Difference Between KYC and AML
Both national and international bodies around the world regulate Anti-Money Laundering (AML) guidelines for the finance industry. These impose serious screening and monitoring processes on all financial institutions. The steps to implement a successful anti-money laundering (AML) program include a key process: ‘Know Your Customer’ (KYC). Oftentimes, the terms AML and KYC are used interchangeably, which means they are seen as the same thing. However, this is far from the truth, as both KYC and AML differ greatly in their meaning, especially in a regulatory context.
In order to successfully comply with anti-money laundering regulations, firms must understand both AML and KYC, what they are, how they are different, and how they both relate to each other within the regulatory process. Financial institutions often use this understanding to implement in their compliance program through anti-money laundering software.
What is Know Your Customer (KYC)?
Know Your Customer or KYC is a fundamental process in any financial institution’s anti-money laundering program. It is defined as the process through which these institutions gather information on their client and verify their identity. This greatly helps them to adequately assess the risk associated with each client. For example, all investors must be verified before they can participate in any ICO or fundraising activities. Fintech companies are mandated to gather ample, verifiable information on their client and their identity in order to determine their legitimacy before beginning any business activities.
What is AML?
Anti-money Laundering (AML) refers to the overall, broader measures and processes that financial institutions and governments use in order to prevent and combat financial crimes (specifically money laundering and terrorist financing). AML regulations are dictated by global bodies, such as the UNODC and FATF, regional bodies, like FINRA, as well as local governments and bodies.
The AML policy forms part of the broader, complete AML compliance program of a financial institution.
What is the Difference Between AML and KYC?
The difference between AML and KYC is that, on the one hand, AML (anti-money laundering) refers to an umbrella term for the full range of regulatory processes that firms must implement in order to carry out legitimate business, while, on the other hand, KYC (Know Your Customer) is a smaller component of AML that consists of firms verifying their customers’ identity. It is a mere step in the larger process.
A lot of financial institutions often get confused between KYC and AML, blur the lines between the two processes, and are subject to disciplinary action by regulatory bodies as a result. They can be fined or even sentenced to prison time based on the severity of the offence.
It is true that AML/KYC are not the same and cannot be used interchangeably. That being said, KYC and AML are deeply interconnected processes.
KYC is the first step in the implementation of an AML program or policy. It is the process through which the client’s identity is verified. The objective is to understand the client and their financial dealings on a deeper level, in order to effectively manage risks. KYC is the process that starts off the AML compliance process.
As mentioned before, AML, on the other hand, is a much larger, broader concept that consists of the following:
- KYC
Customer Due Diligence (CDD), the basic process of verifying customer identity, and Enhanced Due Diligence (EDD), which is a more advanced KYC procedure that is used primarily for high-risk customers. These customers are generally more prone to being involved in financial crimes, including money laundering and terrorist financing, hence the need for more thorough verification.
- Risk-based AML policies
- Ongoing Risk Assessment and Ongoing Monitoring,
- AML compliance training programs for staff
- Internal Controls and Internal Audits
Key Differences Between KYC and AML
Why Do Companies Confuse AML and KYC?
KYC is a compliance process that forms the first step of the broader AML framework. But it is not unusual to see financial institutions and companies confuse the two. Most companies use KYC software as a tool to detect fraud in addition to customer verification. This just isn’t accurate, since AML compliance is a much more complex and detailed process.
The prevention and implementation of anti-money laundering require an in-depth knowledge of a lot of factors. From the inner workings of the finance industry to an understanding of local, regional, national and international anti-money laundering regulations and rules, a successful AML professional must have a skill-set beyond that of KYC. In addition, they must also be up-to-date with the latest technology and AML software on the market.
It is not hard to imagine why companies often confuse the two processes of KYC and AML. After all, they both play an integral role in a financial context. And to top it off, they are both risk-based approaches as well. They also share some common features such as client identification and risk management. But it is important to always bear in mind that these processes are not the same and serve varied functions. This will help you to find the right professionals and team to take up each task — AML or KYC — and do it justice.
We hope that you are now aware of the definition of KYC and AML. These two processes, although different, are complementary, interconnected, and work together to combat financial crime. AML and KYC compliance is a must for all financial institutions who want to carry out legitimate dealings and avoid breaking the law.
Want to know more about AML? Here are 5 common myths about AML.
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