Money laundering and fraud are among the most significant problems facing the online economy. According to the United Nations, the amount of laundered money worldwide in a year is about 2–5% of the global GDP. That’s equivalent to $800 billion to $2 trillion. Therefore, if you want to offer financial services, your organization must comply with the national and international regulatory requirements. Failure to do so could lead to various regulatory penalties.
Implementing a Know Your Customer (KYC) and Anti-Money Laundering (AML) program can also help guard your platform against fraud, money laundering, terrorist financing, and illegal use of funds. Therefore, it’s crucial to better understand AML vs. KYC and the key similarties and differences between AML and. KYC.
Overview of AML and KYC
What is the difference between KYC and AML? Both are terms often used in the same context – that’s why many people don’t know the nuances of each.
The critical difference between KYC and AML is that KYC involves the process of knowing who your (potential) customer is, and ensuring they meet specific requirements when building business relationships, transacting higher than a specific value, and much more. On the other hand, AML is a set of processes dedicated to fighting money laundering and terrorist funding. KYC processes like identity verification are also part of an AML program. KYC refers to the process of acquiring information about your customer from a credible and independent source, validating it, and determining the possible threats from transacting with the customer. The KYC process enables you to have excellent knowledge about your customers and their true identities.
On the contrary, AML is like an umbrella term for regulated procedures and mechanisms that financial institutions must implement to fight money laundering and terrorism financing.
What Is AML and KYC?
Let’s define each of these terms and see how they work:
AML refers to procedures financial institutions and other entities must take to monitor customers actively and avoid financial crimes. AML regulations specifically help prevent terrorists from financing and profiting from a vast range of crimes. Organizations must take precautionary measures to avoid potential regulatory penalties taken against them.
An AML framework comprises various elements like:
- Risk assessment of customers or clients
- Risk management systems
- Customer due diligence or KYC programs
- Relevant reporting obligations
In short, AML implementation is an ideal choice if your company has exposure to finance-related crimes. An effective AML program will help prevent financial crimes and ensure regulatory compliance.
Now, what is KYC? During user onboarding, it is important to carry out identity verification to know who your customer is. Today’s digital identity verification processes typically match a user’s biometrics (i.e. a selfie video) with a government-issued document such as a passport or driver’s license. This is part of the Know Your Customer (KYC) process.
KYC refers to the acquisition and validation of a client’s identity against credible and independent sources to safeguard a company from risks related to financial crime. In other words, KYC involves the practices performed by a company to ensure its customers are authentic and cannot pose a threat to the business.
This helps your entity avoid transacting with a customer on a sanctions list or unsuspectingly facilitating money laundering. In addition, KYC processes ensure funds move between legitimate sources only. KYC strives to protect your entity and customers by reducing the risk of exposure to money laundering and fraud, increasing transactional security, and improving customer trust and confidence.
AML and KYC Differences
AML involves all efforts to prevent money laundering and fraud, i.e., restricting criminals from becoming your customers and monitoring your business transactions for any suspicious activity.
In contrast, KYC involves understanding your customers, monitoring their financial transactions, and determining the potential risks they may have to your business relationships. It is a process that identifies and verifies a customer’s identity. Let’s look at other differences between AML and KYC:
- Process: AML involves legal monitoring of suspicious transactions and activities. KYC on the other hand has to do with customer verification by obtaining personal details and verifying them.
- Purpose: With AML, you prevent money laundering, fraud, and terrorist financing globally. While KYC helps prevent criminals or fraudsters from entering a business platform.
- Elements: AML comprises risk assessment, transaction monitoring, stoppage and reporting of suspicious activities. KYC encompasses customer identity verification, risk identification, and risk management.
AML and KYC: Similarities
AML and KYC offer regulatory processes and requirements that every entity must comply with to avoid regulatory penalties. Besides, they help identify and fight risks such as money laundering, terrorist financing, fraud, and illegal use of funds. These two terms are also similar as they all involve a set of procedures that your business should take to avoid financial crimes. The processes are to mitigate fraud and other threats to your platform and users.
Processes in a KYC Program
- Collection of various customer identification information like: Name, date of birth and address
- Identity verification, often through biometrics matched to an official government document such as a passport or driver’s license
- Close monitoring and scrutiny of transactions and business relationships
- Implementation of continuous monitoring procedures
Processes in an AML Program
The anti-money laundering network constantly changes with the pace of unethical activities. Plus, rules and regulations may vary with time. Here are the steps that will help your business comply with the AML regulations:
- Stay informed about the changing AML regulations
- Implement KYC processes
- Carry out watchlist checks
- Ongoing monitoring and transaction monitoring
It’s essential to spot high-risk exposures that may affect your business and customers. Identify the risks posed by your vendors, customers, and third parties and implement practical AML standards.
Role of KYC vs. AML in Financial Institutions
The Fintech industry, especially cryptocurrency, is rapidly growing and attracting many users. However, some people enter the industry with hidden agendas. Crypto can guarantee users anonymity, enabling criminals to fund terrorists and launder money easily.
AML and KYC compliance programs offer a viable solution for protecting your crypto business from financial crimes. They provide a step-by-step review of a secure monetary system. Additionally, they apply verification procedures that help screen customers against potential fraud risks. With these compliance standards, you’ll avoid harsh regulatory fines or penalties.
Regardless of your sector, allowing customers to freely move money across your platform exposes your business to financial crimes. Whether it’s a Fintech, bank, crypto exchange, or marketplace, implementing an effective AML and KYC program can shield your business against the stated risks.
In summary, AML refers to procedures used to prevent money laundering. While KYC involves the processes that help in customer identification and verification for better AML solutions.
Passbase provides a convenient way for businesses to perform KYC checks through identity verification. You can integrate Passbase into your platform via the Passbase API or with SDKs for iOS, Android, and web.