Learn all about KYC/AML on this overview page. If you would like to see PlanetVerify's KYC document collection tool in action, click the link below!
KYC/AML – Know your customer (KYC) and anti-money laundering (AML) compliance are two terms that are often used interchangeably, however there are a number of differences. At a high level, KYC is focused on ascertaining the identity of a customer through the collection and verification of ID documents and personal data points such as name, address, and date of birth. AML on the other hand is an entire framework comprising a set of procedures and regulations designed to prevent money laundering activities. KYC is a vital part of any AML program, but AML is a much broader, all-encompassing area. To fully understand the differences between KYC and AML, let us take a more in-depth look at each area.
KYC refers to a standard within the financial services industry that ensures institutions can establish customer identity. KYC itself comprises a number of components including the customer identification program (CIP), customer due diligence (CDD), and enhanced due diligence (EDD) of a customer’s financial activities. Put simply, financial institutions need to be sure their customers are who they say they are. Customers who fail to pass KYC verification checks may not be allowed to open an account or engage the services of the company.
While KYC was made compulsory for US banks with the introduction of the Patriot Act in 2001, it is now used in many different industries such as trading, telecom, payments, and crypto – as, essentially, a first line of defense against money laundering. Traditionally, KYC checks are used during the client or customer onboarding stage – however, they may also be applied as a security measure when processing large transactions, updating records, or updating authorization systems.
While KYC is a procedure, AML can be considered an umbrella term that covers the full framework of laws, regulations, and processes that are designed to uncover the use of illegally-obtained funds within the financial system. Beginning with the Bank Secrecy Act of 1970, AML laws were set up to combat a rise in financial crime such as money laundering, tax evasion, fraud, and, more recently, funding of terrorist organizations. AML compliance regulations require companies to verify customer identification and monitor any activity which could be considered suspicious.
Other key aspects of AML include transaction monitoring, risk assessments, internal procedures, employee compliance training, and independent audits. These activities, combined with KYC and an ever-evolving set of compliance regulations make up the basis of modern day AML.
KYC/AML is not without its challenges. The AML landscape is one that is constantly being disrupted by new technologies, regulations, and bad actors finding new and innovative ways to disguise illicit funds as legitimate income. To run a successful program, financial services companies need to take a proactive approach. Below are some of the most common KYC/AML challenges companies face today.
As the amount of money laundered each year reaches an estimated $2 trillion globally, law enforcement, regulatory bodies, and governments are constantly looking to strengthen their AML regulatory frameworks. For financial institutions, the challenge is keeping abreast of the latest regulations and ensuring internal compliance procedures meet any updated requirements.
There is also the challenge of AML regulations that vary by geographical region which multinational companies need to be aware of. Internationally, the Financial Action Task Force heads global AML activities through the promotion and assessment of the highest possible AML compliance standards. In the U.S., the Bank Secrecy Act and the U.S. Patriot Act are the foundations on which AML compliance regulations are built on, while in Europe, the EU AML Directive provides a set of regulations companies operating in member states must follow to combat money laundering activities.
One area that is often overlooked is the AML and KYC document collection process. For such an integral part of AML, it is surprising how many companies are still relying on legacy tools like email – and even in-person methods – to collect AML/KYC documents. Implementing an automated AML document collection tool at your company can increase productivity, reduce security risk, and, ultimately, help your company to get compliant with AML regulations.
Collecting personally identifiable information (PII) is one of the core aspects of KYC. This process however is complicated by data protection regulations such as GDPR in Europe and similar regulations in other jurisdictions. GDPR lays out a set of procedures companies must follow as they collect and manage clients’ personal data. It is no longer enough to collect PII to confirm the identity of a new client and move on with your day’s work. Instead, that PII must now be stored and managed in a GDPR compliant fashion. Storing a lapsed client’s personal data without a lawful basis, for example, would not be considered best practice and can result in GDPR non-compliance fines. Financial institutions must now build data compliance into their AML/KYC processes.
The modern day client expects to receive on-brand, on-schedule, and on-point communications. The days of ad hoc emails and telephone calls during client onboarding are numbered. Leading companies today are developing KYC processes with automated workflows that include things like welcome emails, automated document collection links, reminders, and internal alerts that fire when the process has been completed. Companies who do not move with the times and persist with manual and ad hoc legacy KYC processes will provide an underwhelming client experience. As is the case with personal data in the previous example, the client experience needs to be considered as KYC processes are developed.
As AML threats become increasingly sophisticated, companies who are still relying on disparate legacy AML systems and processes are wide open to potential AML/KYC non-compliance reputational risk. More than ever, companies need to be agile in their approach to AML. For instance, a rules-based legacy environment might meet historical AML requirements, but manual and legacy systems will not be easy to adapt for the evolving nature of modern AML. Instead, the most forward-thinking companies are incorporating modern technologies into their AML processes and will gain benefits that go beyond AML compliance such as improved client experience and increased internal efficiency.
AML and Cybersecurity are two areas that are becoming increasingly interlinked. However, some AML/KYC activities are more high risk than others from a security standpoint. For example, collecting documents and PII from new clients opens up the door to all kinds of cyber threats – especially for those companies who still rely on tools like email to collect KYC documents. Cybersecurity has a vital role to play within AML – protecting mission-critical systems and sensitive client information. As you build and develop your AML processes, it is important that cybersecurity leaders within your organization are looped in and that best practices are both followed and continuously updated.
With over 120,000 users, PlanetVerify is used by companies from many different industries to collect and manage sensitive customer documents and information during the onboarding process.
At PlanetVerify, AML/KYC is one of our specialist areas. Indeed, we work alongside many of the World’s leading companies helping them implement secure, streamlined, and data compliant AML processes. Our solution is easy to implement and can bring powerful results within days. We help companies to accelerate and secure the collection of KYC documents. If you are still relying on time-consuming legacy processes to collect KYC documents, please reach out to us today for an introductory call via the link below!
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