Connections between KYC and AML Explained
Fazzaco has had discussions on how to find the best KYC solutions earlier. Whenever we talk about KYC, AML is an inevitable topic. We had a brief explanation of the difference in between, and now let’s go deeper in this article and go through all the connections between KYC and AML.
Is KYC A Subset of AML?
As mentioned in the first KYC article, the term AML has a lot of meanings, including a number of measures, controls, and procedures that businesses take to maintain anti-money laundering compliance. KYC is a part of AML, specifically, it refers to a set of mechanisms and methods businesses use to verify client identity and their financial activities.
Risk-based AML & Reinforced Due Diligence
Trading platforms take a risk-based approach to AML compliance with KYC measures, both to identify clients and to understand the level of money laundering risk that a client presents. In this regard, the Financial Action Task Force (FATF), an international organization, has made a recommendation that companies should assess their clients one by one to carry out the risk-based AML. A more rigorous AML review process should be in place for clients with high risk assessment, while simpler and less damaging measures could be implemented for low-risk clients.
For a trading platform, using a risk-based approach to AML can strike some balance between their regulatory responsibilities and budgets, and more importantly, lead to a relatively better client experience. Through one-by-one evaluation, companies can identify a small number of clients who need to be monitored with complex KYC measures. After all, complex review will inevitably bring bad experiences. Ideally, businesses implementing risk-based AML procedures are able to balance compliance efforts, budget, and service experience.
Therefore, for those who show higher risk of money laundering, a so-called reinforced due diligence (EDD) shall be initiated. It normally comprises of extra collection of ID info, verification of income source, close monitoring of trading purposes, or the nature of their business relations, as well as continuous monitoring.
Are Fintech Firms Disruptors
For fintech firms, their innovative services bring both positive and negative impact on KYC. On the one hand, executions are faster, due diligence becomes more efficient, and the results are reflected on shorter client onboarding. On the other hand, some solutions may frequently send out requests automatically asking for information from clients, which in turn brings adverse impact on client experience.
So, many financial institutions turned to some tested methods for KYC. That being said, these old conventional KYC measures might be tested by time, but companies can still make use of fintech’s innovative achievements, e.g. integrating data analysis and AI. New techs explore client behavior in a deeper and more granular way, supporting decision-making in an increasingly complex compliance environment.
Essentially, KYC is An AML Solution
For a trading broker, AML should be a driver of the company’s business once carried out in accordance with the filtering and monitoring requirements the company is observing. Keep in mind, AML-relevant requirements are subject to change due to current financial crime trends and the legislative needs of a jurisdiction.
Ultimately, the relationship between AML and KYC should be one of constant mutual support. As a subset of AML, KYC should tailor the AML work plan to the needs of the business, and the compliance team is tasked with regularly refining client risk profiles and improving compliance performance.
Utilizing a dedicated KYC software helps businesses manage the identity verification process, with the ability to automatically prioritize high-risk clients while reducing human error and false positives. To learn more, please go to Fazzaco’s previous article A Practical B2B Guide: Locate the Best KYC Solution