This involves not only establishing identity but also assessing the volume and type of transactions with virtual assets, monitoring potentially suspicious transfers.

Privacy and Anonymity Maintenance

Among advocates of financial transaction anonymity (especially concerning cryptocurrencies), the necessity for identification is perceived negatively. Verification requirements and transaction control equate state and private banks as a controlled system and cryptocurrency exchanges following KYC.

Financial institutions guarantee data security, but many privacy advocates are unwilling to take risks. For some institutions, assumptions about disclosing client data to third parties are not unfounded. For example, many crypto exchanges (probably due to a lack of funds) do not use secure information protection methods. Additionally, there is occasional information that hackers gain access to data due to insufficiently secure or unlicensed (not timely audited) software.

How to Go Through Identification

Depending on the organization's rules, the procedure can vary, but always pursues the same goals: collecting and verifying information about the client, their financial status, continuous monitoring of operations. Usually, KYC verification includes the following stages:

Customer Identification Program (CIP). Involves collecting and confirming basic personal data of the client through additional sources. Banks request passport details, phone number, and other information when opening an account. Crypto exchanges and stock markets proceed to verification after registration, phone, and email confirmation.

Due Diligence (DD). In some cases, a decision may be made for a deeper check of client data and request for detailed information about their biography. The main goal is risk analysis. For example, if a person was previously a defendant, suspect, or witness in any case, it will become known.

Continuous Monitoring. Continuous automatic control ensures timely data acquisition. Transfers to countries with increased terrorist activity (using the list of state sponsors of terrorism, corresponding to the official position of the US State Department) are under suspicion. Depending on the results of internal investigation, the financial institution may report a violation to law enforcement or the regulator.

The verification process may vary slightly across different platforms. Typically required data includes:

  • Confirmation of communication methods: phone number and email address;
  • Full name, date and place of birth;
  • Home address, postal code;
  • Passport details.

A bank statement or tax return, copies of paid utility bills for proof of actual residence (for companies – e.g., office lease agreement) may be required. When interacting with financial institutions in the UAE, data from the document confirming legal stay in the country (passport with a resident visa, Emirates ID) is also needed. Checking all documents can take several days.

Levels of Privacy and Anonymity

Different institutions set various levels of verification policy. Based on the depth of KYC implementation, one can distinguish:

  • No KYC requirements (for example, some crypto exchanges do not request identity documents at all);
  • Basic check (there is a requirement to provide limited information);
  • Full procedure (identification proof is required – this is how banks, stock exchanges, insurance companies, etc., operate).

KYC and AML: Differences

AML is a policy against laundering money obtained illegally, financing terrorist organizations, and creating weapons of mass destruction. Like KYC, AML involves identification, storage of client information and their action history, transaction monitoring.

KYC verification is part of AML as an overall package of measures. It is necessary to comply with KYC policy to meet AML requirements. These security standards complement each other.

Is it Possible to Maintain Confidentiality and Security

In the UAE and many other countries where KYC standards operate, financial institution clients have no choice but to verify their identity. Otherwise, an individual will not be able to use standard services for individuals and businesses: open an account, take out a loan, insure property, exchange dirhams, rubles, and other currencies, order a collection service.

Full confidentiality cannot be maintained – this is the flip side of security. Following KYC/AML standards is necessary as it ensures protection against fraudulent actions. At the same time, banking secrecy is maintained – if the system is set up correctly and sufficiently protected, information about clients and their transactions will not reach third parties.

De-anonymization becomes the norm in all areas, including the crypto industry. Clients who choose full anonymity must understand that they take on additional risks, such as the total loss of funds due to information falling into the hands of third parties.

In the cryptocurrency market, there are exchanges that allow anonymous work, for example, DEX – decentralized trading platforms. To date, about 200 DEXs operate. However, all of them are registered outside the UAE, where operations with cryptocurrency are regulated. Centralized exchanges (CEX), such as Kraken, Coinbase, Bitfinex, etc., necessarily require verification, as do other financial institutions.

Experts of The Level Consulting know the specifics of UAE legislation, including in the field of banking secrecy, security, and confidentiality. We can help you open an account in a UAE bank for yourself or for business, and register such complex businesses as a commercial bank, insurance company, financial marketplace, exchanger, or cryptocurrency exchange.

Our services also include legal support, transaction preparation, nominee service, accounting, and audit of existing businesses, registration, and certification of products for sale in the UAE, etc. Schedule a consultation to learn about the specifics of opening a business or relocating to the UAE.

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