Companies in Germany have to comply with two levels of national and European Know Your Customer (KYC) requirements. They must either provide KYC documents to a third party or conduct checks on their own. In this article, you will learn about KYC documents, including which documents are required for a KYC check of private individuals and legal entities. We also explain which industries require KYC checks and how companies can overcome challenges.

What’s in this article?

• What are Know Your Customer (KYC) documents?
  
• What are the required documents for a KYC check of a private individual?
  
• What are the required documents for a KYC check of legal entities?
  
• What are the necessary documents for an extended KYC check?
  
• Which industries require KYC checks?
  
• What challenges do KYC checks pose for companies?
  

What are Know Your Customer (KYC) documents?

According to the 6th EU Anti-Money Laundering Directive and the national Money Laundering Act (GwG), companies in Germany must check the identity and economic eligibility of their customers—especially in regulated industries, such as the financial sector, real estate, and legal services. This process is called “Know Your Customer” (KYC) and serves to prevent money laundering and ensure compliance with regulatory requirements. Thorough KYC checks enable companies to meet compliance requirements while minimizing operational risks.

Identity verification is the main focus of KYC checks for private individuals. When it comes to legal entities, it is necessary to check ownership structures and economic authorizations. KYC documents provide the required information for this process. By systematically collecting and reviewing these documents, companies can identify and verify customers. At the same time, they can detect suspicious activities at an early stage and take appropriate countermeasures. KYC documents are a central component of effective risk management and a prerequisite for compliance with national and international compliance standards.

What are the required documents for a KYC check of a private individual?

The required documents for a KYC check depend on the type of customer. For private individuals (i.e., not businesses or organizations), the following documents are important:

Official identification document

An official identification document verifies the identity of the individual. This can include, for example, a valid identity card or passport. It is important that the document contains:

• A photograph
  
• Full name
  
• Date of birth
  
• Period of validity
  

Proof of residence

In addition to proof of identity, a business can ask for proof of residence—but the law does not require it. If provided, the document must confirm the individual’s current place of residence. For example, this can include:

• Official registration certificates
  
• Electricity or gas bills
  
• Tax assessments
  
• Bank statements with address details
  

Proof of income

In certain cases, proof of income might also be necessary as part of the KYC process. It is particularly important for individuals seeking financial services and making large investments. Common forms of proof include:

• Pay slips
  
• Tax assessments
  
• Bank statements
  
• Employer confirmations
  

By checking these documents, companies protect themselves against potential fraud and also ensure a solid foundation for financial transactions.

What are the required documents for a KYC check of legal entities?

KYC checks of legal entities (i.e., companies) must include the following documents:

Commercial Register entry

A Commercial Register entry is an important KYC document for legal entities. Companies and institutions often request it to verify the legal existence and structure of another company. The entry serves as official proof of registration in the Commercial Register and contains important information about the company. This includes:

• Company name
  
• Company type and purpose
  
• Registered office
  
• Managing directors
  
• Legal representatives
  

For a proper KYC check, a Commercial Register entry must not be older than three months.

Partnership agreement

A partnership agreement is the basic legal agreement for establishing a company. While it is not subject to any formal requirements—such as the general partnership (OHG) or civil law partnership (GbR),—a partnership agreement for stock corporations must contain specific information and be notarized (see Section 2 of the German Act on Limited Liability Companies [GmbHG] and Section 23, Paragraph 1 of the Stock Corporation Act [AktG]).

The partnership agreement regulates the internal structure of the company, rights and obligations of the shareholders, management, distribution of profits, and liability. Thus, a partnership agreement provides a clear overview of ownership and responsibilities in a company.

Shareholder list

A shareholder list contains the main economic owners of a company. The list contains information about shareholders who hold more than 25% of the shares. This includes:

• First and last name
  
• Date and place of birth
  
• Nationality
  
• Contact details
  
• Address
  
• Tax ID
  

Company structure diagram

In addition to the list of shareholders, a KYC check often also includes an official document showing the company’s shareholding structure. Typically, this is a structural or organizational chart that shows the relationships between the various legal entities and private individuals who own shares in the company. The purpose of these diagrams is to ensure identification of all persons who have a direct or indirect influence on the company.

Power of attorney

If a transfer of authority takes place, the KYC check process must also review the corresponding power of attorney. This authorizes third parties to act on behalf of the company. A power of attorney contains the name of the authorized person, associated powers, and any areas of validity with regard to specific tasks or time periods. A legal representative of the company must sign the power of attorney. In addition, companies must include proof of identity of these company representatives.

Powers of attorney are necessary during KYC checks to ensure the right people can act on behalf of the companies and make legally binding decisions.

KYC documents at a glance

What are the necessary documents for an extended KYC check?

