KYC and AML checks - what is the difference?

A crucial part of working in finance is the compliance side of things. Acronyms like KYC and AML pop up on a regular basis and can often be used interchangeably - they are both used to prevent financial crimes. However, there are distinct differences between KYC and AML checks.

Here, we’ll go into KYC and AML checks in more detail, discussing each process’s scope and objectives. Being a vital part of running a business, it is crucial to understand how each one of these processes works so that you are able to build robust safeguards against financial crime. 

Know Your Customer (KYC) compliance checks

Let’s first take a look at what Know Your Customer (KYC) entails. 

Essentially, the KYC process is about verifying the identity of potential clients and being able to assess and understand the potential level of risk they may pose. This step is crucial to implement before doing business with any customer. 

The main goal in implementing a KYC compliance check is to prevent identity theft, fraud, funding of terrorist activities and money laundering. This is done by ensuring that financial institutions and other regulated entities are dealing with legitimate businesses by collecting identity details and ensuring those details are verified. 

Also, by implementing the KYC process, you are ensuring that you understand their financial activities and assessing their risk profile. 

Here’s what a KYC compliance check includes: 

  • Customer Identification Programme (CIP): Certain information about a potential customer that can verify their identity will be collected, including their date of birth, full legal name, residential address and their unique identification numbers (passport number or company registration number).
  • Customer due diligence (CDD): Next, the information that has been collected will be verified with the use of reliable databases. This step also includes assessing the level fo risk posed by the potential customer, looking at factors such as their geographic location, occupation and the nature of their transactions. 
  • Enhanced due diligence (EDD): When there are customers that are deemed higher risk, there will be more enhanced scrutiny with more extensive background checks. This includes individuals from high-risk areas, PEPs or those involved in high-value transactions. 
  • Ongoing monitoring: KYC compliance checks involve continuous monitoring of customer relationships and their transactions. You’ll need to look out for any changes in their risk profile or suspicious activity that may come up over time. 

The main result of conducting KYC compliance checks is that you end up with a verified customer profile with an attached risk assessment that will allow you to tailor the way you manage risks. 

What is anti-money laundering (AML)?

Instead of focusing on the customer, the focus here is to detect, prevent and report money laundering activities by adhering to a set of laws, regulations and following procedures. 

Money laundering is the act of disguising the origins of illegally obtained money by making it appear legitimate. So, AML checks look to expose this by identifying and disrupting these channels that inject these illegal funds into the legitimate financial system. 

This is done through a broader scope of procedures that also include KYC, for example: 

  • KYC procedures: KYC compliance checks fall within the AML checks process. 
  • Transaction monitoring: With this step, advanced software will flag any suspicious activities that are based on predetermined rules or algorithms. This will involve looking into customer transactions or any suspicious activity that alludes to money laundering. 
  • Sanctions screening: all transaction parties, customers and owners will be screened against any international sanctions lists (such as from the UN, OFAC or national governments). This ensures compliance with any financial restrictions. 
  • Suspicious Activity Reporting (SAR/STR): There is a legal obligation for financial institutions to report suspicious activity to the appropriate authorities - this is known as the SAR/STR. 
  • Record keeping: Keeping detailed records on customer identification information is crucial for audit trails and investigations. 
  • Internal controls and training: Internal quality assurance and training are necessary for ensuring AML regulations are understood and properly adhered to throughout the organisation. 

KYC and AML checks - what are the core differences

So, what are the key differences between KYC and AML checks? Let’s take a look at this below: 

 

Feature

KYC

AML   

Focus

The core focus here is to identify customers and their posed risk

AML checks are specifically designed for broader financial crime prevention

Scope

KYC checks are primarily concerned with who the customer is. 

AML checks involve the KYC compliance check process, including the transactions the client makes and how they move money

Objective

The objective of KYC checks is to prevent fraud, assess risk and identity theft. 

AML checks are there to detect, prevent and report illegal cash flow, such as money laundering or financing terrorist activities. 

When

The KYC check is usually completed at the onboarding phase, with periodic reviews. 

AML checks are a continuous process that covers all aspects of a customer’s lifecycle and any financial operations. 

Tools/Methods

Documents used include: identity documents, biometric verification, databases and risk scoring. 

Documents used include: transaction monitoring systems, sanctions screening, suspicious activity reporting, record keeping and internal controls 

How KYC and AML checks overlap

Although KYC and AML checks are distinctly different, they do intertwine and support one another. Here’s how: 

KYC is the foundation of AML

If you are unaware of who is making the suspicious transactions, you won’t be able to properly monitor the suspicious activity. KYC checks provide you with the necessary data to accurately monitor illicit activity. 

AML guides KYC 

The AML process is the umbrella process that dictates how rigorously KYC checks need to be implemented. AML regulations state that higher-risk customers will require more intensive due diligence. 

A continuous cycle

KYC checks establish the initial customer profile and risk associated with them, and following on from that, the AML checks will then continuously monitor the activities of the clients against their profile. If there is anything suspicious flagged by the AML checks, it may trigger an enhanced KYC review, which will intensify the due diligence process. 

Shared Goal 

Both processes, however, serve the same purpose of safeguarding the financial system from illicit financial activity. 

Why are both KYC and AML checks necessary? 

Investing in both KYC and AML checks is a necessary part of ensuring that you are compliant with the necessary regulations. This is especially important for businesses operating in finance, real estate or high-value goods. 

  • Regulatory compliance: One of the main reasons to implement KYC and AML checks is to avoid the hefty fines and penalties imposed by regulatory bodies
  • Risk management: Another important reason to implement these checks is to protect your business from money laundering, fraud or financing terrorist activities. This supports safeguarding your business against direct financial loss.
  • Maintaining integrity and reputation: By adhering to KYC and AML checks, you’ll automatically be upholding ethical standards and will automatically build trust with your clients and protect your brand’s reputation. 
  • Operational efficiency: It may take a lot of work to set up KYC and AML checks, but once everything is set up, it can streamline your processes and monitoring, thereby preventing time-consuming investigations after financial crimes have taken place. 

So, by implementing both KYC and AML checks, you automatically ensure that your business operates securely and that it is compliant with regulatory requirements. This way, you’re able to protect your business, your customers and the integrity of the global financial ecosystem. 

For more information on international company credit checks, get in touch with our team of experts at Creditserve today on 01992 414222.