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Within regulated industries, the terms KYC (Know Your Customer) and AML (Anti-Money Laundering) are often used interchangeably, but they refer to distinct processes with unique purposes.
Understanding the difference between KYC and AML is critical for businesses to ensure compliance, mitigate illicit activity and financial crime, and maintain a positive reputation in the market.
The origins of AML and KYC can be traced back to the establishment of the U.S. Bank Secrecy Act in 1970, and since then have evolved to become a crucial element of account opening, identity verification, and fraud prevention.
Regulated entities, including banks, financial services, crypto exchanges, gambling operators, e-commerce, and more are required to perform KYC and AML on every customer, navigating cross-jurisdictional nuances in regulation and rising customer expectations.
In this article, we explore the definitions, applications, regulations, and difference between KYC and AML, providing a comprehensive overview to those seeking to understand the processes and how to effectively implement them.
What is KYC?
Know Your Customer, or KYC, is a process that regulated businesses need to implement to verify customer identity.
This involves collecting and analysing personally identifiable information such as name, address, date of birth, and identity documents including passport and driving license. KYC checks are conducted at the beginning of the customer lifecycle, during account opening or customer onboarding. However, ongoing monitoring is also essential to detect any suspicious activity or changes in customer behaviour.
The primary goal of KYC is self-explanatory, to receive, verify, and analyse data on customers to ensure they are who they say they are.
In the context of corporate KYC, or Know Your Business (KYB), the primary goal is to analyse financial reports, credit, beneficial owners, and degree of risk by partnering with another business.
By effectively implementing a robust KYC process, regulated businesses can prevent identity theft, fraud, and other financial crimes by gaining an effective overview of each customer.
What is Anti-Money Laundering (AML)
Anti-Money Laundering, or AML, encompasses a broader set of regulations and procedures designed to prevent money laundering and terrorist financing.
AML regulations require regulated businesses to screen individuals and businesses at the point of onboarding, report suspicious activities, monitor transactions, and maintain records to ensure transparency and accountability.
In the context of screening at the point of account opening, onboarding, and point of payment, AML typically involves screening individuals to discover if they are Politically Exposed Persons (PEPs), sanctioned, or possess adverse media.
AML processes are continuous and involve various stages of the customer lifecycle. Regulated businesses must conduct Customer Due Diligence (CDD), Enhanced Due Diligence (EDD) for high-risk customers, and ongoing monitoring to detect and prevent illicit activities. AML compliance is mandatory for all entities involved in financial services.
What is the difference between KYC and AML?
While KYC and AML are often used interchangeable to describe the identity verification and wider financial crime prevention process, KYC serves as a subset as AML.
KYC focuses specifically on verifying a customer’s identity, while AML covers a wider range of activities aimed and preventing money laundering and financial crime.
KYC compliance is the first step of the AML, providing the necessary information for businesses to monitor and assess customer risk.
Once KYC has been successfully performed, AML will then involve screening at the point of onboarding against PEPs, sanctions, adverse media, and watchlists. But the process doesn’t stop there, as customers need to be re-screened to be notified of any changes in risk profile, transactions need to be monitored, and Enhanced Due Diligence (EDD) may be required for higher risk cases.
Understanding not only the differences between KYC and AML but how both processes can work co-operatively leads to numerous benefits, including:
- Integrated compliance: Effectively combining KYC and AML within a compliance framework leads to more efficient data flow, easier analysis, and robust accountability.
- Cross-functional collaboration: In larger organisations, different teams may be responsible for KYC and AML. Understanding the objectives for each and how to split responsibilities leads to more effective collaboration and slick operations.
- Regulatory compliance: As regulation becomes more stringent globally and changes to regulation become more commonplace, understanding how changes impact KYC, AML, or both processes is critical to remaining compliant.
How does KYC and AML implementation differ?
The implementation of KYC and AML can differ significantly depending on the method used by businesses.
For a KYC check to be performed, the business will need access to at least name, address, and date of birth, with the addition of Government approved ID documents to help find a more effective match.