In the GwG, Annex 1 and Annex 2 list factors for potentially lower or higher financial risks. These are particularly important because Section 10 of the GwG stipulates that businesses should determine the specific scope of KYC measures based on the respective risk of money laundering or terrorist financing. As a result, the higher risk factors listed in Annex 2 of the GwG give companies an indication of whether increased due diligence obligations apply (see Section 15 of the GwG) and when an extended KYC check is necessary. If one is necessary, the business will need the following documents:

Bank letter

A bank letter serves as official proof that a company has a business account with a particular bank. It should contain:

• Company name
  
• Bank name and details
  
• Confirmation of the active business account
  
• Date of issue
  
• Bank stamp or signature
  

Source of funds (SOF)

Proof of an SOF ensures a company has legal and traceable financial resources. According to Section 15, Paragraph 3 of the GwG, an SOF review is advisable, for example, if the transaction “is particularly complex or unusually large compared to similar cases.” In this case, the document serves as proof of the origin of the funds the business can use in a particular financial transaction or investment. The following documents can serve as proof:

• Tax returns for the previous tax year
  
• Letters from the bank or the company’s accountants listing the assets
  
• Bank statements
  
• Proof of income for the previous year
  

Source of wealth (SOW)

With proof of SOW, companies can clearly demonstrate the origins of their total assets. This evidence goes beyond the source of financing of individual transactions and serves to explain the long-term creation of corporate assets. The following documents serve as proof:

• Annual financial statements and financial reports
  
• Participation certificates and company balance sheets
  
• Sale or transfer agreements
  
• Tax documents
  

Which industries require KYC checks?

KYC verification is mandatory in many industries—especially those subject to strict regulatory requirements and exposed to an increased risk of money laundering and financial fraud.

Financial services

Banks, credit institutions, payment service providers, and other financial companies must ensure they only enter into business relationships with legitimate customers and do not facilitate illegal financial transactions. Legally, they have to conduct KYC checks and must immediately report suspicious transactions to the Financial Intelligence Unit (FIU). A careful review protects financial service providers from legal consequences and damage to their reputations.

Real estate industry

The real estate industry is particularly vulnerable to money laundering because fraudulent actors can invest large amounts in real estate to conceal illegal funds. Therefore, real estate agents and property developers in Germany must check KYC documents in accordance with the GwG to ensure funds do not come from criminal sources.

Legal services

Legal service providers must ensure customers do not use their services for money laundering or terrorist financing. There is a high risk that customers will conceal illegal financial flows, particularly when setting up companies, conducting real estate transactions, or carrying out trust activities. Therefore, lawyers and notaries must generally carry out KYC checks.

Crypto financial services

Cryptocurrencies provide an anonymous and cross-border means of transactions, making them vulnerable to money laundering and fraud. Therefore, crypto exchanges and wallet providers in Germany must check their customers’ KYC documents, in addition to monitoring transactions and reporting suspicious activities.

Gaming industry

The gaming industry in Germany has seen a significant increase in online platforms and transactions in recent years. The use of virtual currencies and in-game purchases is increasing, which makes the industry vulnerable to money laundering and fraud. In order to prevent illegal activities, providers in the gaming industry must also carry out KYC checks.

What challenges do KYC checks pose for companies?

The verification of KYC documents presents companies with several challenges, which are both organizational and technical in nature.

High effort

One of the biggest challenges for companies when conducting KYC checks is the high organizational effort involved. The identity verification of private individuals and legal entities requires the collection, verification, and documentation of a large amount of information and paperwork. For international customers, there is an added difficulty because different countries have different requirements and document standards.

There are automated KYC solutions, however. Stripe Identity can help companies with document verification. With Identity, you can verify official identification documents from over 100 different countries. In addition, a biometric comparison of ID photos and selfies is possible. Using Identity, you can also automatically validate names, dates of birth, and social security numbers.

Privacy policy

When collecting and storing KYC data, companies have to comply with both anti-money laundering laws and data protection regulations, such as the General Data Protection Regulation (GDPR). This means companies must store and process sensitive customer data securely and comply with additional compliance measures. Errors or negligence in handling personal data can lead to significant legal and financial risks.

Through internal audits, companies can ensure they meet all GDPR requirements. It is also advisable to train employees regularly. In principle, companies should only store and transmit sensitive customer data using secure encryption technologies.

Risk management

KYC checks require companies to implement comprehensive risk management to identify potentially risky customers. This can be particularly challenging in international transactions. Companies must be able to identify suspicious transactions and report them in accordance with legal requirements.

To meet these high and constantly changing challenges, employees should receive regular training. In addition, it can be useful to set up a specialized compliance team. This team can analyze and report suspicious activities in close cooperation with the relevant authorities. Anti-money laundering (AML) software offers additional support, monitoring transactions in real time and flagging suspicious cases automatically.