Anti-money laundering procedure (AML) and Know Your Customer (KYC) check are often perceived as the same component of the Customer Due Diligence (CDD) assessment. However, these are quite different, and as fintech is quite a heavily regulated industry, knowing the difference between AML & KYC procedures is essential to avoid paying large non-compliance fees or risk your EMI license revocation.
According to Investopedia, the AML regulations term refers to a set of rules, international AML laws and best practices banking and fintech companies must follow to make it harder for criminals to launder their ill-gained assets. For example, one of the key AML rules requires any bank or financial business to perform a customer background check when starting the partnership or when issuing credits or accepting deposits to ensure AML banking compliance.
This background check refers exactly to what is KYC in banking. By validating the identity of a customer and the origin of their funds, the banks and other financial entities can ensure they work with legitimate requests and are not actually a part of a fraudulent or money-laundering scheme.
Thus, in short, AML procedure is the ongoing monitoring of activities and enforcement of policies to prevent money laundering, while KYC information gained from periodic checks is what ensures that every AML requirement is met.
Complexities of manual KYC/AML procedures
The problem here is that this is easier said than done. People are added to or removed from the watchlists of Politically Exposed Persons (PEP) and other sanctions lists all the time. Of course, there are globally available lists you can scan manually, and this is what special departments do in banks and financial organizations. In addition, there are huge data handlers like Dow Jones, who provide automated access to such lists.
However, while manual KYC information gathering is possible at the beginning of the contract, it is literally impossible to ensure KYC/AML procedures are performed on a daily basis, especially at scale. On the other hand, there are many smaller financial organizations that cannot afford to keep risk managers on a payroll but can be unwillingly used as accomplices in money laundering.
To make things worse, not a single regulator will hear your pleas of the complexities or constant manual checks. If you do not comply with AML or Know Your Customer regulation in the EU or USA, you risk getting fined or having your EMI license revoked.
KYC automation is the solution to AML banking compliance
The key Know Your Customer meaning for business is to ensure you know whom you are dealing with, have assesses the associated risks and are ready to prove to the regulator that the financial transactions conducted with that customer are not a part of a money-laundering scheme.
Various KYC automation tools like Covery enable achieving this result. Due to being a Dow Jones-certified anti-fraud solution, Covery has a secure REST API integration with all of the PEP/RCA/SAN watchlists and can perform KYC checks in under one second. This enables any financial services provider to perform customer checks at every login or transaction, always operating up-to-date KYC information — and without having to hire dedicated risk analysts for this purpose!
Now you definitely know the difference between AML and KYC. Anti-money laundering procedure should the modus operandi of any financial organization, while periodic KYC checks make AML banking compliance possible.
Should you need any more information on KYC/AML procedures and how to implement them for your business — contact Covery, we are always glad to assist!