No matter if you’re a member of a financial institution or the customer of one, it’s critical that you understand the difference between KYC, or know your customer, and AML, or anti-money laundering. Governments around the world have set regulations in place to protect against both. Unfortunately, the two terms are often used synonymously when there are fundamental differences between them. Understanding the roles of each could keep you safe and compliant.
What Is AML?
According to Investopedia, AML “refers to a set of procedures, laws, and regulations designed to stop the practice of generating income through illegal actions.” These laws require financial institutions to take actions to help ensure that they are not part of a money-laundering scheme, nor are they financing terrorist activity. Money laundering is a broad term representing:
• Trade of illegal goods
• Market manipulation
• Tax evasion
• Corruption of public funds
• Any action meant to conceal these wrongdoings
Not only are financial institutions required to report these crimes to their government, but they must also do everything in their power to not engage in such activity. Regulations vary around the globe, with US institutions complying with the Bank Secrecy Act and EU institutions abide by the Fifth Money Laundering Directive, otherwise known as AMLD5.
What Is KYC (Know Your Customer)?
KYC is one step that financial institutions take to meet AML regulations. KYC is the act of financial institutions confirming the identity of their customers, both before entering into business and while engaged in business. The goal of KYC is to identify parties who may participate in illegal activity. KYC techniques also prevent financial institutions from entering into risky business or holdings, as customers must disclose all relevant monetary information.
While KYC falls under the umbrella of AML compliance, it too can be wide-sweeping. For instance, many KYC policies are broad, encompassing some form of risk management and monitoring of transactions, as well as policies supporting customer acceptance and identification. KYC regulations were outlined in the United States under the Patriot Act. Companies of the EU can find their rules under AMLD5.
KYC regulations have recently expanded to protect consumers as well. For instance, AMLD5 sought to protect consumer’s data. The directive set limitations on what type of information financial institutions can request form customers and how long they can hold onto this information.
So, in summary, there are regulations set forth for both AML and KYC proceedings. However, AML regulations are significantly broader, with KYC regulations making up one part of the AML regulations. AML regulations are often part of an overarching governance framework while KYC processes are the tools that financial institutions use to meet these regulations.
Other Differences Between The Two Regulations
Other differences exist between AML and KYC. For instance, the primary purpose of KYC regulation is to ensure that everyone involved with a business transaction meets anti-bribery standards. The primary goal of AML regulation, on the other hand, is to detect suspicious activities before they occur so that companies cannot commit fraud or engage in other illegal activities.
KYC also tends to impact everyone. Not only does this include financial institutions, but so too includes individuals and other companies. All parties are responsible for the implementation of KYC regulations. This is in stark contrast to AML regulations, where implementers include countries and financial institutions.
How these parties go about meeting these two regulations varies as well. For instance, KYC regulation primarily focuses on authenticity validation and transaction monitoring. AML regulation, on the other hand, focuses far more on payment screenings, data protection, and staff training.
If your organization must meet AML regulations, then you’ll need to use KYC tools. However, companies may be required to meet KYC regulations without having to remain compliant with AML standards.
KYC Regulations Will Impact AML In The Future
Recently, we’ve seen growing importance placed on KYC regulations. As these regulations increase, so too will the impact they have on AML. For instance, the EU now sets limits on the personal data that companies can access when verifying data. Companies have had to adapt and change their methods. For instance, those parties engaging in forex trading have had to find ways to provide live two-way authentication.
Fortunately, technology is increasing and making this more realistic. For instance, facial recognition technology has improved to the point that financial institutions can verify an individual in real time with their identification. As money laundering and illegal activities grow in significance, so too will the emphasis on KYC regulation. Stronger KYC regulation can increase the likelihood of AML compliance.
Additionally, companies now exist to help institutions meet all compliance standards. For instance, at AU10Tix, we provide fully automated customer onboarding and KYC Initiation, providing customers with forensic-level forgery, counterfeiting, and risk factor auto-detection. Contact us today to learn more about how we can strengthen your KYC and AML processes.