Whatever your background and experience in business operations, you’re likely to be aware of the sheer number of acronyms and definitions you’ll need to remember.
For those within the compliance space, KYC and AML will crop up time and time again. Know Your Customer and Anti-Money Laundering are a key part of the complicated web of compliance.
It’s easy to tangled up, with disastrous consequences for businesses that aren’t on top of compliance measures. Stay in the loop and up-to-date with Red Flag Alert’s expert breakdown of how KYC and AML are distinctly difference, yet serve a similar purpose…
What is Anti-Money Laundering (AML)?
Anti-money laundering refers to a set of regulations, laws, and procedures that regulated industries must follow to maintain compliance.
The aim of AML is to prevent and minimise the illegal activity of concealing the origins of illegally obtained money, typically by means of transfers involving foreign banks or legitimate businesses.
AML regulations are critical for several reasons, including:
- Prevention of criminal activities
- Protection of financial systems
- Mitigation of risk
- Maintaining trust in financial institutions
- Compliance with regulatory requirements
- International cooperation
What are the Core Requirements of AML?
Creating a comprehensive Anti-Money Laundering (AML) checklist is crucial for financial institutions and businesses to ensure compliance with regulatory requirements and mitigate the risk of financial crime:
Company Wide Risk Assessment
Conduct a thorough risk assessment to identify and assess the money laundering and terrorist financing risks associated with customers, products, services, and geographic locations.
Customer Due Diligence
Establish procedures for conducting CDD on all new customers as well as ongoing monitoring of existing customer relationships. This involves collecting and verifying customer identification information, including name, address, date of birth, and identification documents.
This step should also involve assessing the nature and purpose of the customer relationship and the source of funds to determine the risk level and appropriate level of due diligence.
Enhanced Due Diligence
Implement procedures for conducting EDD on high-risk customers, including politically exposed persons (PEPs), high-net-worth individuals, and customers from high-risk jurisdictions.
Record Keeping
Maintain accurate and complete audit trails of customer identification, CDD/EDD documentation, transaction records, and SARs.
Establish retention periods for retaining records in accordance with regulatory requirements.
Regulatory Compliance
Stay informed of changes to AML laws, regulations, and industry best practices to ensure ongoing compliance. It’s best to monitor regulatory developments and update AML policies and procedures accordingly.
What is KYC?
KYC stands for Know Your Customer, and refers to the process in which businesses, particularly those in the financial sector, verify and assess the identity of their customers.
The primary purpose of KYC is to prevent identity theft, money laundering, fraud, and other illicit activities by ensuring that businesses have accurate and up-to-date information about their customers.
What are the core requirements of KYC (& CDD)?
KYC (Know Your Customer) and CDD (Customer Due Diligence) processes are different to AML procedures, but serve the same purpose in preventing financial crimes such as money laundering. As such, the following core requirements for KYC and CDD are vital for businesses to follow:
Identification of Customers
Collecting sufficient information to identify and verify the identity of customers. This includes obtaining valid government-issued identification documents such as passports, national IDs, driver's licenses, etc.
Risk Assessment
Conducting a risk assessment to understand the nature and extent of risks associated with a customer, including the risk of money laundering, terrorist financing, fraud, or other illegal activities.
Ongoing Monitoring
Implementing procedures for ongoing monitoring of customer transactions and activities. This involves keeping track of unusual or suspicious transactions and updating customer information regularly.
Customer Profiling
Developing customer profiles based on their risk level, transaction history, and other relevant factors. This helps in identifying unusual behaviour or patterns that may indicate suspicious activity.
Enhanced Due Diligence (EDD)
Implementing enhanced due diligence measures for customers who pose a higher risk, such as politically exposed persons (PEPs), sanctioned individuals (HNWIs), or customers from high-risk jurisdictions.
Source of Funds/Wealth
Understanding the source of a customer's funds or wealth to ensure they are legitimate and not derived from illegal activities.
Purpose of Account/Transaction
Determining the purpose of the customer's account or transaction to ensure it is legitimate and consistent with their profile and expected activity.
