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Introduction
Your customers and their financial transactions may put your financial institution at danger of high-risk fraud. There are a vast number of rules for to navigate in terms of compliance. Additionally, there are numerous compliance terms that might signify different things.
These regulations and numerous compliance terms signifying different things makes it a furthermore complicated process.
KYC and AML are frequently used interchangeably and conflated. Their concepts however, are drastically different.
AML stands for “Anti-Money Laundering” and KYC is known for “Know Your Customer.” Compliance with these terms is mandated by both global and local authorities. Entities failing to do so face severe penalties from the government.
This blog addresses KYC, AML, their fundamental differences and importance in various financial organisations.
What is AML
AML laws aim to reduce money laundering and terrorism funding.
AML compliance programs comprise interior and outer frameworks. These apply KYC during onboarding, identification of suspicious movements (eg. flagged transactions), oversee risk controls, offer staff training, and submission of independent audits regularly. Consolidating these frameworks gives FIs a far higher possibility of quick identification and thwarting illegal activity.
FIs and service providers are scrambling to keep up with the increased demand for financial products, which is being met with tighter AML standards. With an increase in money laundering, the country’s economies get sabotaged while its currency value suffers.
In this regard, implementing robust AML regulations across the financial industry aids in elimination of unwanted candidates. This protects clients against fraud, companies from financial loss, and economies and nations from currency collapse and criminal development.
A typical AML program includes:
- KYC during onboarding and throughout customer lifecycle
- Monitoring financial exchanges
- Reporting suspicious activities to regulators
- Ongoing risk evaluation
- Methodical internal audits
- AML compliance training for employees
What is KYC
As its name suggests, Know Your Customer (KYC) implies the process of validating a customer’s identification. It’s a subset of the larger term AML.
It is used by businesses to gather information about their clients and verify their credentials. Clients wanting to use a company’s service must present their identification documents. Likewise, it helps the organisation to adequately evaluate the risk involved with every client.
The 3 Components of KYC
- Customer Identification Program (CIP) : As part of CIP in KYC procedure, the ‘Personally Identifiable Information’ (PII) of customers is collected and analysed. Based on the verification’s goals, an institution can gather any PII it wants. For the most part, this will consist of info like the customer’s entire name, address, and birth date. In addition, the institution has the prerogative to request any document from the listed list of OVDs for the same. As this stage isn’t standardised, customers may discover it differs from bank to bank.
- Customer Due Diligence : As part of CDD, all of a customer’s credentials are gathered to validate their identity and determine their level of risk exposure. Simplified due diligence (SDD) and enhanced due diligence (EDD) are two subcategories of CDD. Low-risk bank accounts, such as standard bank accounts or low-value bank accounts, are suitable for SDD. EDD is for people who might be involved in money laundering or terrorism funding. Additional data collection is required if a consumer is deemed to be a high risk. Information about a person’s location, occupation, property/asset, banking activities, and transaction kinds are all included in EDD.
- Continuous Monitoring: One-time security checks aren’t enough. Continuous monitoring is the only way to assure that your customers are safe to deal with. Understanding and monitoring a customer’s account activity helps discover abnormalities and eliminate dangers.
A ‘Customer Profile’ outlines risk levels and transactional behaviour of any client. Any suspicious behaviour will be flagged in the future by comparing transaction data to this profile.
Difference between KYC and AML
It’s common to see KYC and AML as being nearly identical, yet the two are actually quite different.
AML
- Meaning : AML refers to any attempts to prevent money laundering, such as prohibiting criminals from becoming customers and monitoring for suspicious activities.
- Origin : BSA (2001) was used as a framework for the implementation of AML legislation under the US Patriot Act, which was signed into law in 2003. So, AML regulations are a natural outgrowth of KYC regulations.
- Process : To apply rules and regulations that combat doubtful activities and illegitimate trades, for example, tax avoidance.
- Scope: The financial industry, including banks, insurance companies, and the like, is the primary setting in which AML guidelines are put into action. As a result, AML requirements have lately expanded to include enterprises in the fields of real estate, legal, Fintech, and precious metal dealers.
- Purpose: To combat financial crime, particularly the terrorist financing or the laundering of funds.
- Elements: Client and data protection, execution of KYC and AML rules, identifying, tracking, reporting and combating money laundering are some of its elements.
“KYC is a process while AML is a structure”
KYC
- Meaning : It relates to the identification and screening of customers. It also makes you aware of the hazards your clients bring to your business.
