The growing threat of money laundering alongside terrorist financing and financial crimes has motivated regulators to establish laws for prevention. The most prevalent regulations regarding KYC and AML practices exist. Although these rules share comparable terms or sometimes appear together in statements, they function differently. So, in this guide, we’ll outline the difference between AML and KYC compliance and best practices to prevent money laundering with automation.
What is Know Your Customer (KYC)?
KYC refers to a financial regulation standard that receives authority from specific regional legislation. In the United States, the Know Your Customer procedure operates under the name Customer Identification Program (CIP), derived from the USA Patriot Act.
Member entities subject to regulation must collect personal information about customers to ensure proper service use and confirming applicants for financial services do not appear on sanction or PEP lists. Users must undertake KYC verification during new account setup, throughout the account cycle, and after any detailed modification. During regular business operations, European banks spend AED 22 million* annually on KYC operations.
What is Anti-Money Laundering (AML)?
AML refers to legal frameworks that facilitate crime prevention and financial identity recognition against money laundering activities and terrorist funding schemes. Most institutions must comply with AML workflows by conducting KYC procedures to acquire customer knowledge, which continues with transaction analysis for suspicious activity reporting. ‘
Anti-money laundering describes various methods organisations use to fulfil demanding standards and protect themselves from legal penalties.
Global banks’ fines for money laundering violations in 2022 reached AED 18 billion*, whereas the previous year saw an AED 11 billion* sum. Proactive bank investment in compliance works through vigorous enhancement of their onboarding operations.
What are the Key Differences Between KYC and AML Compliance?
The operations that form AML compliance include identity verification, suspicious activity detection, and other key measures to defend against money laundering. AML compliance requires KYC as a procedure that verifies customers through identification processes. The two regulatory standards serve to protect businesses from fraudulent activities.
The following details show the difference between AML and KYC compliance:
How Does the KYC Process Work?
KYC demands that companies validate new customers using identity documents, including valid ID cards, driver’s licenses, and passports.
This information assists organisations to gain superior insights about their client base. After receiving customer identity data from businesses, the information needs verification through approved third-party organisations, including government records and credit bureaus.
Companies maintain verified customer data for monitoring to help identify fraudulent attempts that may happen in other parts of their customer journey.
During certain security checks, the user needs to submit supplementary documents. AML compliance mandates that users submit evidence of their proof of address (PoA) to proceed. KYC shares integration with AML compliance, making the process difficult for certain customers to handle.
KYC requirements include:
- Verifying the user’s identity
- The service evaluates the user through comparative checks in multiple outside sources.
- Determining the customer’s risk profile
- The process includes active security checks that prevent potential cases of fraudulent activities.
How Does the AML Compliance Program Work?
The Financial Action Task Force (FATF) published global standards that guide businesses in establishing AML compliance. Companies must develop and merge AML regulatory requirements that address the unique risk factors that emerge from their business operations according to AML laws.
Companies use their AML programs to execute real-time AML screening processes and monitoring protocols.
What are the Five Main Components of an AML Program?
The creation of AML programs happens through companies’ implementation of the five fundamental AML pillars. The implementation of a successful AML program requires the following five essential steps which include:
- The first step requires appointing a compliance officer to fulfil the role.
- Employee education and training represent the second vital step in developing an AML program.
- Developing internal policies
- Independent assessments and audits must be performed as part of step four.
- Perform in-depth risk assessment while conducting active due diligence as the final part of the procedure.
Full compliance with AML requirements requires no omission of these specified steps. As per the fifth pillar, organisations must carry out routine watchlist and sanctions screening procedures for individuals.
Moreover, watchlist screening is part of the AML check program to identify whether individuals remain free from banned customer lists. Continuous monitoring is essential to comply with AML regulations because of its natural relationship to the rules.
What are the Three Main Components of a KYC Program?
Know your customer programs’ specifications should be adjusted according to the nature of the business and the associated jurisdiction. Companies should use 3 main risk-based strategies in their KYC program development to stop fraud and money laundering incidents.
- Customer Identification Program (CIP)
An entity requires performing checks to confirm the identity of customers who claim to be who they present themselves to. The verification of customer identities occurs through multiple processes with various stages, including:
- Wider security measures must be implemented depending on how high the identified risks are.
- A customer identification process must secure four vital details: name, address, date of birth and identification number.
When asking your customer for an onboarding selfie, you should confirm their IP address and other information.
- Customer Due Diligence (CDD)
The ID verification process of KYC enables businesses to establish money laundering risk levels through customer identity assessment, but standard CDD enables risk-based management of AML. FATF recommends organisations perform due diligence and assess customer risk levels for all business activities.
