Financial institutions have a series of regulations to navigate through. Add the confusing terminology of the several compliances, and financial institutions can fail to achieve proper compliance. The two primary compliances that financial institutions are legally obligated to comply with are:
KYC (Know Your Customer)
AML (Anti-Money Laundering)
AML or anti-money laundering refers to the steps that financial institutions and other businesses operating under the financial industry have to take to prevent criminals from depositing and then laundering the illegally sourced money. Particularly, AML regulations design to stop terrorist funding, human trafficking, drug peddling, and other crimes that are possible with the laundering of money.
KYC or Know-Your-Customer compliance refers to the steps that a company takes to ensure that its customers are who they claim to be. Fraudsters often use fake or stolen identity data to trick banks, financial institutions, credit unions, and others. KYC often comes under AML, even though both of these terms are often used interchangeably.
To put things in simple words, AML is the culmination of all the steps, rules, regulations, and efforts involved in preventing the laundering of money.
Know your Customer regulation on the other hand is for verifying customer identities, screening, and ensuring that a business understands the risk associated with them. Proper implementation of KYC throughout the organization helps in preventing money laundering as well as financial fraud.
KYC: Customer Due Diligence:
Customer Due Diligence (CDD) is one major aspect of KYC procedures, however, businesses often use these terms interchangeably. The first phase of KYC is to collect as much information as possible about the customer during the onboarding process.
The second step in KYC compliance is CDD, this is when you perform ID verification to ensure that the person submitting the application isn’t just pretending to be someone else. This is often done using biometric verification to ensure that the person is physically available. Businesses also perform watchlist screening, to ensure that the person applying for the process is not a politically exposed person or on the sanctions list.
CDD also includes building a risk profile for the customers to determine how likely they are to conduct financial fraud in the future. Let’s say, a customer applying for an account lives in a high-risk area and has a certain type of account then they may consider as a high-risk customer.
To fully comply with KYC, businesses also conduct EDD (Enhanced Due Diligence). This type of diligence conduct for high-risk customers usually applying to stricter rules while monitoring every small and large financial activity. Businesses can rely on manual methods, but using an automated KYC solution should provide an ideal solution to the business’s needs.
How Does a KYC Process Work?
Regardless of whatever terminology a business uses, any typical KYC process includes some basic steps:
Verifying the customer’s identity for fraud prevention.
Screening the customer against PEP and sanction lists.
Building a risk profile for customers to determine their risk level.
Continuous monitoring including transaction monitoring, history monitoring.
KYC compliance overlaps with AML compliance heavily and that’s why both of them use interchangeably.
AML Compliance Programs:
Criminals are very careful about how they spend their illegally sourced amount. To give a more clear idea, AML policies state that businesses have to report to a regulatory body whenever a customer deposits large amounts of cash. This is why criminals are always looking for new ways to move their illegally sourced money and convert them into legal or clean money.
Over time, AML laws have evolved and amends to keep up with all the new tricks developed by criminals. That’s why businesses require compliance officers and teams to regularly review and ensure the compliance of policies throughout the organization to reduce the risk of fraud.
How Does an AML Program Work?
There are various factors that make an AML program successful, but all the KYC programs will include basic steps like:
Conducting KYC checks during onboarding and throughout the whole customer-business life cycle
Monitoring financial transactions
Reporting suspicious transaction activity to regulatory bodies
Methodical recordkeeping that can use during surprise audits
Building policies and training employees to remain up to date
Where are KYC and AML Regulations Required?
KYC and AML regulations require to follow all over the globe. Terrorism funding is a worldwide phenomenon and it doesn’t stop based on a country’s borders.
The Financial Action Task Force (FATF) acts as an international regulatory agency that corresponds with over 200 countries to set standards and prevent the risk of money laundering and other financial fraud. The FATF also has an outreach program and trains government agencies to provide a better understanding of practices.
Use of KYC and AML Regulations: Financial and Other Industries:
KYC and AML compliance is vital for preventing all kinds of financial fraud including money laundering, terrorism funding, and so on. Regardless of the industry, if a business allows its customers to move money around freely, then they could be a target for money laundering. It doesn’t matter if you’re a bank, FinTech, marketplace, or online gaming community, an effective compliance program can help you assure that your customers don’t become prey to fraudsters.