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With the rapid growth of FinTech around the world, there came a need for stricter laws and security measures in order to combat terrorist financing, money laundering, tax evasion and other criminal activities. Regarding these regulations, there are two terms, KYC and AML, that are commonly used, often interchangeably.
This article talks about KYC and AML, what they mean and is there a difference between them.
What is AML?
Anti-Money Laundering (AML) refers to a set of procedures, laws and regulations devised to prevent generating income through illegal and criminal activities. These regulations require financial institutions to take certain step to help ensure they are not part of a money-laundering scheme nor are they financing terrorist activities.
Money laundering is a blanket term for all the illegal activities including the trade of illegal goods, market manipulation, tax evasion, corruption of public funds and any action meant to conceal these wrongdoings.
AML regulations vary around the globe. For example, the US institutions comply with the Bank Secrecy Act and the EU institutions follow the Fifth Money Laundering Directive (AMLD5).
What is KYC?
KYC refers to the process through which the identity of clients is verified. It is part of due diligence that ensures that financial institutions and businesses collect authentic information about their clients in order to verify them. In KYC, the clients are required to verify their identity using their identity documents. Any institution that provides financial services is obligated by AML regulations to authenticate their customer’s identity before offering their services. Through KYC, it is determined that the institution is doing business with legitimate entities and the potential risks of illegal intentions for the business relationship are also evaluated.
AML and KYC – The Difference
One way to understand the difference between AML and KYC is to think of AML as a whole framework while KYC software is one feature of that framework. Through AML, institutes seek to prevent money laundering and through KYC, the identities of clients are verified. Regulated entities often refer to AML regulations while independent vendors mention KYC more frequently. KYC is focused on authenticating the identities of the consumers while AML relies upon KYC and other steps to prevent money laundering.
AML and KYC Compliance
The AML regulations demand institutions perform certain elements of due diligence and report risks. KYC is a compliance process that only accounts for one feature of the broader AML structure, which makes KYC not a regulatory framework in its own right.
An AML Compliance program contains a lot more than KYC. Some features of the AML framework are:
- KYC: Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD)
- Risk-based AML policies
- Ongoing Risk Assessment and Ongoing Monitoring
- AML compliance training programs for staff
- Internal Controls and Internal Audits
AML and KYC Compliance are both associated with such elements as client identification, client acceptance, transaction monitoring and risk management.
The main purpose of both is to make sure that the institutes verify their clients, detect suspicious activities and report any irregularities to the authorities so the companies do not get engaged with illegal activities. Widespread AML and KYC compliance is quickly becoming the norm on the global business stage.
