When it comes to compliance, there are many different regulations for companies to navigate. Adding to the confusion is the various compliance terminology, such as AML and KYC, which are similar but can mean different things.
AML or anti-money laundering refers to the steps that financial institutions and other firms must take to prevent criminals from depositing or transferring funds that came from illicit activity. In particular, AML regulations are designed to stop terrorist financing and proceeds from crimes like human trafficking.
KYC or Know Your Customer refers to the checks that a company performs to ensure their customers are who they say they are and do not pose a risk to the business. KYC falls under the larger umbrella term of AML, even though AML and KYC are often used interchangeably.
Broadly speaking, AML refers to all efforts involved in preventing money laundering, such as stopping criminals from becoming customers and monitoring transactions for suspicious activity. KYC refers to customer identification and screening, and ensuring you understand their risk to your business. In this way, KYC compliance helps prevent money laundering as well as fraud.
How Does KYC Work with Customer Due Diligence (CDD)?
To meet KYC requirements, financial institutions and other businesses need to create a customer identification program (CIP). This involves detailed KYC checks and customer due diligence to help businesses comply with beneficial ownership requirements as well as AML and KYC requirements.
Customer due diligence (CDD) is just one aspect of KYC procedures, but people often use these terms interchangeably. The first phase of KYC is the new customer information program. In this phase, you collect information about the customer during the onboarding process.
The second phase is CDD, where you perform identity verification to ensure the person is not pretending to be someone else. Biometric identification is an important part of this step to make sure the person is physically present. You also perform watchlist screening and ensure they are not a politically exposed person (PEP) or on a sanctions list.
CDD also includes risk assessment to determine how likely they are to become involved in money laundering. The risk level of a customer can be determined by a number of factors including their financial history, transaction patterns, geographical location, nature of business and any previous incidents of suspicious activity or criminal record. For example, if they live in a certain country and are opening a specific type of account, they might be considered a high-risk customer.
KYC includes enhanced due diligence (EDD) for high-risk customers. In this phase, companies determine how to work with these customers, usually applying stricter rules when monitoring their financial activity. The primary goal of KYC is to decide whether — and how — to do business with your customers. In this way, KYC helps prevent money laundering. The right KYC solution should provide these answers in real time to streamline the experience for your customers.
How Does a Typical KYC Process Work?
Regardless of which terminology you use, a typical KYC process includes:
- Verifying the customer’s identity to prevent fraud
- Screening the customer against prohibited lists
- Assessing the customer’s risk profile to determine if they’re higher risk
- Ongoing monitoring to make sure their risk hasn’t changed
Using a risk-based approach, the KYC process overlaps heavily with the AML compliance program.
AML Compliance Programs
Criminals often face a major challenge: how to spend their ill-gotten gains. For example, AML policies require that businesses report when a customer deposits large quantities of cash. As a result, criminals are constantly looking for new ways to get their dirty money into the financial system so they can legitimize or “clean” it.
AML laws have evolved over time to keep up with criminals. For example, the Bank Secrecy Act and the USA Patriot Act made dramatic changes to the scope of AML laws. Likewise, compliance teams have had to regularly review and revise their AML compliance programs and their approach to risk management.
What Does a Typical AML Program Look Like?
There are several key qualities of a successful AML compliance program. A typical AML program will include:
- KYC during onboarding and throughout the entire customer lifecycle
- Assessment and monitoring of customer risk
- Methodical recordkeeping that stands up to an audit
- Policies and training to keep employees up to date
Where Are KYC and AML Required?
KYC and AML are required in countries all around the globe. But terrorism financing doesn’t necessarily stop at one country’s borders.
The Financial Action Task Force (FATF) serves as an international watchdog agency. It works with more than 200 countries and jurisdictions to set standards and prevent money laundering and other illegal activities worldwide. The FATF also provides outreach and training so government agencies and financial service providers can understand best practices.
KYC vs. AML FAQs
What are the consequences of non-compliance with AML and KYC regulations?
Non-compliance with AML (anti-money laundering) and KYC (Know Your Customer) regulations can result in severe consequences, including legal penalties, fines, reputational damage, and potential imprisonment. Financial institutions and businesses may face regulatory actions and the loss of their license for failing to adhere to these regulations.
Are there any differences in the regulations for AML and KYC authentication?
Yes, there are differences between AML and KYC regulations. AML focuses on preventing money laundering and the illegal flow of funds, while KYC primarily involves verifying the identity of customers to mitigate risks related to fraud, identity theft and financial crimes. Both play complementary roles in the broader framework of financial regulation, with some overlapping requirements.
Are the requirements for opening accounts the same for AML and KYC?
The requirements for opening accounts are not the same for AML and KYC. AML regulations focus primarily on transaction monitoring and reporting suspicious financial activities, while KYC requirements involve collecting and verifying customer information, such as identity documents and personal details, as part of the onboarding process. However, they are often interrelated, with KYC serving as a foundational component for AML compliance.
Who is responsible for ensuring compliance with AML and KYC regulations?
Financial institutions, businesses and regulated entities are primarily responsible for ensuring compliance with AML and KYC regulations. They are required to establish and maintain robust AML and KYC programs, conduct due diligence on customers, monitor transactions and report any suspicious activities to relevant authorities. Regulators also play a role in overseeing and enforcing compliance within their jurisdiction.
KYC and AML in Financial Institutions and Other Industries
KYC and AML compliance are critical for preventing fraud, money laundering and other financial crime. Regardless of your industry, if you enable customers to move money, you could be a target for money laundering. Whether you’re a bank, fintech or marketplace, an effective compliance program helps assure that you and your customers can do business with confidence.
Let a Jumio expert show you how easy it can be to integrate our automated identity verification and AML solutions into your onboarding and ongoing monitoring processes. Request more information here and we’ll be in touch shortly.
Originally published Sept. 9, 2021