- Origin : KYC began with the Banking Secrecy Act (BSA) in 1970. Furthermore, the law was enacted to prevent the laundering of drug-related money. The regulation’s primary goals are to combat drug trafficking and money laundering.
- Process : The primary spotlight is on gathering customers’ data. In addition, this includes verifying their identities.
- Scope: KYC requirements are applicable to a wide range of businesses. It is, however, dependent on the nature of the business and the associated risk to it.
- Purpose: To keep criminals and dubious characters out of legal banking institutions.
- Elements: Data gathering, authentication, transaction monitoring, risk analysis, and management are included.
Importance of KYC and AML for FIs
Worldwide, KYC and AML regulations are in place. Financing for terrorism unfortunately, does not always end at the country’s borders. Economic crimes and money laundering are on the rise around the world, and they need to be dealt with. In order to fulfil this function, regulators are enforcing significantly stricter KYC and AML norms.
If you let users move money, you or your business can be a money laundering target. But extortion is less probable when a company takes strong measures to avoid fraud.
Compliance with KYC and AML is not only important for the safety and satisfaction of customers, but it is also required by law. Regulations require all banks and FIs to adhere to the specified set of AML standards. A comprehensive anti-money laundering strategy begins with KYC initiatives.
Regtech for KYC – AML compliance
Financial institutions should also invest in effective IT solutions in order to efficiently conduct their AML compliance programs. Modern-day consumer risk management is too complex for many current AML-KYC systems to handle. AML risk ratings for customers are either done manually or rely on a limited set of criteria. As a result, risk factors that differ in number and importance from one consumer to the next are not adequately covered.
Most of the time, consumer information is not kept up to date in the proper manner and frequency. This leads to superfluous case reviews, which increases expenses and dissatisfied customers. To make matters worse, the inflexible nature of risk criteria means that financial institutions are left vulnerable to new dangers when client behaviour shifts.
It’s about time that the old process is given a makeover. The constraints that make your organisation vulnerable to identity theft and faulty processing must be eliminated in new solutions.
The good news is that as rules and demand rise, new tech is catching up to service providers’ needs. Using IDfy’s cutting-edge automated KYC technology, your business can reduce the costs, delays, and clerical errors that come with manual identification and verification.
Learn how to easily incorporate IDfy’s AML and identity verification solutions into your onboarding and ongoing monitoring processes. In the event, if you have any questions, please feel free to contact us here.
IDfy’s AML Solution
IDfy’s AML Check API is an automated mechanism for screening global sanctions, warnings, adverse media and PEP lists for suspicious individuals to aid in preventing money laundering activities across the world. It is a near real time product that accepts a search term and instantly searches millions of global databases within a couple of seconds to return relevant results.
Near Real Time
We use modern tech – AI, NLP, ML to make this API near Real Time.
- All of our sanctions, watchlists, PEP, are updated every 15 min
- Our PEP (Politically exposed person) checks updated every 24 hours
- Our media checks are twice a day
- Every profile is updated at least once every 24 hours
- On average we update about 50k profiles / day, and add about 10k profiles / day
Databases we look at
Sanctions: We cover all the major lists across every major country to keep our API updated with actual and meaningful data. For example: OFAC SDN, UN Sanctions list, US Bureau, Ministry of Home Affairs (India). The list covers 150+ such entities.
Warnings: We cover all warnings list across Asia, Europe, Africa, South and North America. The list covers 1000+ such entities. For example: Immigrations, Customs, Wanted Fugitives
PEP: We cover all PEPs, starting from the head’s of the state to the Local city councils, classified differently as pep-class-1, pep-class-2, etc.
Fitness Probity: We cover all major fitness and probit lists, for example: Ministry of corporate affairs, US System for Award Management Exclusions, etc.
Adverse Media: Our API is in realtime updating this database every few minutes, further, we offer a classification / breakdown across adverse media type, for example, adverse-media-financial, adverse-media-terrorism, etc.
Don’t forget to read our extensive blog on ‘All you need to know about KYC in India‘.
Why IDfy’s AML Checks?
- We cover all possible databases you could look at for performing AML checks
- Ability to customise this API per your requirements by only reading specific fields from response
- Response is within 2-2.5 seconds
- Lists updated daily in real time
- Ability to filter searches based on specific checks
An automated KYC and AML solution provided by IDfy eliminates the onboarding inefficiencies associated with manual verification procedures by enabling quick, simpler and more secure ID verification.
