Banks, lenders, and other financial institutions are subject to several different complex regulations. KYC (know-your-customer/know-your-client) rules and AML (anti-money laundering) rules are two of the most important regulations that financial entities must comply with. You may hear KYC and AML referred to together, but it is important to understand that these are two separate regulations. Read on for an overview of KYC vs AML regulations for financial institutions.
What Is KYC?
Banks and other financial institutions that accept U.S. clients/customers must understand their obligations under American law. The USA Patriot Act of 2001 enacted a wide array of comprehensive KYC regulations. You may hear KYC called either know-your-customer or know-your-client. Broadly speaking, KYC refers to the process that a financial entity must go through to identify and evaluate the customers and clients that they are taking on.
What Is AML?
The modern anti-money laundering (AML) regulations in the United States derive primarily from the Bank Secrecy Act of 1970. Over the past five decades, many updated AML rules and regulations have been put in place. As explained by the Financial Crimes Enforcement Network (FinCEN), the core purpose of AML laws is to “safeguard the financial system from the abuses of financial crime, including terrorist financing, money laundering, and other illicit activity.” Banks and other financial institutions are required to put an effective, legally-sufficient program in place to ensure that they are not facilitating money laundering, drug finances, terrorist financing, fraud, or other illicit activity.
KYC and AML: Understanding the Key Differences
Indeed, KYC and AML compliance programs work together to ensure that financial entities are in the best position to report suspicious activity. However, it is important to emphasize that KYC and AML are not synonymous. Here is a brief explanation:
- KYC is fundamentally about customer identification. It ensures that banks and other financial institutions know who they are accepting as customers and clients.
- AML is fundamentally about stopping money laundering. It involves not just customer verification, but also the monitoring (and potentially reporting) of suspicious transactions.
To summarize, KYC is essentially a part of AML. It falls under the large umbrella of an AML compliance policy. Anti-money laundering regulations exist to ensure that banks and other financial institutions monitor and report suspicious activity. Know-your-client is an important aspect of anti-money laundering compliance because it is difficult to detect, report, and address suspicious transactions unless a financial institution knows who it is working with.
How to Set up an Effective KYC Verification Program
KYC regulations for financial institutions accepting American clients require firms to adopt a comprehensive customer due diligence (CDD) program. As noted previously, KYC verification is about knowing who you are working with. Here are three key aspects of an effective KYC compliance policy:
- Collection of Personal Identifiable Information (PII): KYC always starts with the collection of the relevant personally identifiable information (PII). While PII can vary somewhat from firm to firm, it generally includes things like name, date of birth, and address. Official documents should be used to verify that a customer is who they claim that they are.
- An Evaluation of the Client/Customer: Once a customer has been identified, there should be an evaluation of their background and their purpose to ensure that they are reasonably safe to accept as a client.
- Ongoing Monitoring—Especially of Higher Risk Clients: Finally, it is important to emphasize that KYC does not stop when a bank or other financial institution agrees to accept a new customer or client. Some form of ongoing monitoring is needed, especially of clients/customers that have been identified as posing a higher risk.
How to Set up an Effective AML Compliance Program
There are comprehensive AML regulations in place under United States law and other foreign laws. Anti-money laundering regulations have evolved to keep up with modern challenges. Banks, lenders, and other financial institutions must be in complete compliance with all applicable AML regulations. A well-crafted AML compliance program will be proactive, not reactive. Among other things, an effective anti-money laundering compliance policy will likely involve:
- Thorough KYC verification at the start of the onboarding process and throughout the entire customer/client relationship;
- Consistent and comprehensive monitoring of financial transactions to ensure everything seems normal;
- Timely reporting of all suspicious transactions and suspicious activity under relevant legal regulations;
- Strong record-keeping procedures to verify full compliance with AML regulations; and
- Well-designed policies and internal training to ensure that all employees are aware of the AML requirements.
Integrity Is a Global Leader in KYC Verification
A division of Aristotle, Integrity leads the way in identity verification and age verification. We are committed to providing narrowly-tailored, cost-effective services to our clients that meet the KYC and/or AML needs. If you have any questions or concerns about know-you-customer (KYC) verification or anti-money laundering (AML) verification, contact us today to learn more about our KYC and AML compliance solutions.