Record Keeping
Maintaining comprehensive records of customer information, transaction history, and due diligence measures undertaken. These records should be kept for a specified period as required by regulations.
Compliance with Regulations
Ensuring compliance with relevant laws, regulations, and industry best practices, which may vary depending on the jurisdiction and type of business.
Who should implement KYC and AML?
Any financial institution or company regulated by the Financial Conduct Authority (FCA) or similar regulatory bodies in other jurisdictions is required to implement KYC and AML measures. This includes a wide range of entities such as:
- Banks and financial institutions
- Accountants and auditors
- Law firms
- Estate agents
- Tax advisors
- Credit unions
- Asset managers and investment firms
These entities are required to implement robust KYC, KYB, and AML procedures to verify the identities of their customers, understand the nature of their business relationships, and detect and prevent money laundering and other illicit financial activities.
Failure to comply with these regulations can result in severe penalties, including fines and loss of operating licenses.
What is the Difference Between AML and KYC
AML (Anti-Money Laundering) and KYC (Know Your Customer) are closely related concepts but serve different purposes within the financial industry. Take a look at our breakdown of the two, and how they interact:
Purpose
- AML - AML regulations are designed to prevent and detect money laundering and the financing of terrorism by identifying and stopping the flow of illicit funds through the financial system.
- KYC - KYC procedures are aimed at verifying the identity of customers and assessing the risk they pose in terms of money laundering, terrorist financing, fraud, and other illicit activities. As such, AML processes will include a KYC check.
Focus
- AML - AML focuses on identifying and mitigating the risks associated with money laundering and terrorist financing activities within financial institutions.
- KYC - KYC focuses on collecting and verifying customer information to ensure that businesses have accurate and up-to-date information about their customers, thereby reducing the risk of financial crime.
Scope
- AML - AML encompasses a broader set of regulations, procedures, and measures aimed at combating money laundering and terrorist financing, including customer due diligence, transaction monitoring, suspicious activity reporting, and compliance programs.
- KYC - KYC is a subset of AML and specifically refers to the process of verifying the identity of customers and assessing their risk levels.
Regulatory Requirements
- AML - AML regulations are established by government authorities and regulatory bodies to ensure compliance by financial institutions and other businesses that may be vulnerable to money laundering and terrorist financing activities.
- KYC - KYC procedures are mandated by AML regulations and form an essential component of AML compliance efforts. However, KYC specifically focuses on customer identification and verification.
Implementation
- AML - AML measures are implemented through comprehensive compliance programs that include policies, procedures, controls, training, and oversight mechanisms to prevent and detect money laundering and terrorist financing activities.
- KYC - KYC procedures are implemented as part of AML compliance programs and involve collecting customer information, verifying identities, assessing risk levels, and monitoring customer accounts and transactions.
How Red Flag Alert Transform KYC and AML Checks
Secure peace of mind with Red Flag Alert’s complete services, ensuring your compliance with regulatory requirements.
We provide a comprehensive database and tools for businesses to perform quick checks on international databases of politically exposed persons (PEPs) or sanctions lists. By going beyond the industry standard, users can benefit from UK and international sources, including information on ultimate beneficial owners, corporate family trees, PEPs, and sanctions lists.
We have led the charge in creating a platform that guarantees access to accurate and comprehensive data necessary for risk assessments and regulatory compliance without excessive training or experience. Combined with real-time data updates and business intelligence, we enable businesses to monitor changes to customer risk profiles and react promptly.
Our platform reduces the amount of staff time needed to send a check to less than a minute. Whilst our AI-powered fully digital checks are completed conveniently on your customer's device and reduce referral rates to just 2%.
Take care of your data security and compliance with GDPR requirements with our quick and easy digital verification for customer onboarding, helping to enhance customer experience and business performance.
Unlock your free trial today and begin integrating Red Flag Alert into workflows to transform AML compliance, streamline regulatory audits, and provide comprehensive records to regulators.