Businesses with low-risk customers should follow the standard set of CDD procedures. They include:
- Identifying and verifying customers’ identities
- Businesses need to establish the identities of beneficial owners with 25% percent or more of ownership stake.
- Organisations must perform continuous risk tests and create profiles that rate potential risks.
- Continuously monitoring customers and their transactions.
Your selection of CDD measures depends on the established risk level of each customer:
i). Simplified Due Diligence: The low risk of fraud, terrorism, or money laundering leads to the adoption of Simplified Due Diligence (SDD). The bank implements SDD as a customer protection measure when depositing minor funds to establish a savings account.
ii). Basic Due Diligence: The entity conducting operations must acquire essential information to lower vulnerability through Basic due diligence (BDD). Every business applies BDD to confirm new customer identification and determine their connected potential risks.
iii). Enhanced Due Diligence: The assessment of additional data becomes mandatory through Enhanced Due Diligence (EDD) for higher-risk persons who fall under Politically Exposed Persons (PEPs). A business must complete EDD procedures for high-value transactions since these transactions suggest more potential for money laundering activities and terrorist financing. The additional step requires confirmation about where funds are originating from.
Organisations can use customer due diligence as a distinct method which enables them to create adaptable security features based on individual customer exposure risks.
- Continuous Monitoring
Organisations must execute real-time account monitoring processes to maintain KYC and AML regulations across complete business relationships. An effective KYC program depends most heavily on its continuous monitoring element, its last important component.
To stay compliant, organisations must implement a system that includes monitoring their customers’ activities and transaction behaviour to detect suspicious patterns.
The following warning signs must be monitored:
- Unusual transactions. Customers should watch out for unusually large cash payments and behaviour patterns inconsistent with their expected dealings.
- Suspicious behaviour. Customers should be monitored for large-scale irregular withdrawals in designated high-risk money laundering locations.
- Unverifiable information. Suspicions will be detected if someone presents false documentation, among other indicators such as missing income source verification.
- Sanctions and embargoes. The staff should identify sanctioned or embargoed entity transactions and monitor PEP additions, adverse media reporting, and sanctions list changes.
Importance of Adhering to KYC and AML Regulations
Following AML and KYC requirements present essential requirements for business protection of customers’ interests and company legal compliance.
Validating customer identities protects you from customers who may have stolen identities while ensuring that your business deals only with real clients. Hence, you will get several benefits:
- Reducing reputational risks
- Enhancing operational efficiency
- Ensuring accurate customer data
- Guaranteeing effective fraud prevention
Through regulatory compliance, organisations understand KYC and AML operations, enabling them to construct proper compliance programs.
How to Automate AML and KYC Compliance?
Financial institutions experience improved operational efficiency and enhanced security and accuracy when they automate KYC and AML procedures. The following technologies make it possible to execute these essential compliance requirements:
KYC Onboarding Checks
Financial institutions use two critical checks during KYC processes, representing essential elements for customer registration and account maintenance services.
- ID document verification: This system uses modern technology to conduct fast passport and driving license authentications, strengthening KYC security protocols.
- Face Match: This security system relies on facial recognition features that evaluate the customer’s appearance versus photo identification for improved protection against fraudulent acts.
AML Regulations and Sanctions Screening
The process for AML compliance requires detailed screening procedures to help institutions detect money laundering and related financial crimes that occur through their operations.
- PEP Lists and Sanctions Screening: It involves automated technology matching individuals to premium lists and embargoed entities to detect security risks and comply with mandatory standards.
- Adverse Media Lists: This check system automatically scans customers against media resources to find possible signs of money laundering risks through adverse information.
Final Words
Financial institutions must understand the difference between AML and KYC to maintain compliance and security standards. The financial industry uses KYC to validate customer identities, yet AML is used to detect and stop money laundering activities. Businesses that follow these regulations decrease risks, enhance operational efficiency, and protect themselves from fraudulent activities.
Does your business face ongoing financial inefficiencies combined with compliance challenges? Xpert Advisory offers corporate restructuring services to stabilise businesses while optimising their operations and ensuring compliance with AML and KYC regulations. Contact us now, and let us turn your obstacles into possibilities to drive lasting business achievement.
FAQs
What is an AML Checklist?
The document lays out important guidelines for AML compliance management, including methods to perform due diligence and risk assessment, policy development, and duties for Money Laundering Reporting Officers.
What is the Customer Due Diligence Rule?
Under the CDD Rule, these covered financial institutions must establish and validate the identity of natural persons who control and gain from legal entity customers beginning when these entities create new accounts.
