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Company Check Sep 19, 2023

All You Need To Know About KYC and AML Compliance

KYC processes are becoming increasingly important for businesses. This is for several good reasons. 

For one, regulators are constantly tightening legal requirements and increasing fines. As a result, businesses are putting greater effort into customer due diligence to avoid costly mistakes.

The other reason is that a company's connections have a direct impact on its reputation. Reputable organisations avoid doing business with firms that provide services to toxic figures or help whitewash illegally obtained funds. 

This article explains in detail the importance of KYC compliance for business and the ways to make it more effective.


What Is KYC?

The global economy remains vulnerable to financial crime. Know Your Customer (KYC) compliance is aimed at addressing this issue through more thorough customer checks. 

Generally, the procedure is performed by financial institutions before providing services to individuals or companies.

what is kyc

Checks include several steps:

  1. Verify the identity of the potential customers.
  2. Gather information about their activities and verify the source of their wealth.
  3. Identify risks for cooperation, such as a political career or citizenship of a sanctioned country.

Meeting these criteria is an essential component of combating corruption, terrorism, and other fraudulent activities. Despite the efforts of the international community and local initiatives, the industry still has much room for growth and correcting mistakes. 

The more companies engage in the process and treat their obligations responsibly, the more transparent and secure the corporate landscape will become.


Who Needs To Do KYC?

who needs kyc

Client verification takes place when a new client contacts your company. You can also apply the procedure to current customers, that is, to monitor whether their data and business activities have changed.

KYC compliance is mandatory for almost all institutions dealing with large amounts of money. Here are some examples:

  • The banking sector.
  • Creditors and insurance companies.
  • Brokers and asset management companies.
  • Cryptocurrency and gaming industries.

Any of the regulated organisations can become a link in the chain that facilitates criminal activity. Such groups may not only harm certain countries but also hurt international markets and the world economy. 

Not all persons will be subject to the same level of scrutiny. For small transactions and residents, it is enough to check an ID document. Persons with PEP status or foreign nationals are considered to be riskier. Thus, when dealing with such customers, your company should request more information, as they fall under the scope of enhanced due diligence. 


Why Is KYC Important?

Each year, the global economy suffers losses from money laundering. Figures are ranging from £616 billion to £1.47 trillion, or 2 to 5 percent of global gross domestic product (GDP).

Under these circumstances, enforcing KYC compliance is a must. This procedure has become an international standard that is embedded in the national laws and regulations of most countries. 

Neglecting KYC requirements is very risky. Your business could be fined, become a target of fraud, or even lose a licence to operate. 

On top of that, you could harm your relationships with other customers or your public image. As no firm wants to be caught up in a scandal due to dubious partners engaged in illegal activities.

To protect yourself from negative impacts, carry out client screening at the onboarding stage. Keep in mind that the status and activities of organisations may change. Thus, you should monitor the activity of your current customers and repeat the checks regularly. This is particularly relevant for high-risk customers. 


What Does KYC Process Include?

Client screening may have its specifics depending on the industry or jurisdiction. However, in general, the process involves three stages:

  • Customer Identification Program (CIP).
  • Customer due diligence (CDD).
  • Ongoing monitoring.

These standard steps are enshrined in the legislation of many countries. However, each organisation can apply its additional tools for KYC compliance and differently harmonise the legal requirements with internal regulations and put them into practice. 

Step 1: Customer identification

KYC for business customers begins with the confirmation of identity.

Banks can request a domestic or foreign passport, driver's licence, tax number, or other official documents to authenticate a private person. 

Enterprises can provide registration documents, business licences, etc. The bank might also require information about the owners and financial statements.

By the end of this stage, you need to confirm that the client is the person they claim to be.

Step 2: Customer due diligence (CDD)

At this stage, a prospective client is reviewed through the lens of a risk-based approach. That is, you evaluate the risks of a certain person or company.

If the risks are low, you can provide the service.

If the client is a high-risk person - a citizen of a foreign country, a PEP, a sanctioned individual, or conducts high-value transactions - you should request more details. 

Step 3: Regular monitoring

Businesses are constantly changing. 

Maybe your employees had no questions during the initial check. However, in the course of cooperation, you may notice suspicious transactions, abrupt operational changes, and changes of ownership or location. You may also find the company involved in a scandal or fall under sanctions. 

To avoid missing important developments, you need to set up monitoring. Client updates that you should pay attention to include registration data, ownership structure, financial and property status, media mentions, sanctions lists, court cases, and business links. 


How Do You Comply With KYC?

KYC compliance means meeting legal requirements. Here are a few steps to help you with this task:

  1. Assess all the requirements that apply to your organisation. This includes international standards, industry standards, and domestic AML/KYC legislation. 
  2. Develop internal standards and procedures in your company.
  3. Regularly review the effectiveness of your company's KYC procedures.
  4. Follow legislative and customer changes.

Every year, new digital tools appear to improve the quality of KYC checks. For instance, at a national level, the introduction of biometric data reduces the risk of document counterfeiting. New RegTech products are emerging, such as LIGA UNITED, which combines information from sanctions lists, media, and court practices. This makes customer screening much easier. 


KYC and AML: What’s the Difference?

The concepts of KYC and AML are adjacent and are often used interchangeably. Yet, there are some differences between them.

KYC is just one of the procedures within AML. This check serves a specific purpose - to verify the identity of the customer. KYC requests are limited to the initial verification of documents and, if necessary, further data on the individual.

