KYC and AML Explained

Posted by Henry Hirsch on 1/20/19 3:40 PM
Henry Hirsch
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KYC and AML Explained

Know your Customer (KYC) and anti-money laundering (AML) are probably terms you’ve heard before, especially as discussions around consumer privacy and security increase. However, sometimes the meanings of KYC and AML can become confusing depending on who you speak to or the application they’re being used for.

In this article, we explain the differences and similarities between KYC and AML. We also outline why organisations often fail to meet established standards. Finally, let’s look at how SingleSource enables simplified regulatory compliance that benefits both individuals and organisations.

KYC and AML: What’s the Difference?

Although there is a wide range of definitions amongst regulatory compliance experts, let’s look at a few commonly-accepted similarities and differences between KYC and AML.

Know Your Customer (KYC) is a process for organisations to obtain information related to potential customers to ensure that individuals do not have previous involvements in crimes like money laundering, terrorist financing, or various forms of fraud. It is essentially a process to ensure a person actually is who they say they are.

As part of KYC, organisations look at a variety of factors. Some examples of information that individuals could provide for KYC checks might include identity verification number (i.e. social security number), credit score, address, date of birth, passport, citizenship status, and more.

It is the responsibility of organisations to verify this information is correct and conduct checks based on certain legal criteria. KYC reviews may include other processes like risk profiling, screening and due diligence, and transaction monitoring. KYC is one of a few important policies and procedures that make up part of the larger framework of anti-money laundering (AML).

Anti-Money Laundering (AML) can also include risk assessments and transaction monitoring. The major difference between the two is that AML can be considered the overarching governance framework or set of laws that a regulated entity constructs to meet its regulatory requirements. The KYC process is one of the requirements by AML acts with the objective to reduce the risk of illegal transactions, money laundering or financing terrorism. While KYC is viewed more as a policy that emphasises thorough background checks.

Other AML requirements include transaction monitoring to identify and track suspicious transactions, or ongoing customer screening and profiling. Any financial institution (such as banks) are obligated to comply with AML requirements.

Does Modern KYC and AML work?

KYC and AML have long played a vital role in compliance for financial institutions, governments, and an array of other organisations. The fundamental question to ask is, “Are they effective?” Overall, the simplest answer is yes. However, effective compliance can be complicated and costly to achieve.

As a result, solutions used for KYC checks and AML frameworks oftentimes don’t stop major financial crimes from occurring. This continues to lead to major legal breaches that result in massive penalties for financial institutions. There are at least two main factors for this.

First, over 50% of organisations still utilise manual KYC checks that tend to sacrifice customer onboarding speed or thorough due diligence. Second, organisations that do use automated checks don’t always include enough factors to make an accurate assessment related to a customer’s identity, background, and/or sources of funds. For example, many RPA (robot process automation) solutions don’t support fundamental aspects of AML compliance. Some solutions don’t prepare suspicious activity reports or even search counter-parties to determine the connection between organisations and individuals.

Even in cases where organisations do avoid these two issues, there are other factors that impact the effectiveness of compliance. For example, organisations might find that keeping up with regulatory changes requires more staff training. It’s also possible that investing in some automated solutions might be costly up front and take away from other potential areas where a company could potentially benefit from additional spending.

SingleSource eKYC and CryptoAML for Individuals and Organisations

SingleSource eKYC is a RESTful API that provides high-speed identity screening, document verification, and risk scoring that goes beyond normal due diligence checks, uncovering risks and potential threats to an individual’s reputation.

For individuals, this is an effective way to verify their background information and prove their trustworthiness via a risk score. For organisations like banks or crypto exchanges, eKYC improves upon previous systems for KYC checks for a number of reasons. One example is the Fraud Intelligence Engine (FIE), which utilises proprietary algorithms and machine learning technology, making it vastly more cost effective when compared to manual checks. Additionally, SingleSource eKYC allows you to customise the KYC process by selecting only the factors that your specific organisation needs. Moreover, eKYC allows you to easily trigger additional checks as the interaction with the customer grows.

SingleSource Crypto-AML is also a RESTful API. More specifically, Crypto-AML performs a full crypto-wallet check uncovering associated risks and potential reputational threats via SingleSource’s Wallet Screening Engine (WSE). For individuals that pass the screening process, you have the ability to speed up the onboarding processes required to use crypto exchanges.

For crypto exchanges, Crypto-AML detects a comprehensive range of risks and uncovers connections to fraudulent wallets, no matter how remote. Potential laundering activity is identified by tracking suspicious transactions and detecting if an exchange’s specific requirements or other regulations have been violated.

By combining Crypto-AML with eKYC, organisations can complete comprehensive checks that focus on both an individual’s background as well as wallet fund sources to ensure streamlined compliance at a fraction of the cost of traditional solutions. Simultaneously, legitimate individuals can gain greater access to services and complete compliance processes in a shorter amount of time. If implemented, this can improve the KYC and AML verifications usually required for an exchange user to increase withdrawal limits and trading limits.

Download the AML: wallet screening product sheet here

Topics: AML, KYC

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