Anti-money laundering (AML) restrictions are made mandatory by both domestic and international agencies around the globe, and financial firms are subject to a wide range of assessment and monitoring responsibilities. Among these AML duties is the Know Your Customer (KYC) procedure, which allows businesses to understand and analyze their consumers’ financial behavior. Moreover, due to the close vicinity of the words KYC and AML and the possibility that they are frequently utilized synonymously, it can be tough to comprehend how they vary in a legal and regulatory framework.
Because of the legal significance of the governance framework, companies must learn to differentiate between AML and KYC, as well as how the two connect to each other in the legal mechanism.
How Do They Differ from Eachother?
AML (anti-money laundering) is a general concept for the multiple aspects, controls, and methods that businesses must implement in order to meet legal requirements. KYC, on the other hand, is a specific composition of AML and directly relates to the methods by which companies demonstrate and authenticate their consumers’ identities, as well as supervise their financial behavior.
Generally, the KYC procedure includes collecting and verifying a variety of characterizing data from consumers, including:
- Date of birth
- Business incorporated documents
KYC might also involve ongoing transaction screening and a variety of consumer screening initiatives, such as sanctions screening, biased media, and PEP (politically exposed person) screening.
Enhanced Due Diligence in AML and KYC
KYC enables organizations to adopt a risk-based strategy to AML, allowing them to both recognize their consumers and know the depth of the money laundering threat they pose. Risk-based AML, a Financial Action Task Force (FATF) guidance, necessitates businesses to evaluate their clients separately in order to identify their overall risk: clients considered to pose a greater AML threat should be susceptible to more rigorous AML oversight, whereas lower-risk consumers may be susceptible to easier, less restrictive measures.
The risk-based strategy to AML allows businesses to manage regulatory requirements with available budgetary assets – and, most importantly, with the need to bring forth a good user experience. Businesses can make sure that only a minority of clients are made subject to burdensome KYC provisions that adversely influence their experience by evaluating them one by one. Businesses should ideally incorporate risk-based AML procedures in order to bridge the gap between their compliance requirements, funds, and client service experiences.
As a result, where a client poses an especially high threat of money laundering, the KYC procedure should include Enhanced Due Diligence (EDD). The EDD procedure may include the following steps:
- Enhanced customer recognition materials are being collected.
- Confirmation of the origin of the user’s finances
- Close examination of the transaction’s intention or the evaluation of financial relationships
- Continuous monitoring processes are being implemented
AML KYC Compliance
The tension between establishing proper KYC laws and persisting to improve the consumer experience has lately been exacerbated by electronic upstarts like FinTechs and competitor banks. Document verification service is also used for this purpose.
FinTech advancements have both benefits and drawbacks to the KYC procedure, while most add pace, shortening the time required to conduct due diligence, those similar advancements also refresh anticipations around the onboarding times, creating any profits delegation on a company’s opportunity to sustain to enforce KYC measures effectively. Solutions that, for instance, transfer numerous automated enquires from consumers are more likely to generate bad experiences than solutions with a softer approach.
Taking this into account, many financial firms remain dependent on tried-and-tested KYC techniques. A Wolfsberg Group 2021 research confirmed the usefulness of KYC provisions that are planned and constructed to reduce risk while assisting government agencies’ goals. While conventional KYC initiatives stay viable, companies can still benefit from FinTech innovation by incorporating new techniques such as advanced analytics and artificial intelligence. These innovations depict a means of gaining a deeper, more subtle knowledge of consumer behavior while improving decision-making in a highly complicated compliance environment.
KYC in an AML Solution
AML restrictions in most territories enable businesses to design and execute an AML system that is customized to their company requirements and capable of handling the possible risk that their consumers or related industries present.
The AML software of a company should make it easier to carry out the pragmatic assessment and surveilling steps necessary by the AML regulations under which it functions. It is critical to realize that the screening and monitoring processes connected with AML regulations are subject to change based on current trends in financial fraud and the regulatory needs of financial institutions.
When to Implement KYC Measures
The KYC procedure must take place during the customer onboarding procedure to make sure that clients are telling the truth about their identity and their business as well. An evaluation of a user’s personal details as well as the essence of their business connections should be part of the identity validation system.
Moreover, KYC should occur throughout the professional relationship to ensure that a client’s risk level remains consistent with the company’s previous review of them.
Expert KYC system software is accessible now to aid companies in managing the identity verification process, enabling them to focus especially on high-risk clients, while trying to minimize human mistakes and false positives.