What is KYC & AML?

The Know Your Customer (KYC) process is performed to verify new customers’ identities and prevent illegal activities, such as money laundering or fraud. KYC is undertaken as part of Anti-Money Laundering (AML) requirements.

Conducting KYC and adhering to AML regulations protects the company and its customers.

What are KYC and AML Checks?

KYC is a key part of AML activity – and both AML and KYC are essential parts of due diligence in finance. KYC refers to the checks that banks (and other organisations) must carry out to establish a customer is who they claim to be, and involves verifying the identity and documentation of the customer and establishing the level of risk they pose. AML or Anti-Money Laundering refers to the regulatory processes to control money laundering, fraud, and financial crime.

KYC and AML are vital in the finance sector – given the potential for financial transactions to be criminal or fraudulent. Together, KYC and AML checks play a crucial role in safeguarding businesses and financial institutions from unlawful activities while maintaining the integrity of their operations and the security of their client’s assets.

Importance of AML & KYC

AML and KYC regulations were introduced to try and control the problems of money laundering, fraud, and other forms of financial crime.

The United Nations reports that money laundering accounts for 2- 5% of global GDP (around US$800 billion to US$2 trillion). As such, AML regulations are vital in protecting the financial services industry against fraud and money laundering.

Having robust AML and KYC procedures is best for banks, fintechs, and other financial institutions to protect their platforms from misuse.

Verifying a new customer’s identity, establishing the level of risk they might pose, and monitoring them throughout the relationship is essential for protection and a legal requirement.

There is, however, another important aspect of AML and KYC in banking: While security and protection are key, these processes also form a vital early part of the customer experience. Customers want to feel secure, but they also want an easy and friction-free experience. Implementing intuitive AML and KYC procedures can offer this, improving conversion rates and creating the right first impression.

Process of AML & KYC

Processes for AML, Combating the Financing of Terrorism (CFT), and KYC are well-defined in most countries’ AML regulations. KYC is a subset of AML and CFT and refers to the risk-based approach to customer identification and verification that forms part of AML requirements.

AML, CFT and KYC procedures must include:

• Identity verification. A new customer needs to be verified based on their official identity documents. This will include checks that documents are valid and that the image/likeness matches the customer. Identity verification is often automated, using modern artificial intelligence techniques.
• AML Screening and Monitoring. Customers need to be screened to determine risk levels. This can include PEP (Politically Exposed Persons) screenings, checks on sanction lists, and watchlists.
• Continuous Monitoring. AML and KYC checks continue throughout the customer relationship. Individuals must be monitored for changes, and suspicious transactions must be identified.

The broader concepts of AML and CFT also include:

• Reporting of suspicious activity and transactions. A process must be in place to report and deal with suspicious transactions internally and with appropriate authorities. This includes the handling of false positive results.
• Training and policies to update employees with regulations, processes, and tools.
• Maintaining sufficient internal records and audit trail. The AML and KYC audit trail must be appropriately maintained for both internal use and for regulators.