AML refers to all the measures a company takes to prevent money laundering. This may include the introduction of additional controls that are not required by law, staff training, etc. 


How To Establish Clear AML/KYC Policies and Procedures

Effective control mechanisms start with the KYC policy and KYC procedures in your company. Here are some tips that might come in handy:

  1. Assign responsible personnel from the legal department, compliance officers, or a dedicated anti-money laundering officer.
  2. Describe in detail how the procedures should be carried out in your organisation. This will reduce the number of mistakes and questions from employees.
  3. Organise staff training for those who conduct customer onboarding or directly handle transactions.
  4. Invite independent experts to evaluate your internal procedures and policies. This is especially relevant for businesses that are scaling up or entering new markets.
  5. Keep in mind the interconnectedness of KYC/AML processes with your company's overall compliance program. You cannot assess compliance in a particular procedure in isolation from overall compliance. 
  6. Ensure that your employees' actions are documented and that you can provide documentary evidence to auditors or regulators if necessary. 


What Are the Key KYC Requirements?

The FATF is the main international body that sets standards and provides guidance on customer screening and anti-money laundering. 

More than 190 countries adhere to the recommendations of this institution. Their lawmakers have enacted KYC/AML legislation per international frameworks. National regulators monitor whether financial institutions follow the rules.

These are some examples of laws from different countries:

  • In the US, KYC checks are mandated by the Patriot Act of 2001.
  • In the EU, the relevant legislation is represented by the Anti-Money Laundering Directives (AMLD4, 5 and 6). Some directives address narrower issues, such as The Payments Services Directive (PSD2).
  • In the UK, the requirements for client verification are determined, in particular, by The Money Laundering Regulations - 2017 (MLR) and the Electronic Identification and Trust Services for Electronic Transactions Regulations (2019).

Naturally, the KYC guidelines of each country have their regional peculiarities. Yet, standard requirements for financial organisations include checking personal IDs or corporate documents for legal entities. Financial institutions are also required to develop customer identification processes and maintain customer risk profiles. If criminal activity is detected, firms must report it to the relevant government agencies. 


How Businesses Are Future-Proofing Their AML Compliance Capabilities

Each year, firms find it increasingly difficult to keep up with changes in clients and legislative updates and to control the growing amount of information. Manual screening becomes time-consuming and inefficient in terms of business resources.

RegTech solutions can provide the desired quality of company&person checks. They allow regulated companies to check the latest anti-money laundering policies. AI-powered features enable quick scanning of all open records on a potential customer and identifying red flags. 

Now, let's take a look at more useful functions of automated software to optimise KYC for companies and make informed decisions. 


AML Compliance Solutions

Compliance with KYC/AML regulations is a legal obligation for businesses. And software helps to fulfil this task faster. 

These solutions facilitate gathering and verifying customer information. This greatly reduces the time spent searching for registration details, such as official name, legal address, etc.

Moreover, using the software, you can automatically check a person for the key risk factors. You can, among other things, see if your client is a politically exposed person, if they are subject to sanctions, or if the media is questioning the legality of their actions. 

You can also set up monitoring for your customers. This way, you will receive timely notifications on changes in their ownership or management structure, media mentions, or their reorganisation or scaling.

Apart from that, financial institutions are actively using the capabilities of the software to monitor customer transactions, which allows them to detect suspicious activity at an early stage.


AML Compliance Software Use Cases

AML/KYC software brings many benefits to all stakeholders.

Businesses get complete information on their customers, avoiding legal and financial risks. Governments and regulators improve control over suspicious operations or entities, which allows them to prevent financial crimes more effectively. Clients, in turn, can be verified faster and receive the services they need.

But in which specific instances can automated tools be used? Let's take a look using the LIGA UNITED example.

Scenario 1: To check the general registration details of an organisation

On the platform, you can check the main information about the company. In particular, you can find the official name, address, company number, current status, and incorporation date.

Scenario 2: To obtain information on the ownership structure, determine the UBOs

Finding the ultimate beneficial owners is one of the most difficult tasks in company due diligence. With the innovative " graphic links" tool, you can instantly see all affiliated companies and individuals, no matter how complicated the structure is.

Scenario 3: To assess the company's risks

In LIGA UNITED, you can check whether a company or affiliates are under sanctions and whether they have a toxic trail of cooperation with russia and belarus. You can also perform adverse media screening and check whether a potential client has a negative media background.

Scenario 4: To check and monitor company changes

Check the client's latest updates in the change history and set up monitoring for new developments.

Scenario 5: To check companies' financial and trading activity

On the platform, you can get information from official registers about the trading activity of companies and their financial statements. 

LIGA UNITED is a one-stop source for all information about businesses and individuals. It combines the key information flows from registers, sanctions lists, and media, so you can save time on routine checks and instantly evaluate client risks.


Final Thoughts

KYC compliance is an important requirement for businesses. It guarantees financial security, regulatory compliance, and a strong reputation in the market. 

But implementing effective controls can be challenging. LIGA UNITED can help your business to cope with the task. You'll easily navigate the ever-changing legal landscape and gain 100% confidence in each client.

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Frequently asked questions.
What features to look for in AML software?

Financial institutions are actively leveraging automation opportunities for KYC compliance. In particular, relevant tools include searching for companies on sanctions lists, identifying ultimate beneficial owners, searching for registration data, etc.  

What are the requirements for KYC compliance?

Legal requirements vary across countries and industries. A common rule is that companies must verify who their customers are. The FATF is the main international agency that governments adhere to when formulating their KYC rules.