KYC and AML — the difference and best practices

AML KYC software to combat financial crime and avoid troubles with the law
The growth of FinTech industry puts forward the demand for fighting financial crime, e.g, money laundering or financing terrorism.

KYC or "Know Your Customer" is the process of verifying the identity of the customer. Each client is supposed to pass the KYC procedure and provide their credentials in order to participate in the ICO or use fintech service. This is a necessary measure to ensure that the projects is doing business with legitimate entities.

The term AML (anti-money laundering) is broader than KYC and refers to a number of international and local policies, laws and regulations established to prevent generating income in a fraudulent way as corruption, drug selling or terrorism financing.
AML system
AML, or Anti-money Laundering refers to all policies and regulations that oblige financial institutions to monitor their clients in order to prevent generating income through illegal actions. A financial institution's anti-money laundering policy forms part of its wider compliance management, and should be arranged to meet the requirements of its legislative environment.

AML software is a basic part of an organization's AML strategy.
Anti-money laundering systems analyze customer data and examine it for suspicious activities. These activities are considered to be rapid increase in funds or withdrawing large sums of cash.
Basic AML usually includes:
  • Transaction monitoring (Suspicious Activity Reports, Suspicious Transaction Reports)
  • Currency Transaction Reporting (CTR)
  • Customer identity management, such as Know Your Customer (KYC).
What is KYC and what it includes
KYC is a process that allows businesses to identify who their customers are. It is crucial for financial institutions in order to prevent fines, sanctions or even criminal liability for doing business with a money launderer or a terrorist. KYC laws can vary in different countries whereas its fundamental part is to receive enough information for identification of a person and making sure that their activities are legitimate.

KYC procedures are started by collecting essential data about clients, mainly using electronic identity verification. There usually are 3 steps:

The principal aims of KYC procedures are:
  • Select the proof of identity document type (passport, national identity card or driving license).
  • Upload a photo of a document.
  • Upload a photo of holding the proof of identity.

Organizations requiring KYC procedure do not have access to customer's personal data. The data will be processed by an identity verification engine.

The principal aims of KYC procedures are:

  • Identify the client.
  • Better understand customers and their financial dealing, thus, manage risks efficiently.
KYC and AML in banking and Fintech
Complying with AML and KYC laws has become a rule every bank has to follow. Failure to abide by these laws leads to a heavy financial penalty, and also causes a big damage to banks and financial institutions. KYC can be thought of as the umbrella term here, as there are other procedures apart from identification of a customer.

  • CDD - Customer Due Diligence is a process of KYC which is used to gather customer's data about identity, address and to evaluate the risk category of the customer. In general it is a kind of basic scrutiny about a customer.
  • EDD - Enhanced Due Diligence is a additional KYC process to be followed for high risk customers. The customers who are classified under high risk category in CDD are prone to money laundering and financing of terrorism. Hence they are regulated and monitored as per stipulated norms.
KYC in ICO and blockchain
The KYC procedure is becoming a standard for cryptocurrency exchanges and token crowdsales likewise. It is still a controversial point, because the reason most people were attracted to crypto is anonymous transactions (so, there is no doubt they were used for at least money laundering purposes). However, customer identification is obligatory on most cryptocurrency exchange platforms, because anonymous trading accounts are forbidden in many countries. Therefore, the advantages of implementing KYC in ICO and blockchain are:

  • Avoiding legal and reputational issues.
  • Combating criminal acts (money laundering).
  • Ensuring safety of investors' assets.
  • Establishing credibility with banks.

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