KYC and AML: Understanding the Importance and Differences

Fraud and financial crimes are not growing smaller in number. On the contrary, they are becoming more sophisticated. In this connection, security of financial information is critically important. Know Your Customer (KYC) requirements and Anti-Money Laundering (AML) measures help banks and other financial institutions protect themselves as well as their customers from illegal operations, identify suspicious transactions, and prevent money laundering. 

What is KYC?

Today, all financial institutions have to know their customers. They have to identify their personalities thus providing financial security and protection against fraud. They collect, verify, and analyze personal information to identify their clients and assess possible risks. Client profiling helps banks spot suspicious transactions and prevent financial crimes. Suppose a bank client normally makes small transactions locally but he or she suddenly starts sending large sums of money abroad. This should arouse suspicion and lead to inspection. 

How are the KYC procedures carried out?

The client identification process contains several steps:

1. Any bank will have a Customer Identification Program. Such a program helps the bank administration collect information about potential clients. Whether you would like to set up an account at the bank office or online, you have to show your passport or another identification document.
2. After that, Customer Due Diligence procedures start in relation to some customers. Various databases are used to assess the risks of taking a certain customer onboard. If the person has a suspicious past (if he or she has been involved in some fraudulent schemes, has a bad credit history, etc.), the CDD will reveal this information.
3. Dynamic control. KYC requirements include continuous monitoring of the customer’s financial behavior. All his/ her transactions are monitored and if some of them look suspicious (for instance, if money is transferred to a country associated with terrorist organizations), the account may be suspended and regulatory and law enforcement agencies notified.

Why is it so important?

KYC procedures make financial operations secure. Their advantages for banks and their clients include the following ones:

• Decreased risk of getting involved in questionable banking operations;
• Legality of all transactions;
• Protection against fraud and unauthorized access to personal data of payment process participants;
• Increased trust to the banks on the part of the clients.

KYC procedures guarantee legality of banking operations and help build long-lasting trust between the bank and the client. If you have questions related to the KYC requirements, please do not hesitate to contact our experts who will be happy to answer them.

What is AML?

AML (Anti-Money Laundering) is a complex of measures aimed at reducing the risk of fraud and illegal financial operations. The term ‘money laundering’ refers to the process of legalizing the money obtained in illegal ways by concealing its true origin. AML measures are governed by a set of legislative acts.

How does AML work in practice?

The history of AML legislation starts in the 1970s when the first acts were passed in the USA. Drug dealers used various money laundering schemes to legalize their ‘dirty money’ and measures needed to be taken against these practices. At the end of the 1980s, the Financial Action Task Force (FATF) started its operations. With time, FATF has become the leading international organization in combating financial crimes. FATF coordinates the efforts of many countries pursuing this goal.  

The IMF is also active in developing regulations in the financial sector. The European Union takes serious AML measures as well. Besides, most EU countries are FATF members and they follow the organization’s recommendations. The EU is expected to issue a new directive soon that will contribute to combating money laundering and other financial crimes.

Why is AML so important?

AML does not only protect the financial system against fraudulent activities but it also helps maintain public safety:

• Companies that take AML measures protect themselves from participating in illegal schemes, which helps them avoid fines and keep their good reputation.
• AML helps prevent terrorism financing and human trafficking by monitoring suspicious money flows.
• International standards and cooperation allow combating money laundering at the global level thus improving the stability and security of the world financial system.

Interrelations between KYC and AML

KYC and AML are instruments for protecting the security of financial operations. KYC procedures help banks identify their customers, which is the first step in combating fraud. AML measures use the data collected in the KYC processes to monitor and analyze transactions, detecting and preventing suspicious activities.

The processes help achieve the following practical goals:

•  Protect business companies against fraud in a complex way;
• Conform to the regulator’s requirements and compliance rules;
• Monitor suspicious transactions and detect illegal financial activities;
• Protect business companies against getting involved in financial crimes;
• Strengthen internal controls of Fintech companies, banks, card issuers, and electronic marketplaces;
• Identify company UBOs and decrease risks through due diligence procedures and security checks;
• Enhance security of international money transfers.

Differences between KYC and AML

KYC and AML differ in their goals and the ways of achieving them. Let’s consider the main differences.

How do KYC and AML procedures help business companies?

Law enforcement and regulatory agencies want all companies to comply with the KYC and AML requirements. If a company does comply with them, it acquires several important advantages:

• It confirms its preparedness to carry out legal business operations exclusively, which increases trust on the part of the company’s clients who are sure of the security of their assets and personal data.
• It protects itself from possible sanctions on the part of state agencies.
• It reduces legal risks by detecting and reporting suspicious activities.
• It helps detect and deter fraudulent activities.
• It can optimize the client registration processes, which improves efficiency of its operations.

Companies that protect the confidentiality of information and security of transactions enjoy a better reputation. If a financial institution does not conduct proper due diligence checks, it risks being fined and losing its license. Moreover, its managers may be taken to court. For this reason, complying with the KYC and AML requirements is investing in stability and security of your business operations.

Modern trends in KYC and AML spheres

Artificial intelligence and Fintech solutions are actively used in the KYC and AML processes. Machines can process vast amounts of information in a much faster and accurate wat than humans can. They help detect anomalous transactions, assess risks, and identify suspicious activities. Thanks to AI, the client identification and document verification processes are becoming much faster.

Blockchain technologies are also used for KYC and AML purposes. They allow building decentralized databases that protect the information from unauthorized alterations. Modern technological innovations reduce the risk of fraud and simplify data analysis.

Prospects

Modern technology improves the KYC and AML processes in the following ways:

• They accelerate client registration;
• They reduce operational costs as many processes become automated;
• They cater to clients’ needs;
• They increase the probability of detecting fraud.

Such innovations as biometric identification through iris scanning, for example, promise great opportunities in the area. Quantexa Company is already exercising an innovative approach by using big data for context analysis and KYC procedures improvement. The Singpass initiative aimed at building centralized databases enjoys governmental support. In the future, companies will be able to exchange their clients’ transaction templates, which will help combat financial crimes. The concept of the ‘continual KYC’ is also being promoted. The client is identified when he/ she opens a bank account and then his/ her transactions are monitored continually. This allows spotting changes in the client’s behavior thus preventing possible risks.

Conclusion

The use of modern technologies in KYC and AML procedures makes the international financial system safe and transparent. The introduction of AI and blockchain technologies opens new possibilities for automating security checks and improving their accuracy. At the same time, business companies have to adapt to the recent technological achievements and changes in the legislation. They have to invest in innovative solutions and train their personnel. Our professional consultants and KYC and AML specialists will be delighted to help your company adapt to the new reality and successfully develop.