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Company Check Jun 05, 2023

AML/KYC Meaning and Steps

Anti-money laundering (AML) is a legal requirement in the majority of countries, which is carried out to prevent financial crimes and reduce the circulation of illegal funds.

This procedure may involve different steps, but one of the most vital pieces is customer verification, also known as “Know Your Customer” (KYC). Financial institutions, naturally, cannot effectively fight FT/ML crimes without knowing their clients.

This article will help you understand AML and KYC concepts, the difference between them, as well as the basic requirements for businesses.


What is the Difference Between AML and KYC?

Know Your Customer (KYC) and Anti-Money Laundering (AML) are commonly used interchangeably. However, these concepts cover a different range of issues. Organisations should clearly distinguish the difference to correctly design their compliance programs.

What is KYC? In simple terms, this is an identification of customers by financial institutions. The most basic check would be to verify passport and contact details, i.e. client’s name, date of birth and residence address. It should be noted that it is crucial for companies not only to request information but also to verify its authenticity.

Anti-Money Laundering implies all the steps that the company takes to combat fraud, corruption, and legalisation of illegally obtained funds. In addition to customer verification, the procedure ensures correct reporting and financial documentation, timely response to legislative changes, and regular updating of internal compliance programs in line with recent challenges.

AML refers to cases where simply checking the client's documents is not enough. For example, a bank may need information about financial history and transactions, career, immediate circle and business connections. The depth of the check will depend on the risks posed by the client (the lower the risk of illegal actions involving the client, the fewer data about him will be required). 

Thus, the main difference between KYC and AML is scale. KYC is one of the elements of AML.


AML Compliance

Compliance refers to the steps an organisation takes to meet legal requirements. 

To make sure that anti-money laundering measures work smoothly within the company, internal procedures are described in the AML program. This is an internal document that is adopted at the management level and describes the requirements for personnel, workflow, steps to verify and monitor clients, and the procedure for dealing with risky customers and suspicious transactions.

The main goal of the program is to protect the business from the risks aligned with financial crimes. Banks and financial institutions nowadays may face high fines and reputational damage if they become involved in money laundering. The AML program is a shield that protects the company from unreliable business relationships and illegal transactions.

Risks underlie the company’s program and dictate its provisions. To determine risk factors, you should consider:

  • Legislative features of the countries in which the company operates ( both local and international legislation).
  • Personnel actions and mechanisms to prevent violations.
  • Actions taken by new clients, monitoring of regular clients.

Money laundering schemes are becoming more complex every year. Therefore, it is important for businesses to regularly make updates to their programs to meet new challenges.


KYC Compliance 

Compliance with KYC requirements is mandatory for banks, insurance and investment companies, for private professionals (for example, lawyers and accountants). They have to make sure that their clients are really who they say they are. Violating companies will face serious penalties from regulatory authorities because ML/FT crimes harm the economies of countries.

At the same time, every year it becomes more difficult for businesses to cope with the growing volume of information and tightening legal requirements. On top of that, customers have increased expectations for financial services, such as the ability to complete an ID check online without a personal presence at the bank.

Automated IT solutions come to the rescue. LegalTech offers a wide range of software to help businesses complete compliance tasks faster and more efficiently. Order LIGA UNITED now to get a broader perspective on each client.


KYC Process and Steps

As discussed above, organisations have to check their customers under KYC requirements. These rules are valid in the majority of countries and form the basis of the larger effort, to prevent financial crimes and money laundering.

The main purpose of client verification is to obtain identification data and verify the authenticity of the identity. The procedure may differ between organisations, but generally, it includes the following steps:

1. Client identification is performed at the initial stages of work when a client decides to open a bank account, get a loan or take out insurance. 

Providing a service requires a financial institution to ask for the customer's documents and gather minimal information to verify this person or legal entity. So, individuals must provide ID documents (passport, driver’s licence or equivalent); papers for companies include constituent documents, state licences, etc.

2. Customer due diligence is an individual assessment of each customer. 

Companies do not need to delve into the history of each individual or new contractor in the same way. Only high-risk business relationships require careful attention. What is the transaction amount? Is the client a politically exposed person (PEP), listed on the global/local sanction databases? If the answer to these questions is yes, then you need to take additional steps when checking. There are 3 levels of customer due diligence — simplified, standard and enhanced due diligence. The latter is the most complex procedure, which may require verification of the recent transactions of an individual or a company, the intended goals of business relationships, and analysis of information from the media and other sources.

3. Ongoing monitoring is necessary to control the client’s changes. 

The business activity of clients may change, and those individuals and businesses that seemed trustworthy and transparent yesterday may be involved in dubious transactions today. That is why regulated organisations need to check clients throughout the entire period of cooperation, and not just when opening an account. If at some point a negative story pops up in the media, suspicious transactions are carried out, such business relationships need to be reconsidered.