An AML check only requires a name, but it is helpful for the business to also have access to date of birth and address to better narrow down potential matches and reduce false positives.
A KYC check typically used credit information (such as electoral roll, telco, etc.) so plugging into Credit Reference Agency data is a common method. AML on the other hand requires Politically Exposed Persons and Sanctions list, and adverse media so the data sources can vary significantly.
The emergence of data aggregators has become a popular choice for regulated entities as they can plug in to multiple data sources through a single access point, providing access to data required for both KYC and AML.
The responsibility of KYC and AML usually sits with the compliance team, but in bigger organisations they can also be separate responsibilities between MLRO’s, compliance, onboarding, and others, therefore reinforcing the importance of understand the differences.
KYC regulations vs. AML regulations
One of the trickiest parts of navigating KYC and AML is cross-jurisdictional regulation. Whilst all regulation and regulatory bodies have the same goal of preventing financial crime by imposing strict regulation, there are various nuances between regulation that can make compliance difficult for businesses operating in multiple jurisdictions.
Here are some of the most notable regulations:
6th Anti-Money Laundering Directive (6AMLD) – European Union
Effective from 202, 6AMLD increases the number of offences linked to AML and KYC non-compliance, reduces transaction thresholds for fines, and enhances penalties for violations.
Bank Secrecy Act (BSA) – United States
One of the original AML regulations, the BSA was enacted in 1970, requiring financial institutions to maintain records and report suspicious activity to help prevent money laundering.
Patriot Act – United States
Introduced in 2001, the Patriot Act expanded KYC and AML requirements, including Enhanced Due Diligence for foreign accounts and increased cooperation between regulated entities and regulators.
Financial Action Task Force (FATF) Recommendations – Global
FATF sets global standards for AML and counter-terrorist financing (CTF), including guidelines for KYC and processes and Customer Due Diligence (CDD) that local regulators can build regulation from.
Some of the major regulatory bodies include the Financial Conduct Authority (FCA) in the UK, Financial Action Task Force (FATF) globally, Financial Crimes Enforcement Network (FinCEN) in the United States, and the European Banking Authority (EBA) in the European Union.
What are the risks that KYC addresses vs. AML? (H4)
As KYC is used to verify the identity of customers, some of the key risks it identifies are:
- Identity theft: KYC processes verify the identity of customers through documents and data, ensuring they are who they claim to be.
- Fraud: By verifying customer information and conducting due diligence, KYC helps detect and prevent fraudulent activities and accounts.
- Operational risks: Effective KYC procedures streamline customer onboarding, improving operational efficiency and providing customers with a slick onboarding experience.
In contrast, some of the risk AML addresses are:
- Money laundering: AML processes identity high-risk individuals, monitor transactions and report suspicious activities, helping to detect and prevent money laundering.
- Terrorist financing: AML regulations require regulated businesses to identity and report transactions that may be linked to terrorist financing.
- Reputational risk: Adhering to AML regulations and identifying bad actors that you shouldn’t be doing business with help protect an organisation’s reputation.
This further strengthens the case to understand the differences between KYC and AML, as both processes help identity different risks posed to businesses but also by having the two processes work harmoniously bolsters compliance efforts.
Are there any technologies that support both KYC and AML?
As demand for secure KYC and AML has grown from regulators and customers alike, the pressure on regulated entities has risen to perform robust KYC and AML as efficiently as possible.
That’s where the emergence of data aggregation platforms and specialist RegTech firms has been established as a key player in the market.
Businesses such as FullCircl provide automated, real-time KYC software and AML solutions to assist regulated businesses in the constant fight against financial crime.
With a data agnostic approach and single access point, regulated businesses can customise the KYC and AML process, ensuring that not only regulatory obligations are met by integrating to leading data sources, but also that customers are given the best possible onboarding journey with real-time checks.
Want to discover more on enhancing your KYC and AML process? Speak to the team today.
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