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KYC And AML Compliance: Everything You Ought to Know

There are numerous regulations for businesses to navigate whenever it comes to compliance. And there are many compliance terminologies out there, which can sound diverse and increases the level of confusion.

AML, or anti-money laundering, refers to the measures that financial companies and other businesses must follow to avoid criminals from dumping or transferring funds obtained through illegal activity. AML regulations, are specifically out there to put an end to fraud, terror financing, and many other illegitimate activities that include money.

KYC (Know Your Customer) involves the procedures that a business employs to make sure that its clients are who they claim to be and do not present a danger to the company. Despite the fact that the terms KYC and AML are used synonymously most of the time, still, AML is a broader term and KYC falls underneath it.

Difference Between KYC and AML

AML encompasses all efforts aimed at preventing money laundering, such as preventing lawbreakers from becoming consumers and monitoring transactions for malicious transactions. KYC refers to the identification and screening of clients, as well as ensuring that businesses recognize the client’s risk to their company. In accordance with that, businesses can protect themselves and stop potential fraud from happening.

How Customer Due Diligence is Related to KYC 

Customer due diligence (CDD) is only one feature of KYC procedures, but the terms are frequently used interchangeably. The new client information program is the first stage of KYC. During the onboarding process, companies gather details about the customer in this phase.

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Phase two is CDD, which involves performing a verification process to ensure that the person is not impersonating someone else. Moreover, to confirm that the customer himself is present at the moment, biometric identification is a critical part of this step. Companies also screen them against watchlists to make sure they aren’t a part of the politically exposed person (PEP) or a blacklist.

Customer due diligence also encloses risk examination to evaluate the possibility of a customer being involved in money laundering. For instance, they can be categorized as a high-risk customer, if they belong to a particular country or territory, or if they open a particular kind of account.

For high-risk customers, KYC also provides enhanced due diligence (EDD). Companies decide how to work with these clients during this phase, usually by enforcing tighter standards when monitoring their banking transactions. The immediate purpose of KYC is to determine whether to pursue a client or not. That is how KYC prevents businesses from getting involved in crimes like money laundering. To improve your customers’ experience, the right KYC solutions will have to provide these solutions in real-time.

How Does KYC Process Work:

No matter what kind of terminologies businesses use, a routine KYC process consists of:

  • Authenticate the client’s identity to prohibit fraudulent activities
  • Screening of customers in blacklist databases
  • Evaluate the client’s risk profile to find out if they pose any risk to your business
  • Ongoing monitoring of the client’s risk profile to see if there are any changes regarding his transactions and involvement with the politically exposed persons.
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AML Compliance System

KYC and AML processes correlate with each other excessively. According to AML compliance policies, if a customer deposits a large sum of money, businesses are bound to report it. So the crucial step for fraudsters is how they put their illicit money to use. Therefore, bad actors are continuously finding new schemes to trespass the AML policies without getting caught so they can put their illegitimate money to use by getting inside financial industries. 

AML laws are amended from time to time because criminals are always finding new schemes to commit fraud. Therefore, it is up to compliance to teams to review the amends made to the AML policies and run their AML compliance program accordingly.

How Does AML Process Work 

A successful AML compliance program covers many key qualities but in routine, a normal AML process includes: 

  • Proper KYC checks from when onboarding a client to as long as he stays with the company
  • Transaction monitoring 
  • Informing the regulatory bodies about the duplicitous activities of a client
  • Bookkeeping that can hold up to an audit
  • Providing proper training to the staff so they can stay familiar with the new policies

The Need for AML and KYC

KYC and AML are mandated all around the world. Terrorist financing, however, does not always stop at a country’s borders.

The Financial Action Task Force (FATF) is a global ombudsman organization. It collaborates with over 200 countries and jurisdictions around the world to develop guidelines and help stop money laundering and other illicit activities. In addition, the FATF conducts outreach and training to help federal agencies and financial institutions understand best practices.

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Final Thoughts

KYC and AML compliance is essential in stopping money laundering, fraud, and other types of   crimes involving finance. Regardless of the industry, if businesses allow clients to transfer funds, they may become a target for money laundering. A healthy compliance program makes sure that companies and their consumers can do business with confidence, whether they’re a marketplace, fintech, or a bank.