Know the Differences between KYC and AML

Know the Differences between KYC and AML

There’s a massive surge in AML compliance due to the fast-evolving online space and increased money laundering threats. The Fintech industry is also growing and needs robust AML compliance programs. KYC is an integral part of the AML compliance process, but some key differences between KYC and AML. Let’s discuss how the two approaches differ.

What is KYC?

KYC is an acronym for ‘Know Your Customer’ in which organizations collect relevant data about prospective customers, establish their identity, and create a risk profile. They verify the customers’ identity before opening a bank account or indulging in any financial activity. The regulated firms have to strictly follow the AML regulations, protect their business, and guard their reputation by doing business only with legitimate organizations and verified individuals. The KYC will help them identify any suspicious accounts with a high probability of being a money-laundering entity. 

What is AML?

AML is an abbreviation for Anti-Money Laundering that encompasses various rules and regulations imposed by the government that regulated firms should follow in dealing with money laundering. The AML laws help identify financial crimes and prevent money laundering. With the help of AML laws, governments can stop black money from entering into the legal systems. They help to avoid funding of criminal and terrorist activities. Financial institutions must follow the sanctions screening process, a stringent AML control that helps detect any suspicious economic activity and provides timely information to prevent financial fraud. 

Sanction screening is a crucial step in the KYC process and allows to detection of financial frauds with great ease. The sanctions are imposed to coerce a regime or individuals within a regime and force them to change their behaviour by increasing the cost on them to change their behaviour and not repeat the undesired or offending behaviour. The AML policy is a part of an elaborate AML compliance program that enables the regulated entities to comply with the local AML rules and regulations. 

How do KYC and AML procedures differ?

KYC and AML are often used as interchangeable terms, but the frameworks are different for both. They differ in their processes and their objectives. It is noteworthy that AML is a broader term and includes several functions. It helps institutions stay AML compliant, protect against financial fraud by identifying suspicious entities and deter criminals from legalizing illicit money. Often, the AML compliance process is outsourced to AML service providers.
AML includes an array of services such as AML / CFT Policy Controls and Procedures Documentation, AML/ CFT Health Check, Annual AML/ CFT Health Checkup, AML Training, Annual AML CFT risk assessment report, and AML software selection, AML Training and more. 

Key differences between KYC and AML

KYC

  • KYC collects relevant customer data and evaluates it on different parameters.
  • Verifies the identity of the customers.
  • Customer Screening, identity verification, and Risk Profiling. 
  • The risk-based approach makes it elaborate and identifies fake, fraudulent accounts.
  • AML

  • AML establishes processes and controls to fight money laundering and other financial crimes. 
  • Deter criminals from indulging in financial crimes. Financial sanctions are used to coerce a regime, constrain a target, signal disapproval, and protect the value of assets. 
  • AML regulations, Policies, and controls, Suspicious Activity Reports. 
  • Stay compliant with the new regulations and implement a robust AML compliance framework to prevent financial crimes.   
  •  Standard components of the AML Compliance Process

    • KYC Compliance
    • AML guidelines
    • AML policies
    • Continuous risk assessment and monitoring services
    • AML Training
    • Internal Controls and Audits
    • Escalation Procedures
    KYC is an integral part of the AML compliance program and starts with the KYC process, which establishes the true identity of the customers. Financial crimes cannot be detected and prevented unless a stringent KYC process is followed.       

    AML Compliance

    The AML compliance process requires an in-depth analysis of large amounts of data and the right tools and core expertise in AML compliance services to detect financial frauds and arrest criminals. Automation with the help of the right AML software streamlines the AML process and makes it cost-efficient. Automation eliminates the possibility of human errors leading to high accuracy and increased efficiency. The compliance process is speed up, and compliance with new regulations is possible without any delays. The software solution empowers businesses with advanced technology to comply with the AML, CFT, and KYC requirements. FIs can develop the proper AML compliance framework and make AML training necessary- they need to train the employees for risk profiling, identifying any suspicious accounts, and minimizing false positives. The AML software is a cost-efficient medium that helps organizations be completely compliant with the AML, CFT, and KYC requirements.

    What is the role of AML Software?

    The AML software is instrumental in keeping the AML compliance framework and verifying customer information. It evaluates the customers’ risk profiles and screens against a sanction list. It extracts further details on the PEPs. Counter-Terrorist Financing and Sanctions Module (AML rules) must be followed in the UAE. All the financial institutions must establish AML training programs for the CFT and AML obligations. Law No. 4/2002 Anti-Money Laundering Law, Law No. 1/2004 the Counter-Terrorism Law and Counter-Terrorist Financing and Sanctions Module (AML Rules) are the local AML laws and regulations in the United Arab Emirates. Law No. 1/ 2004 states that people engaged in terrorist financing face imprisonment and death sentences. The AML software helps in KYC and transaction monitoring and creates and executes an effective AML compliance strategy. The software sends real-time alerts to the MLROs- Money Laundering Reporting Officers.

    Conclusion

    AML UAE has served organizations in different industry verticals to keep pace with the CFT/ AML rules and regulations and prevent money laundering. So, the financial institutions in the UAE should comply with the AML/ CFT programs, detect suspicious financial activities, and deter money laundering. They can use the services of a reliable AML compliance firm that will offer an array of AML compliance services. It will also help choose the right AML software that meets the unique business requirements and help businesses to stay AML compliant at all times. 

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    FAQs

    KYC is the process of identifying and verifying your customers. Money laundering is a medium of conducting financial crime. The process of KYC helps reduce the chances of money laundering because customers are identified, their relation with any terrorism or financial fraud is monitored, and their transactions are reviewed.  

    About the Author

    Pathik Shah

    CISA, FCA, CS, DISA (ICAI), FAFP (ICAI)

    Pathik is a multi-disciplinary professional with more than 22 years of experience in compliance, risk management, accounting, system audits, IT consultancy, and digital marketing. He has extensive knowledge of Anti-Money Laundering rules and regulations, and he helps companies comply with legal requirements. Pathik also helps companies generate value from their IT investments.