Under the regulation of FATF (Financial Action Task Force), countries and international organizations all over the world have the corresponding anti-money laundering (AML) standards to supervise the financial industry and some non-financial industries (such as jewelry shops and silverware shops).
The steps to implement a successful anti-money laundering program include a key process: "Know Your Customer" (KYC). Usually, “KYC and AML” will be mentioned together and used interchangeably, which they seem to be regarded as the same thing. However, that is not the case, because the meanings of KYC and AML have a large difference, especially in the regulatory environment and legal norms.
In order to successfully comply with anti-money laundering regulations, companies must know what KYC and AML are, their differences and how they are related to each other in the regulatory process.
What is “Know Your Customer (KYC)”?
Know Your Customer (KYC) is a fundamental process of any financial institution's anti-money laundering program. It is defined as the process by which these agencies collect information about their customers and verify their identities. This greatly helps them fully assess the risks associated with each client. For example, all investors must be verified before participating in any ICO or crowdfunding campaign. Fintech companies are mandated to collect vast amounts of verifiable information about their customers and their identities in order to determine their legitimacy before starting any business activity.
What is AML?
Anti-Money Laundering (AML) refers to the overall and broader measures and processes used by financial institutions and governments to prevent and combat financial crimes (especially for money laundering and terrorist financing). Anti-money laundering regulations are decided by global institutions such as UNODC and FATF on money laundering, regional institutions such as FINRA, and local governments and institutions.
The anti-money laundering policy is part of a broader and more complete anti-money laundering compliance plan of financial institutions.
The difference between AML and KYC
The difference between AML and KYC is that, on the one hand, AML (anti-money laundering) is the general term of all regulatory procedures that enterprises must implement in order to carry out legitimate business. On the other hand, KYC (know your customers) is a smaller portion of AML, and it consists of companies that aim to verify the identity of their customers. This is just one step in a larger process.
Many financial institutions often feel confused when it comes between KYC and AML. They blurred the boundary between the two processes, which lead to being disciplined by regulatory authorities. Depending on the seriousness of the error, they may be fined or even sentenced to imprisonment.
Indeed, AML and KYC are different and cannot be used interchangeably. Having said that, KYC and AML are closely related and interrelated.
Customer due diligence (CDD) is the basic process of customer identification program, while enhanced due diligence (EDD) is a more advanced KYC process which is mainly used for high-risk customers that cannot be excluded through simple CDD steps. These customers are usually more likely to be involved in financial crimes including money laundering and terrorist financing, so they need more thorough verification.
KYC is the first step in implementing AML procedures or policies. It is the process of verifying the identity of customers. The purpose is to have a deeper understanding of customers and their financial transactions, so as to effectively manage risks. KYC is the process that AML follows and starts. As mentioned above, AML is a larger and broader concept, including customer due diligence, risk-based anti-money laundering policy, continuous risk assessment and ongoing monitoring, employee anti money laundering compliance training program, internal control and internal audit.
The difference between KYC & AML
Why would company mix up AML and KYC?
KYC is the compliance process, which constitutes the first step in the broader AML framework. However, it is common to see financial institutions and companies confuse the two. Most companies use KYC system as a tool to detect fraud, and anti-money laundering compliance is a more complex and detailed process.
Preventing and implementing anti-money laundering requires an in-depth understanding of many factors. From the internal operation of the financial industry to the understanding of local, regional, national and international anti-money laundering regulations and rules, successful anti-money laundering professionals must have skills beyond KYC. In addition, they must keep up to date with the latest technologies and AML software on the market.
It is not difficult to imagine why companies often confuse KYC and AML. After all, they all play an indispensable role in finance. Most importantly, they are risk-based approaches. They also have some common functions, such as customer identification and risk management. But it is important to always remember that these processes are different and have multiple functions.
The most critical differentiation
- KYC: It’s more about the identification process and method used prior to customer acceptance, and the regular due diligence after acceptance.
- AML: Usually discusses the post-acceptance measure, especially transaction and behavioral controls.
This will help you find the right professional and team to complete each task (AML or KYC) and comply with the regulations.
We hope this article has helped you understand the definitions of KYC and AML. While these two processes are different, they are complementary and interconnected, and they work together to combat financial crimes. AML and KYC must be followed by all financial institutions that want to conduct legal transactions and avoid breaking the law.
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