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AML and KYC Compliance: Why is it so Crucial?

1 April 2021, 11:04

As we all know, security is the key point of every business. Organizations employ all the best practices, preventing a data breach and financial fraud. Provide ultimate protection, keeping funds and personal information safe and sound.

A quick boost of the financial industry around the world led to an increased demand for regulations especially in fighting financial crimes. It means that even a program implemented in platforms should minimize the risk of fraud.

Therefore, Anti-money laundering AML and KYC compliance are prevalent in the industry. But why are they so vital, and what are the differences? Let’s dig in.


 

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What is the AML, and why does it matter?

Anti-money laundering is also known as AML. It is a group of policies and procedures implemented by financial institutions and authorities to identify and counter illegal activities carried out by criminals. These Illicit actions, including illicit financial flows and terrorism financing, occur outside of the normal range of economic and financial spheres.

Anti-money laundering policy is a part of a wider AML compliance scheme, prepared within a firm. It should be developed to comply with the requirements of its local AML requirements.

As Anti-money Laundering AML laws and regulations are always evolving, it is vital to be aware of new developments. Always be on the lookout for new developments and for great information resources if you use financial services.

 

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What is meant by KYC?

Know Your Customer is also known as KYC. It is a way to confirm a customer’s personality.

According to KYC, it is required to include all important documents, and then you have permission to be a member and use this financial platform. For example, we need to verify investors, so they have a chance to take part in an ICO. You have to confirm your identity if you want to open a bank account.

Since financial companies provide services, they are mandated by AML regulations to verify their customer’s identities before offering services. It is necessary to ensure that companies are doing business according to applicable laws.

 

Here are 3 key elements of a KYC compliance framework

KYC compliance includes detailed procedures such as enhanced due diligence, consumer identification, and verification process. Check out everything you need to know about each step below.

 

Identity verification

Before checking a customer’s identification documents, it is necessary for a company to verify them and scrutinize all available data for any inconsistencies. According to Know Your Customer KYC compliance, a company needs to make sure that a potential user is not on any of the Sanction Lists (such as the OFAC or Interpol Lists).

 

Customer profiling

It is also important if a customer is a Politically Exposed Person, as it is deemed at the international level that such a group of consumers is more susceptible to corruption. So, such consumers can be considered as a part of a high-risk group.

A company makes a set of rules and acceptance criteria for its customers. In addition, it has a right to reject in case of suspicious activity.

This company can also reject certain groups of customers according to their past records of criminal activities, and if he or she lives in a country from a blacklist.

 

Customer identity

Financial institutions collect your records including birth certificates, proof of address, identity, and income papers.

 

Customer Due Diligence (CDD)

The due diligence process includes collecting all available data on the customer from trusted sources, as well as monitoring them to ensure all activity is consistent with recorded client information.

 

Enhanced Due Diligence (EDD)

These measures should be implemented if the user can be identified as a part of the high-risk group. It means that intense monitoring of the client relationship and deeper investigative research are needed.

Risk management can be used to determine which level of due diligence to apply. These can be business rules for watchlists that the customer appears on or the size of the transaction.

 

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The latest options to perform KYC

KYC processes and technologies are boosting rapidly. One of the newest solutions implemented in KYC is biometric identity verification. It is rapidly becoming a useful tool for financial firms. Through integration with smartphones, many of us interact with some form of biometric authentication daily. Let’s take a closer look at the most widely spread options, integrated to perform KYC:

  • Nowadays a fingerprint option is more accessible than ever. Most mobile devices have a required scanner. So, internet banks and other financial services like digital wallets like Google Pay implement this option in addition to passcodes for customer verification. Fingerprint scanners are by far the most accurate and the fastest way to identify a user.

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  • Facial recognition procedures. It is used by many eKYC companies to match a video or a photo of customers with their picture in the doc. This function is also used as a way to sign in to some of the mobile apps, provided on your phone. This tech for identity verification is evolving rapidly especially among banking companies.
  • Voice verification. It is currently under development and testing, and it is still to be accepted worldwide. However, in a few years, identity verification solutions such as automatic video call interviews will be implemented everywhere.

 

How is the KYC process related to AML?

A company’s AML compliance program consists of several processes. And the KYC process takes the major place. It is a method used to verify identity and form a customer’s risk profile. But we should admit that every organization needs more solutions to protect against financial crimes.

A complete AML compliance program includes the KYC process as a first level to determine a customer’s identity and watch their transactions. KYC procedures are the major elements in an institution’s AML policy. Strong AML compliance policies allow organizations to find risks quickly and remove them as soon as possible.

 

What is the difference between KYC, AML?

While closely related, we can admit that the AML system is a more sophisticated set of guidelines.

In the banking sector, KYC rules are the steps institutions must take to verify their clients’ identities. AML operates on a broader field. They are the measures institutions take to prevent and combat illicit activities: concealing the origins of funds and terrorist financing. Banks and other financial companies use AML and KYC compliance to maintain secure financial institutions.

Know your customer (KYC) is the regulatory method. So, a financial institution can confirm a customer’s identity by monitoring his or her personal data and financial transactions. And only then he or she will be allowed to access a service. With the use of KYC policies, financial institutions have a chance to learn more details about consumers. The KYC process gives an opportunity to identify in a flash and avoid dangerous situations.

 

In conclusion

We can admit that financial regulation (AML and KYC) requires significant administrative effort and the analysis of large amounts of transaction data. To avoid human error and potential compliance penalties, many firms automate Anti-money Laundering systems with a range of smart technology options.

Automation not only adds speed, accuracy, and efficiency to AML regulations. It also helps businesses adapt to new regulations and continue to deliver the highest standards of compliance.

We hope that our article about identity verification will be helpful for you. By now, you know about KYC and AML policies, and how they differ. So, you should keep in mind everything that we have mentioned above.

Do not forget that the protection of your funds, by and large, rests on your shoulders. Be very mindful of the fact that financial institutions have full access to all data: personal information, emails, deposits, and so on.

So, you should not overlook the security of any financial service. If it is possible, please, take some extra processes to level up security as soon as you register on a financial platform.

That is all for now. Stay tuned for news and more great content!

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