Author: Alexander Tzankov

FinTech & RegTech professional I Growth I New Markets | New Products | Advanced Analytics

What is the difference between KYC and AML?

The terms KYC and AML are so close and frequently used interchangeably

22 Sep 2022 | 5 minutes read Share on Facebook Twitter share Share on Viber LinkedIN share Email share

The terms KYC and AML are so close and frequently used interchangeably, that it can be difficult to understand how they differ in a regulatory setting.

There are numerous regulations that businesses, banks, and other financial institutions must overcome when it comes to compliance. National and international authorities have imposed a wide range of screening and monitoring duties on financial institutions as a result of anti-money laundering (AML) rules. The Know Your Customer (KYC) process is one of the AML standards that companies must comply with in order to verify their customer's identity and have a better understanding of their financial dealings.

What is AML (Anti Money Laundering)

AML, or anti-money laundering, refers to the methods that financial institutions and other businesses must take to prevent criminals from depositing or transferring money obtained through illegal activities. Through these measures, institutions can prevent corrupt individuals or businesses from hiding their true source of income.

There are a variety of ways in which AML can be applied. Preventing money laundering, terrorism financing, criminal financing, and financial crimes is the goal of AML, which encompasses a wide range of practices and the KYC process is one of them.

What is KYC (Know Your Customer)

KYC is an element of AML that corporations and financial institutions use to verify their customers' identities and track their financial conduct. Identifying and screening your customers to determine what risk factors they pose to your business is what “Know Your Customers” means. KYC compliance contributes to the prevention of money laundering, fraud, and terrorist financing. Usually, the KYC check involves conducting certain customer identification procedures and verifying personal information such as:
- Name
- Address
- Date of birth
- Company incorporation documents
KYC regulations may also include transaction monitoring and consumer screening, such as PEP (Politically Exposed Person), sanctions, and unfavorable media screening.

Is KYC Verification Mandatory?

Some financial institutions may question whether KYC screening is necessary given the prevalent impression of it as a bureaucratic and time-consuming process.

But the answer is an unequivocal “yes”. Institutions are required by law to follow specific protocols for confirming and authenticating their consumers, which are set down by government entities. Approved methods for identity verification include face recognition, document verification, background checks, data comparison, and biometric verification.

What are the KYC requirements for different sectors?

KYC regulations for financial institutions

Financial institutions are obliged by government regulators across the world to complete KYC procedures when onboarding customers to avoid fraud, money laundering, and terrorism funding. KYC assists financial organizations in being compliant while also increasing their trust.

It is the service's responsibility to undertake KYC and monitor client transactions to verify they are not involved in a money-laundering operation. Financial institutions must verify the source of larger sums and report cash transactions that exceed threshold limits and ensure that their clients understand AML regulations in addition to complying with them. Every significant financial transaction needs to be documented properly. Examining the records of related financial transactions is one of the most effective means of discovering crime and corruption.

KYC regulations for Banks
Banking regulators are frequently the ones that incorporate new KYC criteria first. Banks, that provide a range of financial services and handle a great number of accounts, money, and transactions, might be a key conduit for money laundering if left exposed.

Fortunately, technology is enhancing KYC processes and AML programs for banks, allowing for faster, more accurate, and reliable customer identification program. Banks can acquire more information and analyze it more effectively by leveraging APIs, AI/ML, biometrics, and modern optical character recognition (OCR) technology. Numerous additional sources, such as email history, smartphone data, and mobile app data, can help with risk assessments. As a result, there is a greater chance of recognizing fake identities and preventing financial crimes before opening a bank account opening.

KYC regulations for Crypto

KYC obligations seem to be a more challenging compliance problem in the case of crypto exchanges. Enterprises must exert greater effort to establish the identities of clients utilizing their digital services and to comprehend the specifics of the transactions they facilitate.

Following the guidelines of the Financial Action Task Force (FATF), crypto exchanges should implement a risk-based approach to KYC compliance. Risk-based compliance requirements are associated with conducting risk assessments of each customer and then executing an appropriate AML response. The company must assess money laundering risks and if the evaluation determines that a consumer poses a high risk, the cryptocurrency exchange platform should implement more strict compliance procedures, as opposed to less strict steps for customers considered as low risk. Risk-based compliance enables cryptocurrency exchanges to utilize AML resources more effectively while protecting clients from unpleasant experiences and reducing customer risk.

Using machine learning and AI

Often KYC procedures aren’t enough on their own, financial institutions must establish a full set of thorough AML operations. However, compliance costs can increase significantly and the whole customer onboarding process can become time-consuming. Luckily, as regulation and demand increase, technology is rising to meet the needs of service providers. Artificial intelligence (AI) and machine learning are gaining considerable attention for their ability to improve business operations, and regulators are encouraging banks to embrace creative techniques to combat money laundering. A smart solution that can capture evolving customer behaviour through correct identification of risk indicators and regularly updating client profiles is required for AML compliance. There are numerous solutions available to ensure correct AML- KYC compliance in a long-term way.

How can Truvity help?

Truvity offers smart, easy, and powerful solutions for compliance management and customer onboarding processes in the SEE region. Our user-friendly software checks over 1000 public sources of information to extract a consolidated profile of an individual or company. This allows customers to conduct KYC checks within a matter of seconds and find out additional information about related or associated parties, Politically Exposed Persons, and Adverse Media Entities. All of this data is then stored in one easy-to-use dashboard that can reduce administrative burden and complex workflow.


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