Significant rise in financial crimes is posing a threat not to the people but to the financial organisations and regulators also.

With the rise in crime rate, especially for crimes like money laundering and terrorist financing, laws & regulations have been rolled out by regulators to reduce the crime rate.

How?

By keeping financial transactions secure using two important processes – Anti-money laundering (AML) and Know Your Customer (KYC). 

Although these two processes might seem a little similar, they are somewhat different. 

And, 

Both are important for preventing financial crime. 

Now, let’s look at what AML and KYC are and how they’re different.

What is AML?

AML is a set of rules that all financial institutions follow to prevent criminals from hiding illegal money. These rules are meant 

to fight terrorism financing, drug trafficking, and tax evasion. 

to follow these rules to keep their operations smooth, clean and legal.

Banks and insurance companies are required to follow these rules and make sure their systems are not used for illicit activities by identifying customers who might be at risk of money laundering, watch out for suspicious transactions, and report unusual activities to the authorities.  

The Financial Action Task Force (FATF) sets the global standards and guidelines to help businesses follow AML rules and create their own AML programs based on their risks – to identify any possible suspicious activity/transaction.

For chalking out their AML programs, companies usually follow the below mentioned steps.

First, appoint a compliance officer and keep an eye on risks.

How?

By continuous due diligence of the clients. 

Then, conduct frequent training for employees on AML.

And at last, create internal rules and monitor their AML programs regularly.

What is KYC?

Another helpful process for financial institutions to protect against these financial crimes. 

The main goal here is to gather enough information about customers to understand their risk level and prevent fraud. 

What’s the best way banks can actually decrease the risk of money laundering, terrorist financing, and identity theft?

By knowing their customers well.

How can this be done?

Mandatory KYC checks.

Help businesses make sure their customers are who they say they are. 

Help businesses build trust, reduce financial crime, and follow the law by verifying their customers’ identities.

KYC process – a part of the due diligence – includes collecting information like names, addresses, and ID numbers from documents such as driver’s licenses or passports to confirm a customer’s identity.

KYC checks can be done in any given situation like when a customer makes a big transaction, starts a new business relationship or is suspected of doing something illegal. 

The KYC process usually involves checking the user’s identity against outside databases and figuring out how risky they might be.

As we use more and more digital services, industries might need to follow KYC and AML rules to stay safe.

Even if it’s not required for everyone, it’s probably a good idea for any business.

First approach is the Customer Identification Program (CIP). 

This is about ensuring customers are who they say they are. 

The more risk, the more checks are needed. 

At a minimum, companies collect names, addresses, dates of birth, and ID numbers and sometimes they might also ask for a selfie or check on things like IP addresses.

Second approach is implementing the Customer Due Diligence (CDD) process. 

This process helps companies understand the risk of money laundering by checking customer identities. 

CDD includes 

identifying who owns a company, 

imposing regular checks on customers and their transactions, 

implementing different levels of checks done based on how risky a customer looks.

For example, simplified due diligence for less risky customers while enhanced due diligence for where there is high risk. And for moderate level of risk, basic due diligence would suffice.

Third approach is Continuous Monitoring.

Companies should keep an eye on customer activity all the time specifically for big cash deposits or unusual transactions. 

Ignoring these rules can get companies in trouble with the law. 

The specifics of monitoring can change depending on the country in which the company is and the risks involved.

KYC and AML both are important processes that are used by various businesses and banks to address and tackle financial fraud and scams.Although they’re connected with each other, they do serve different functions.

Difference between AML AND KYC

On the basis of goal,

KYC as it unfolds ‘’know your customer’’- makes sure that the customers are accurately identified before any business transactions are conducted with them whereas AML-Anti Money laundering, as its full form says, is about preventing money laundering and terrorism financing.

In terms of focus, 

KYC’s emphasizes on collecting and verification of customer identities whereas AML is going one step ahead and focusing on detecting and ceasing any activity that causes suspicion or is related to frauds.

Per compliance requirements, 

Although there are always rules and regulations that have to be complied, KYC is simpler because it’s primary function is identifying and verifying customers, however AML is more complex as it has a broader framework and includes many functions like management of risk, reporting any suspicious activity and supervising transactions.

Overall, KYC is merely one component of ensuring AML compliance. 

Understanding the difference between the two is helpful to businesses and banks as it protects them from financial frauds and enables the rules to be followed.

AML KYC compliance is a process and the steps for the same are as follows- 

1.ID verification: To confirm that customers are legitimate. 

How can IDs be verified?

Using biometrics like fingerprints or face recognition scans. Addresses are also confirmed to make sure customers are not faking their identity.

2.Due diligence: To understand how risky they might be before letting them sign up.

3. Enhanced due diligence: An extra step to keep an eye on risky customers and strange transactions to spot possible money laundering. 

How to conduct?

By checking their credit history and looking for any negative news about them.

4. Ongoing monitoring: To check in and look for anything out of the ordinary.

It is a continuous process as the level of risk changes with time. 

5. Suspicious activity reports (SAR): Acts as a red flag when raised by banks and professionals to catch the attention of law enforcement when they spot fishy transactions possibly tied to money laundering or funding terrorism.
6. AML training: To recognize and address financial crimes is provided to all staff members, not solely limited to the compliance team.

KYC and AML – both are required by law, but in different situations. 

KYC is about checking who customers are before doing business with them. Here are some examples of when KYC is needed:

– Opening a bank account

– Making an account on shopping websites

– Signing up for cryptocurrency services

– Proving your age for gaming

– Checking in at hotels or airports

– Registering as a patient at a hospital

AML checks, on the other hand, look for signs of financial crimes. Here are some examples of areas when AML is needed:

– Signing up for an overseas bank account

– Using money transfer services

– Making an account at a casino

– Buying real estate

– Law enforcement investigates and punishes people involved in money laundering.

Both KYC and AML are important for many businesses, especially in finance.