MoneyLaundering

The global regulatory landscape is diverse and financial institutions must keep pace with developing rules in order to remain compliant. Given the proximity of terms like ‘AML’ and ‘KYC’ and the fact that they are often used interchangeably, it can be difficult to understand how they differ in a regulatory context. In this post, we look to explore the function of these terms and how they relate to each other.

What is AML?

Anti-Money Laundering regulations are in place to mitigate the risk of money laundering and terrorism financing. Financial institutions are required to monitor their clients to prevent money laundering and report any financial crime they detect to relevant regulators; where a business is functioning determines the local and international regulations they need to comply with in order to continue operating.

AML laws were brought to a global forefront after the creation of the Financial Action Task Force. The FATF is the global money laundering and terrorist financing watchdog. Its list of 97 Recommendations are the internationally endorsed global standards against money laundering and terrorist financing. They provide the framework for countries to build an effective system to combat money laundering and terrorist financing, and implement necessary measures. The FATF currently comprises 37 member jurisdictions and 2 regional organisations, representing most major financial centres in all parts of the globe.

Here are some of the regulated markets which are required to perform AML checks:

  • Finance & Banking
  • Payments & Digital Money
  • Gambling & Social Gaming
  • Cryptocurrency
  • Retail Finance

Businesses operating within the EU must conform to the updated 6th anti-money laundering directive which comes into effect 3rd December 2020. Download our guide for all you need to know on 6AMLD here.

What is KYC?

Know Your Customer (KYC) is part of the process of verifying a customer’s identity. Most regulated financial markets require organisations to perform KYC checks in order to authenticate an individual.

Qualifying organisations need to verify who their customers are before they engage in a business relationship; typically, customers are required to provide credentials such as ID documents in order to use a company’s service. These checks help companies meet KYC & AML regulations and reduce fraud. 

KYC policies have been expanding for some time and have become very important globally. KYC allows companies to protect themselves by ensuring that they are doing business legally and with legitimate entities and protects their customers who may otherwise be harmed by financial crime.

What is the difference between AML & KYC?

AML is an umbrella term for the range of regulatory processes firms must have in place, whereas KYC is a component part of AML that consists of firms verifying their customers’ identity. 

The relationship between AML programs and the KYC process should be one of continuous feedback. As a subset of AML, KYC can be used to tailor an AML program to a business’ unique needs, refining customer risk profiles and enhancing compliance performance.

Regulated firms undertaking financial activities are required to apply risk-based customer due diligence measures to prevent their businesses from being successfully targeted by money launderers or terrorist financiers. By conducting thorough KYC & AML checks, businesses can dramatically reduce the financial, reputational, regulatory and strategic risks from other entities.

What is CDD?

Customer due diligence (CDD) is the process of identifying your customers and checking they are exactly who they say they are, ensuring that they are properly risk-assessed before being onboarded. In practice, this means obtaining a customer’s details and cross referencing them with those of an official document which confirms their identity. 

CDD is at the heart of AML and KYC initiatives, and is designed to help banks and financial institutions verify their customers, confirm they’re not on any prohibited lists and assess their risk factors. There are three levels of due diligence: simplified, standard and enhanced.

The application of customer due diligence is required when companies with AML processes enter a business relationship with a customer or a potential customer to assess their risk profile and verify their identity. In situations where a customer presents a particularly high risk of money laundering, the KYC process should involve Enhanced Due Diligence (EDD), which may involve:

  • Collecting additional customer identification materials
  • Verifying the source of customer funds
  • Scrutinising the purpose of transactions or the nature of business relationships more closely
  • Implementing ongoing monitoring procedures

Due diligence is important, not only to comply with regulation and avoid hefty fines & sanctions, but as smart business strategy – not knowing your customer in today’s financial world is a non-starter.

How we can help

Wherever your business is operating you need to comply with local and international regulations, but keeping on top of jurisdiction while retaining efficient business practice is no mean feat. This is where Hello Soda can help.

Our global suite of AML & KYC solutions satisfy and comply with all regulatory requirements while helping onboard your customers faster and more efficiently with more accurate results. Using our single universal API, Sodium you can onboard up to 68% more customers compared with traditional identity verification methods. One simple integration; a flexible 360° solution which is scalable and secure.

Book a demo today and see for yourself how powerful our suite of solutions are.

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