The rapid growth of the FinTech industry led to an increased demand for regulations especially in fighting financial crimes. As we know , Anti-money laundering (AML) and Know your customer (KYC) are prevalent in the financial world. But what do they really mean to you? And what are the differences between KYC and AML?
What is Know Your Customer (KYC) ?
KYC or “Know Your Customer” can be defined as the process of verifying a customer’s identity. In KYC, each client is required to provide credentials such as ID documents in order to use a company’s service. For example, investors must be verified before they participate in an ICO and people before opening a bank account.
Since Fintech companies provide financial services, they are mandated by AML regulations to verify their customer’s identity before offering their services. These are necessary measures to ensure that the institutions are doing business with legitimate entities.
What is Anti-money laundering (AML)?
AML practice is broader than KYC, and it refers to measures used by financial institutions and governments to prevent and combat financial crimes especially money laundering and terrorism financing.
A financial institution’s AML policy forms part of its wider AML compliance program and should be developed to comply with the requirements of its local AML regulations.
The Difference between KYC and AML
Many financial institutions often blur the lines between KYC processes and AML practice, and as a result incur regulatory fines. KYC, as we have established, is just the identity verification process Identify the client. Its principal purpose is to better understand your customers and their financial dealings, thus managing risks efficiently.
While an AML program consists of the following:
- KYC procedure : Customer Due Diligence (CDD) and Enhanced Due Diligence(EDD).
- Risk-based AML policies
- Ongoing Risk Assessment and Ongoing Monitoring,
- AML compliance training programs for staff
- Internal Controls and Internal Audits
Customer Due Diligence (CDD) is a basic KYC process where customer’s data such as proof of identity and address is gathered and used to evaluate the customer’s risk profile.
Enhanced Due Diligence (EDD) is an advanced KYC procedure for high-risk customers. Generally, customers who are classified under the high risk category after CDD are prone to money laundering and financing of terrorism. Hence they are regulated and monitored as per stipulated norms.
EDD procedure includes verifying the Ultimate Beneficial Ownership information (UBO) and politically exposed persons (PEP). Transaction Monitoring is also a key element of EDD.
- Select the proof of identity document type (passport, national identity card or drivers license).
- Upload a photo of the selected document.
- Upload a photo of them holding the selected proof of identity.
- Avoiding legal and reputational issues.
- Combating criminal acts (money laundering).
- Ensuring the safety of investors’ assets.
- Establishing credibility with banks.