LibraryblogKYC and AML use in the banking industry

KYC and AML use in the banking industry

While KYC refers specifically to customer identity verification and risk assessment, AML refers to a much wider range of techniques, including KYC, transaction monitoring, sanctions and PEP screening, and more. Ultimately, KYC is an important part of a broader AML strategy.

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December 5, 2022
Blog Post

KYC and AML are both vital for compliance in the banking sector. When a bank establishes a new business relationship with a customer, they must carry out a number of checks to make sure the person is real and is not attempting to launder money. 

To do this, they complete a number of KYC and AML checks. But, what do these checks involve and how important are KYC and AML in banking? To answer these questions, we’ve put together this comprehensive guide.

What’s the purpose of KYC in banking?

Know Your Customer (KYC) refers to the checks that a company performs to ensure their customers are exactly who they are claiming to be. KYC checks also help a company evaluate the level of risk that a customer poses. 

KYC standards are designed to protect financial institutions against fraud, corruption, money laundering, and terrorist financing. The KYC process involves financial institutions taking steps to:

  • Establish the identity of their customers
  • Understand the nature of each customer’s activities
  • Establish that the customer’s source of funds is legitimate
  • Accurately assess the money laundering risk associated with each customer

The majority of KYC programs involve three distinct components:  

  1. A customer identification program. Here, customer information is collected and analyzed
  2. A customer due diligence program. Here, the customer’s identity is verified and their level of risk is determined
  3. Ongoing monitoring. Once onboarded, the customer’s activities are checked regularly. This way, the bank can ensure that the level of risk the customer poses has not changed

KYC is a financial regulatory requirement. For example, in the US, customer identification programs are mandated by the USA Patriot Act.  

Banks and other financial institutions must comply with KYC regulations in order to limit fraud. If a regulator finds that a financial institution has not put sufficient KYC processes in place, they may issue heavy fines and penalties.

What’s the purpose of AML in banking?

Anti-money laundering (AML) refers to the steps that financial institutions must take to prevent criminals from depositing funds that come from illicit activity. In particular, AML regulations are designed to stop terrorist financing and proceeds from crimes like human trafficking.

For most institutions, AML policies actually start with KYC. Once the bank is satisfied that it knows who its customers are, it will then monitor their financial activity and report any suspicious behavior. As a result, anti-money laundering actually refers to a number of different techniques that are all employed to meet stringent requirements.

Anti-money laundering rules and regulations are vital for stopping dirty money from entering the financial system. The United Nations Office on Drugs and Crime estimates that somewhere between $800 billion and $2 trillion of money is laundered annually. This equates to between 2% and 5% of the world’s GDP.

AML laws are strict and enforced closely. If an organization doesn’t properly implement AML processes and fails to control the flow of dirty money into the financial system, they could:

  • Incur heavy compliance fines
  • Face a huge amount of reputational damage
  • Help finance terrorism

AML regulations vary by jurisdiction. However, generally speaking, all financial institutions must undertake the following measures in order to meet compliance requirements:

  • Implement a customer identification program: Financial institutions such as banks must implement proper customer identification and verification processes. In doing so, a bank must accurately confirm the identity of the customer and then verify the person attempting to open an account is the individual in question
  • Monitor customer activities: Banks must also monitor the activities of their customers on an ongoing basis. If a customer was initially identified as being low risk but is now making multiple large transactions a day or has started to suddenly make cross-border transactions, this may indicate money laundering and warrants further investigation
  • Large currency transaction reporting: Institutions must file a regulatory report (this is called a CTR in the US) for all transactions above a certain threshold made by a customer during a business day
  • Suspicious activities monitoring and reporting: Banks must also report individuals and businesses that are behaving suspiciously. For example, if a bank believes that a customer is deliberately avoiding reaching reporting thresholds, then they must file a report in order to fulfill their regulatory requirements
  • Sanctions compliance: Regulatory bodies such as the US Treasury Department, US Office of Foreign Assets Control, and the Financial Action Task Force on Money Laundering require financial institutions to check customers against lists of sanctioned individuals, companies, institutions, and countries

The difference between KYC and AML for banks

Although some people use the terms KYC and AML interchangeably, they are different. This is because AML is an umbrella term for a number of techniques and regulations that have been designed to prevent money laundering. Meanwhile, KYC is just one of the techniques used as part of a wider AML framework. 

While KYC refers specifically to customer identity verification and risk assessment, AML refers to a much wider range of techniques, including KYC, transaction monitoring, sanctions and PEP screening, and more. Ultimately, KYC is an important part of a broader AML strategy.

Although KYC and AML are different, both concepts are mandatory for banks. In the US, KYC and AML compliance has been compulsory for banks since 2001, when the USA Patriot Act was enacted.

Why is the combination of KYC and AML so important for banks?

Regulations regarding KYC and AML in banking attempt to limit or mitigate the impact of money laundering, terrorist funding, corruption, and other forms of financial crime. Due to this, KYC and AML are mandatory for regulated entities deemed at high risk of facilitating financial crime. This includes banks and financial service providers.

By combining KYC and AML in banking, financial institutions can strengthen their defenses against money launderers, terrorists, and other criminals. This is because each KYC and AML process they put in place adds another hurdle that a criminal must clear before they can place their dirty money in the financial system.

Similarly, by implementing KYC and AML processes, banks can also safeguard their reputation. By bolstering their processes and making it difficult for criminals to exploit them, banks can enhance their reputation and protect their image. This can, in turn, lead to an increase in new customers and improved customer retention rates.

How Veriff supports you with KYC and AML compliance

If you’re looking to achieve KYC and AML compliance, then our AML screening solution can help you. This solution provides end-to-end compliance and ensures you meet regulatory requirements.

The solution does this by deploying our identity verification service alongside politically exposed persons (PEP) and sanctions checks. It then screens for adverse media and provides ongoing monitoring to ensure that it reduces risk for your business at every turn.

As well as ensuring you meet your obligations, our KYC and AML solution can also help you onboard more customers. By improving accuracy and making the process as simple as possible, it also increases conversions by up to 30%.

See how Veriff’s KYC and AML screening solutions can help you - Book a demo

If you’d like to discover more about how KYC and AML in banking impact your business, then get in touch with our expert team today. We can provide you with a free demo that shows exactly how our AML screening solution can help your business meet its compliance obligations and onboard new customers.