It should be borne in mind that the verification of individuals will differ from the verification of companies and require a different set of documents. The latter procedure is referred to as “Know Your Business” (KYB). As part of such a check, along with the client's official documents, FIs look at beneficial owners, financial and tax reports, compliance with the law and business obligations, among other things.


When to Implement KYC Measures

The banking sector comes to mind first when talking about know-your-client. However, the checks are performed in many more industries, and are related to all businesses that transfer or process significant amounts of money, or where customer verification can prevent crimes (money laundering, terrorist financing, drug trafficking):

  • Financial organisations (banks, insurance companies, lenders, brokers).
  • Gaming and crypto industry.
  • Real estate.
  • Pharmacology and medical field.
  • Sale of art objects, auctioning.
  • Private specialists who provide legal, accounting or real estate services.

KYC checks must be conducted for the first time before a service is provided to a customer and a formal business relationship is established. The company must ensure that customers provide truthful information about themselves and the nature of their activities. To do this, identification documents are requested and verified, as well as questions are asked about the intended nature of the services and other details of cooperation. For legal entities, it is important to identify beneficial owners, that is, those individuals who manage the business, and not just own it on paper.

Checks should also occur for existing customers. Companies require effective monitoring mechanisms to monitor changes in the activities of their customers, and therefore their associated risks.


AML/KYC Requirements

KYC/AML requirements describe the information that companies must verify about their customers and the steps they must take to prevent financial fraud. Compliance with the requirements has a positive effect both on the financial system as a whole and on the internal processes in the company because it allows businesses to identify unreliable partners in time, reduce costs, and prevent risks.

On a global scale, anti-money laundering standards — and KYC as their integral part — are being developed by the Financial Action Task Force (FATF). According to the recommendations of this international organisation, countries enforce domestic legislation. Each country has its own set of requirements and regulatory specifics:

  1. For the United States, the basic requirements are established by the Bank Secrecy Act (BSA) and the US Patriot Act. These laws require reporting entities to verify the identity of their customers and report suspicious activity and transactions to the authorities.
  2. In the EU countries, the general rules are spelt out in the Anti-Money Laundering Directives, and further detailed in the laws of each state. For example, in France, the main regulation is the Anti-Money Laundering Act (AMLA).
  1. In the UK, the key legislative pieces in the field of combating money laundering are represented by: 
  • the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017), as amended by the Money Laundering and Terrorist Financing (Amendment) Regulations 2022. 
  • the Proceeds of Crime Act 2002 (POCA). 

The main regulator for financial institutions is The Financial Conduct Authority (FCA).

At the moment, measures to combat money laundering and to verify customers are described in detail both at the international level and in the legislation of most countries. These standards are binding, and violations have serious legal and financial consequences for companies.


AML Compliance Software

AML policies are difficult to apply in practice. This is due to several factors: both the constant increase in the amount of information in the world as a whole, and drastic changes in legislation in response to new financial fraud schemes. In addition, the financial sector does not stand still on its own. Online banking, cryptocurrencies, NFTs and other innovations require companies to continually adapt their compliance programs.

Fortunately, the RegTech and FinTech market is developing in line with the new legislative and business demands. Financial institutions have come to realise that performing compliance tasks manually at this stage is irrational and inefficient, and they are increasingly using compliance software in their work.

LIGA UNITED solution provides maximum information on your customers and assesses the risks in a few minutes:

  1. Check the basic registration data and the presence of the client in the sanctions lists.
  2. Use a unique tool to visualise business relationships and find ultimate beneficial owners (UBOs) of companies.
  3. Get information at your fingertips from 3 information streams — media mentions, litigation, company check (registration data and business activity).
  4. Set up monitoring for any client to effectively control changes.

AML checks meaning for companies is difficult to overestimate, so do not miss the chance to improve your checks today. Find out all the benefits of LIGA UNITED by ordering a demo.

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Frequently asked questions.
What are AML and KYC?

We may define KYC as the verification of basic data about an individual or company by an organisation that provides services. AML is an even higher-level routine that incorporates all the steps organisations take to prevent financial crime.

What does KYC stand for?

In a broad sense, the term "Know Your Customer" denotes verification of persons/legal entities before providing services to them. This concept is relevant to the banking and financial industry, but can also be applied to non-financial organisations. For example, in the medical field, verification is referred to as KYP (Know Your Patient), and concerning enterprises and businesses — as KYB (Know Your Business).

What is an anti-money laundering check?

AML check refers to the steps that a company takes to prevent its involvement in financial crimes, and hence fines and reputational risks.

AML checks meaning is gaining more traction every year. The authorities are adopting increasingly stringent legislation, and to comply with all the requirements, companies need to use compliance software.