KYC in forex trading: What is it, what's its purpose and the verification process guide

In this article, you will find everything you need about KYC. Among the topics covered, you will be able to find:

• What is KYC, and how it works
• Why it is required
• Why it is important
• How the KYC verification process works
• How to speed up the KYC process
• Problems you may run into

What is the KYC procedure?

KYC stands for “Know Your Customer,” and it is an often mandatory process that requires forex brokers to verify the identity of their traders by asking them to upload documents such as ID cards or other sensitive information.

The KYC procedure became necessary because forex, not being a centralized market, is a market where counterparties can remain anonymous.

This anonymity can result in traders committing illegal acts or laundering money.

KYC, therefore, allows a face to be put on traders in the forex market, and as a result, this helps to:

• Fight money laundering
• Detect people connected or having contact with terrorist cells
• Punish those who commit fraud and/or financial crimes

Why do forex brokers require the KYC?

Forex brokers require KYC to comply with the AML laws (Anti Money Laundering) of the state in which they are based and to categorize their traders based on their experience in trading.

To date, almost all brokers apply KYC for AML issues. This adds a layer of protection to traders. In fact, after KYC, the only user who can request money withdrawal is the owner of the trading account. In addition to preventing money laundering, this prevents scams against the trader.

Brokers who categorize their traders, on the other hand, are a minority. They do so if they are based in countries that require them to categorize their clients between Retail and Professional.

Some brokers do not require KYC; however, it is not advisable to use them because they offer no protection to their traders.

Forex brokers rarely require KYC to open a demo account, as no real money is involved. If you want to upgrade from a demo account to a real one, KYC will be required.

What KYC information do forex brokers require?

Forex brokers generally require two types of information:

• Information for AML: first name, last name, residential address, etc.
• Information for categorization: user’s trading experience and current economic situation

The process may vary slightly from broker to broker, or in case you plan to open a business trading account.

KYC procedure for retail and professional Forex accounts

This process applies to all individuals who wish to open a personal trading account, regardless of their experience.

To open a personal trading account, you must provide the Forex broker with the following information.

AML information: you must provide the forex broker with proof of identity and address.

Proof of identity can be satisfied by sending the broker an official ID issued by your state of residence, such as:

• ID card
• Your passport
• Your driver’s license

Proof of address can be satisfied by sending the broker an official document showing your name and street of residence, such as:

• A utility bill
• A bank statement

Profiling information: this information will only sometimes be asked of you, but the forex broker needs it to see if you can be categorized as a professional trader.

Professional traders can access additional services than retail traders. The questions you will be asked will relate to:

• Your knowledge of how forex trading and CFDs work
• Your current economic situation

KYC procedure for corporate and business forex accounts

This process applies if you open a trading account on behalf of a corporation or if you want to become a Forex account manager. Opening a corporate account is much more complex than required for retail and professional traders.

You need to provide basic information about the business:

• Name of business
• Country of incorporation
• Market in which the company operates

For majority shareholders (not always mandatory for minority shareholders as well), you need to provide some additional documentation:

• Passport
• Utility bill or bank statement
• W-8 form

Depending on the broker, the following information may be required

• A recent extract from the company registry
• Memorandum and Article of Associations
• Share register
• Group structure chart
• Proof of business address in the name of the company
• Recent bank statement of the company
• Latest financial statements (audited if available)
• W-8 form
• Legal Entity Identification (LEI) code

How much time does the KYC verification take?

Most forex brokers take up to two business days to verify your trading account.

To speed up the KYC process, you can provide your passport as proof of identity. The passport is a document with international standards, which greatly speeds up verification.

What happens if the KYC information provided is wrong?

If you provide the wrong documents, the forex broker will point it out and ask you to try again with another type of document.

If you move and change your residential address, you must promptly provide updated information to the forex broker.

If you voluntarily provide outdated or incorrect information, the forex broker may proceed to freeze your trading account or even close it in the most severe cases.

Is the KYC process free and easy to follow?

The KYC procedure is straightforward to carry out. Forex brokers allow it to be done totally online, and it is free.

Typically forex brokers have a self-explanatory wizard on how to verify your trading account.

If you need help with verifying your Forex trading account, you can still contact support, who will guide you further.

Is the KYC mandatory to open a Forex trading account?

KYC, in most cases, is mandatory to open a forex trading account. However, if you open a demo account, the broker will not ask you for any documents since the trading account does not use real money.

When you open a forex trading account, you are, in fact, opening an account through a bank that the forex broker relies on. Bank accounts, in fact, always need documentation to be opened.

So until you decide to open a real trading account, you do not have to provide any information about yourself other than your e-mail.

Is it illegal to trade with a Forex broker without KYC?

Using a forex broker that does not require KYC is legal for traders in most countries. However, it is illegal for forex brokers to accept clients who reside in countries where AML laws are enforced.

For example, traders who have residency in the United Kingdom can open an account with a broker who does not require KYC if they declare any gains and losses from trading.

However, the site of the broker that accepted the UK traders may be blocked by the FCA, which is the body that monitors financial markets in the UK.

Can you withdraw money from your Forex account without KYC?

You must follow the KYC procedure to deposit and withdraw money from your trading account. However, if the broker does not require KYC, you can still withdraw money but only do so in cryptocurrencies.

In fact, brokers who do not require KYC do not use traditional payment methods.

If brokers process payments in fiat currencies (Euro, Dollar, Pound, etc.), they must rely on traditional banking institutions.

The cryptocurrency market, however, still remains unregulated; consequently, it is possible for brokers not to require KYC if they pay in cryptocurrency.

Pros and cons of KYC in Forex trading

Pros

• More protection for traders
• More protection for brokers
• Fiat currency deposits and withdrawals

Cons

• Unregulated brokers could resell traders’ information to third parties
• Trading account opening is slower