Is it true that financial institutions must establish identity and legal capacity when opening accounts?

Financial institutions are required to establish a customer's identity and legal capacity when opening accounts to comply with regulations aimed at anti-money laundering (AML) and customer due diligence (CDD). This is primarily governed by the USA PATRIOT Act, which mandates that institutions implement Know Your Customer (KYC) practices. These practices ensure that the institution knows who they are doing business with and can verify that the individual has the legal right to open an account.

Establishing identity typically involves collecting and verifying personal information, such as a government-issued ID, Social Security number, and proof of address. Legal capacity refers to confirming that the individual is of legal age and has the mental capacity to enter into a binding contract, which is crucial in safeguarding both the institution and the customer.

By fulfilling these requirements, financial institutions can help prevent fraud, mitigate risks, and ensure responsible banking practices.