Decoding KYC: From Guidelines to Global Guardianship

If you lease equipment or vehicles, you must have heard KYC several times. KYC, however, is not just another regulatory box for you to check. KYC, which stands for Know Your Customer, is an international financial compliance. KYC began as a compliance tool for banks but has expanded to encompass all forms of finance, including lease financing.

KYC enables organizations to ensure they are not unknowingly facilitating fraud, money laundering, or other illegal activities.

Let us take a closer look at how KYC has evolved and look at what KYC means for lessors operating in a regulated international marketplace.

The Early Years: Origins of KYC in Financial Governance

KYC has roots dating back to the early 2000s when financial systems worldwide began acknowledging the necessity for enhanced standards around customer identification. The proliferation of financial crimes like money laundering, tax evasion, and terrorist financing (many through unsuspecting financial institutions) served as an impetus for change, the latter two being more urgent given increasing international tensions.

International organizations such as the Financial Action Task Force (FATF) began establishing the groundwork for a unified global effort. The concept that institutions know the counterparties they deal with is simple, but complex to implement.

In 2001, in a wholesale effort to strengthen national security following 9/11, the United States enacted the USA PATRIOT Act. In Section 326, the law mandated a Customer Identification Program (CIP), requiring financial institutions, including those in lending and leasing, to employ specific measures when verifying the identity of their clients.

The European Union soon followed suit. Building on these themes, the Third Money Laundering Directive in 2005 for the European Union established requirements for member states to impose identification, verification, and record-keeping requirements on financial services entities, including lessors.

As these frameworks evolved, it became evident that leasing companies and other financial actors could not function without adhering to KYC regulations.

From Concept to Compliance: How KYC Took Root Globally

A local project quickly grew into a global movement. By 2012, FATF had improved its recommendations to acknowledge that KYC must be more than basic identity verification. Institutions were required to use a risk-based approach, taking their cue from the parties assessed risk, based on multiple factors:
● Industry
● Location
● Transactional volumes
● Business purpose

For lessors of vehicles and equipment, this was a substantial change. No longer was it sufficient to collect the party’s ID and utility bill. Knowing who the client is, the source of funds, what they intended to do with the leased asset, and what risk their profile posed to the company was now critical.

The same rules began to emerge in Asia, the Middle East and Africa. Leasing companies became part of a global compliance regime as countries began aligning FATF recommendations with their domestic policies. Lessors could no longer avoid regulatory scrutiny, whether they were operating in their domestic jurisdiction or extraterritorially.

KYC in Practice: What Lessors Must Do

The true challenge for many lessors in developed economies, and especially those in emerging or mid-market economies, has been putting KYC theory into business practice.

For activating any lease, the customer is required to provide a reasonable bundle of identification documents, depending on the type of entity. As a minimum, the customer must produce IDs issued by a government body, incorporation documents, a tax registration number, and a declaration of beneficial ownership.

Nevertheless, identity verification is merely the start. Lessors need to ensure that the party’s source of funding is not fraudulent. When leasing vehicles or equipment, this often means understanding how the customer earns income, why they are leasing the asset, and if there are any red flags (such as high-risk jurisdictions, or complex ownership).

The requirement for ongoing due diligence makes things even more complicated. KYC is an ongoing obligation. Lessors are required to monitor tenant behavior, and they must be especially concerned about lease modifications, lease renewals, and payments.

There will be a need to build systems to monitor discrepancies, train teams to identify risk events, and keep audit trails for regulatory oversight.

The Digital Shift: Technology’s Role in KYC Transformation

Manual form submissions and copies of documents are quickly becoming a thing of the past. As leasing becomes digital, so is KYC. Technology has fundamentally changed the ways lessors can identify their customers.

Digital KYC (eKYC) platforms, often use third-party verification or biometrics, allow for real-time identity document collection and verification. These systems provide not only speed and accuracy but also help create a secure digital trail.
For equipment and vehicle lessors competing in markets, there are two key benefits. First is the client experience. Lessors can implement less friction during onboarding, allow quicker approvals, and provide a more seamless overall transaction. Second is compliance, which can be more consistent and documented, reducing the chances of a fine.

Secondly, machine learning and artificial intelligence are effective at detecting patterns of consumer behavior and enforcing which patterns are abnormal compared to the party’s normal behavior. The algorithm will automatically alert compliance teams, for instance, if they detect a sudden switch from domestic accounts to foreign accounts in lease payments, or if they see a customer using a service different from their established usage it raises questions.

Again, technology is not the answer. Lessors need to be mindful that their digital KYC measures must also comply with data privacy laws, such as the CCPA (California Consumer Privacy Act) and the GDPR (General Data Protection Regulation). Lessors must also conduct regular audits of their systems or have third-party experts audit the systems to confirm that the algorithms work as designed.

KYC Challenges in Leasing: Risk, Regulation, and Resources

Leasing companies face several obstacles to implementing KYC. Perhaps the most challenging of these obstacles is the continual shifting of regulatory expectations. For lessors without the compliance infrastructure of a major financial institution, complying with AML/CFT regulations is complex.

They face limited resources, especially smaller and mid-sized lessors. It is one of the reasons they have to prioritize fulfilling their obligations while managing costs.
Customer friction is another issue to consider. Some lessors may view KYC as going beyond bureaucracy to be invasive, especially the SMEs. An ineffective KYC process could detrimentally affect conversion rates if lessors are not careful. Lessors must find ways to keep the KYC process as easy and customer-friendly as possible without sacrificing security or compliance.

Cross-border leasing adds another complication. KYC requirements are not uniform across jurisdictions. A single document that satisfies the regulatory requirements of one country very well could only be one of the other documents sufficiently good enough to be possibly a responding document in another country.

Toward Global Guardianship: The Future of KYC in Leasing

In future contexts, KYC will be a competitive strategy rather than a strictly enforced standard. Consumers are now more aware of their digital identity and expect the companies they engage with to protect it. At the same time, regulators are under scrutiny to hold companies to stricter standards designed to increase traceability and transparency.

Simply checking boxes and/or box-ticking is no longer relevant to KYC. Businesses need to protect digital identities.

Compliance and legal cannot be the only departments out managing KYC situations. All parts of the organization, IT, customer service agents, and product development managers need a clear understanding of how their actions support KYC results.

It is necessary to ensure consistency when verifying and sharing customer information in cross-border situations. As international frameworks become more widely adopted, lessors will find it easier to do business with foreign customers.

Conclusion: Embracing KYC as a Core Leasing Capability

Recognizing KYC as a global custodial function that protects both individuals and institutions is more meaningful than knowing a set of rules. KYC is more than a legal obligation to car and equipment lessors. From onboarding to contract termination, KYC is a key function, it is present at every stage of the leasing lifecycle.

Customers, regulators, and partners expect more transparency and accountability. Leasing companies that comply and invest in scalable solutions to maintain a commitment to KYC rules are not just withstanding the wave of regulation, they are enabling longer-term growth and trust.

Lessors now ask, “How do we lead?” versus, “How do we comply?” Since KYC is continuing to evolve. The solution will be a combination of expertise, technology, and a commitment to responsible finance, one client at a time.