Knowledge about a customer is necessary to determine the money laundering and terrorism financing (ML/TF) risk that the organisation may face if providing a designated service to that customer. The requirement to establish and verify the identity of a customer before providing a designated service to that customer is a key obligation of the AML/CTF Act. Customer identification is also a core risk management process that characterises ML/TF risk management. Customer identification is given prominence as it forms the whole of Part B of the required AML/CTF program.

The process of a reporting entity learning about its customers is called know your customer (KYC). The two essential elements of KYC are:

• adequately verifying your customer's identity
• developing an understanding of who your customer is and their expected financial activities.

Appropriate KYC measures are determined through risk analysis of the customer relationship, covering:

• the type of customer
• the methods used to deliver the designated services
• the types of products or services provided
• whether the customer operates in foreign jurisdictions that have less stringent AML/CTF legislation than Australia, or if the country is identified as being at high risk for ML/TF.

Once these risks have been assessed, businesses will need to consider the level of identification and verification procedure that will match the level of assessed risk. These practices will need to be in a documented or electronic format that can be shown to AUSTRAC if necessary.

Like other elements of your AML/CTF program, customer identification procedures may be able to be incorporated or adapted into existing business practices. An evaluation of existing practices can identify gaps in customer identification procedures that may expose your business to be an easy target for use by criminals to launder illegal funds and/or fund terrorism.