KYC & AML: Best Practices For Compliance
We all know criminals can be intelligent. As the world becomes more and more digital, thieves are finding bigger and more invasive ways to disrupt innocent people’s lives. With the rapid growth of the fintech industry, many new regulations have come about as a means of protecting consumers’ best interests (and their bank accounts).
AML and KYC are two of the most notable tools being used to help combat financial crime, but many organizational leaders don’t know what these terms mean. With this in mind, let’s look at the difference between KYC and AML.
What Is KYC Compliance?
Know your customer (KYC) is the process by which financial institutions verify each customer’s identity. Know-your-customer compliance requires banks and credit unions to obtain certain credentials, such as valid driver’s licenses, in order to use the company’s services. At the beginning stages of a relationship between a financial organization and its customers, the bank must perform customer due diligence to achieve KYC compliance. This means the company collects, verifies and stores information on each potential customer — acquiring the data necessary to monitor financial transactions, and prevent bribery and corruption within the organization.
What Is AML Compliance?
Anti-money laundering (AML) compliance is broader than KYC compliance. Its aim is to combat financial crimes, especially as they relate to money laundering and the funding of terrorism. It’s comprised of a structure of regulations aimed at preventing money launderers from performing illegal or corrupt activities, such as the following:
- Using a legal, cash-based company as a front
- Depositing funds into several accounts
- Transferring money to countries outside the United States
- Buying cash instruments
- Investing in securities via third-party dealers
On the surface, many of these activities don’t seem illegal. However, proper AML compliance measures can help financial institutions snuff out criminal behavior, which often has roots deeper than simple bank transactions.
KYC vs. AML
While KYC and AML aim to protect banks and reduce criminal mischief, there are key differences. Think of AML as the whole structure companies use to avoid money laundering. KYC, on the other hand, is the exercise in which banks identify and verify their customers. KYC software is an integral piece within the AML framework. Although these terms are often used synonymously, they refer to different facets; KYC is a part of the grander scheme of AML.
KYC and AML Best Practices
When it comes to keeping your organization protected against financial predators and criminals, KYC and AML are vital to the success of your overall strategies. The following is a brief overview of the best practices for KYC and AML:
KYC Best Practices
- Customer identification program (CIP): Collection, verification and record keeping of customer identification information, as well as screening customers against lists of known criminals.
- Basic customer due diligence (CDD): Obtaining all necessary identifying information of customers and assessing each individual’s potential risk.
- Enhanced due diligence (EDD): Collecting further information from customers deemed to be higher risk. Utilizing customer risk assessments can help determine each person’s risk level.
- Ongoing monitoring: Ongoing oversight of each customer’s financial transactions and accounts based on thresholds developed to assess risk.
AML Best Practices
- Risk assessment: A comprehensive risk assessment framework will help you record, quantify and understand your organization’s risk exposure.
- Internal control reviews: Use the risk assessment process to identify the products, services, customers, third parties and locations that are most vulnerable to potential money laundering and terrorist activities.
- Independent auditing: External audits provide a degree of objectivity in evaluating a firm’s internal control systems.
- Regulatory compliance plans: Knowing what needs to be observed, and how to observe it, helps everyone get on the same page.
- Outline of AML compliance team members: Team members should know what their roles and responsibilities are, as well as who to turn to when they have questions or suspect something is not right.
- Comprehensive plan for onboarding and ongoing training: Creating a culture of compliance starts on day one, but it must continually be reinforced through regular refreshers and trainings when regulations are updated, or major situations take place.
Are you concerned that you may not be hitting the mark regarding AML and KYC compliance? Vigilant can help with that. We offer KYC and AML watchlist screening that can protect your organization from noncompliance vulnerabilities, even if your involvement in untoward behaviors was unintentional. Reach out to our Vigilant team to learn more.