TMCnet Feature
June 22, 2020

The Differences and Best Practices for KYC and AML



As the world becomes more digital, criminals are finding creative ways to commit crime. The unprecedented growth of the Fintech industry has brought more opportunities for businesses and consumers while presenting new opportunities for financial crimes.



Many regulations have been created to protect consumers and Fintech companies; hence, KYL and AML.

What is KYC?

KYC is an acronym for Know your Customer. It is the process of verifying a customer’s identity used during the application process.

KYC protocol demands that a customer must provide credentials, for example, an ID document to access a company’s service. In the same way, you must provide some form of ID before opening a bank account or when seeking other banking services.

The purpose of KYC is identity verification and risk assessment. When a customer provides the necessary personal information, the company can verify and assess the risks carried by the particular customer. These measures protect Fintech institutions from risks.

KYC is part of AML procedures, and this is what differentiates KYC from AML. ID verification was made compulsory in the US by the Patriot (News - Alert) Act of 2001 as the first protection against financial crimes. All financial institutions now apply KYC processes, especially when dealing with large transactions, registering new users, and updating their records.

What is AML?

Anti-money laundering (AML) is a comprehensive financial policy. It entails all the measures put in place by financial institutions and governments to prevent financial crimes, particularly money laundering.

AML originated from the Bank Secrecy Act of 1970, which mandated financial institutions to collaborate with the government in fighting financial crime. Terror funding, money laundering, tax evasion, fraud, and others are some of the crimes covered in AML regulations.

AML requires financial institutions to obtain and verify all customer information, monitor customer transactions, and report suspicious activities to the government.

Therefore, AML is an umbrella term for all the techniques employed to prevent financial crime. It is made up of many protective arms to combat different forms of financial crime. There are internal and external systems, including KYC, detection of suspicious activities, internal risk control, compliance training, and regular independent audits.

AML combines various internal and external protective systems to increase the chance of timely detection and reporting of financial crimes.

Differences between AML and KYC

Most financial institutions often find it hard to implement KYC AML processes. As mentioned above, KYC is the client identity verification process, while the AML program entails KYC (customer due diligence), risk-based policies, ongoing risk assessment, and compliance training programs.

The differences between AML and KYC are illustrated below:

Differences

KYC

AML

A.      Process

Verification of clients by gathering personal information.

Legal control processes to identify suspicious or criminal activities

B.      Purpose

Prevent bad actors from accessing the organization’s services.

To prevent money laundering, terrorist financing, fraud and other financial crime.

C.      Element

Identity validation, risk assessment and management.

Risk assessment, detection and reporting of suspicious transactions.

D.     Features

Efficient and thorough processes to identify all the risks.

Holistic, coherent and up-to-date processes.

Best Practices for KYC and AML

When it comes to best practices, there are a number of key distinctions between KYC and AML processes. The following is a quick look at some of these key differences in teh best practices of both.

KYC Best Practices

KYC processes involve various policies that aim to give the proper background of the customer. The best practices for a KYC system entail the following components:

Customer Identification Program (CIP)

This is the basic foundation for the KYC process. CIP collects, verifies, and keeps client identity information. It also screens customers against the list of known criminals.

Customer Due Diligence (CDD)

CDD refers to all the information obtained from the customers. The information is used to verify identity and evaluate risks presented by the customer.

Enhanced Due Diligence (EDD)

EDD is the additional information collected to gain a better understanding of high-risk customers. Financial institutions can still work with high-risk customers as long as they have adequate information showing that they are likely to pay back the loan.

CIP is used to determine whether there is a need for CDD or EDD. The three processes must be implemented thoroughly and consistently. The processes must also be well documented for auditing purposes.

AML Best Practices

You must invest in AML software. AML software is beneficial as it is cost-effective and efficient. The software will analyze all client data to review for irregularities. AML software can quickly flag off suspicious transactions such as large transactions or large withdrawals by customers.

AML best practices entail the following:

Risk Assessment

Develop a robust risk assessment system to meet all your organizational needs. In developing a risk assessment protocol, ask yourself what the entry and exit points for your money are.

Employees are in a better position to detect risks and transactions that seem suspicious.

AML Compliance Officer

It is advisable to have an AML compliance officer who understands AML and the organization’s risk. The AML Officer will evaluate all the risks and come up with a robust AML system.

Employee Training

Ongoing training is necessary to remind your employees on how to review transactions. Appropriate training on different forms of financial crimes is essential so that employees can quickly identify the red flags.

Know your Customer

KYC is a component of AML. A robust KYC system will be crucial in customer identification, verification, and risk assessment to support other AML activities. Engage in enhanced due diligence for high-risk customers or those who engage in suspicious transactions.

Summing Up

Whether you run a traditional bank or a Fintech company, KYC and AML matter. Fraud and other financial crimes bring massive losses to the organization.

Some businesses do not recover from fraud. Fraud, money laundering, and other financial crimes will also affect your company’s reputation. Therefore, you must implement AML and KYC best practices to ensure the business’s survival and profitability.

AML and KYC policies will protect your business from internal, external, and regulatory risks that are becoming common in the digital age.



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