What is KYC and AML checks and why are they necessary for my business?

July 6, 2021 by Oohar | Views:

You probably seen this two terms being thrown around a lot these few years. Essentially the objective for implementing these are to prevent businesses from being successfully targeted by money launderers and terrorist financiers. Firms, especially those engaging in certain financial activities are required to employ risk based due diligence as mandated by most authorities. Now let us delve into what each means.


What is KYC?

The term KYC is an acronym for Know Your Customer. In order to identify and verify the identities of their clients, banks and other holding companies are required by law to perform KYC so that they have a good picture of the Ultimate Beneficial Owners (UBO) as well as the source of funds. Businesses can also use the term to describe similar processes of their own.


What is the purpose of KYC?

The goal of KYC is to prevent criminals and terrorists from accessing banks and financial institutions. Verifying KYC documents obtained from trusted sources is an important part of the process.

Business transactions and relationships are protected when companies have detailed information about their customer. By establishing KYC, businesses can better protect their customers from liability causes, and avoiding the risk of money laundering and fraudulent activities.


What is AML?

AML or “Anti Money Laundering” is a term referring to a set of legal or regulatory measures designed to prevent money from being laundered. AML also refers to procedures, laws, or regulations that seek to prevent illegal income and/or illegal transactions. A series of steps are typically used by money launderers to make it appear that the money is coming from legal sources, but it actually comes from unethical or illegal sources.


What is the purpose of AML?

These laws seek to prevent money laundering (ML) and terrorism financing (TF) by preventing, uncovering, and investigating these crimes. The FATF (Financial Action Task Force on Money Laundering) calls upon nations to implement the measures needed in order to bring their national anti-money laundering and anti-terror financing systems into conformance with the new FATF recommendations, as well as effectively implement them.

In addition to countering general fraud, AML procedures also maintain a gatekeeper role. The attention, streamlining, leveraging, and investment in KYC can assist organizations in focusing more on their customers, ensuring increased conversions and retention, and optimizing customer experiences across all touchpoints.

3 steps to effective KYC compliance

A KYC program must include the following components in order to be effective:

1) Customer Identification Program (CIP)

KYC begins with the Customer Identification Program (CIP). In order to reduce risks, high-risk customers ought to be identified beforehand. In addition to making sure that a financial transaction is verified, CIP is tasked with verifying the entity performing the transaction. Defining these perimeters is essential to preventing money laundering, terrorism funding, and other criminal activities from threatening the economy at large.

In order to comply with KYC laws, companies and businesses based in a country are required to gather information about their clients. A variety of documents may be included, including:

  • Legal name
  • Date of birth
  • Contact number
  • A photograph of a passport or of a valid government identification card
  • Proof of physical address


2) Customer Due Diligence (CDD)

The second step of KYC compliance is the real-time online collection of basic customer information. This KYC process involves ensuring the customer’s information meets the KYC protocol.

Onboarding customers are verified using all the information collected. Based on the customer’s credentials and financial credibility, the customer is then assigned a rating. The Enhanced Due Diligence (EDD) procedure is conducted in cases of customer IDs appearing on watchlists or PEP records.


3) Ongoing monitoring

KYC compliance doesn’t end with this step. An institution needs to perform a continuous identity screening to thwart fraud. Even authorized entities are at risk for fraud. It is important to monitor financial transactions continuously to identify suspicious activities and cash flows in the system.


Resources for KYC and AML

AML and KYC compliance requires businesses to comply with legal requirements on a regular basis, and some of the leading tools on the market can help businesses achieve compliance in a quick and efficient manner. Some of these tools include:


What does it mean for me

There are regulations and sanction lists which businesses are required to comply with as part of their operations. Not only does having a proper KYC/ AML process in place prevents the contravening of such laws (e.g. United Nations Act, MAS list of designated entities and individuals, etc), it also allows you to better manage some of the key business risks such as credit, counterparty, supply chain, etc.


If it feels overwhelming and are at lost as to where and how to start or simply interested in finding out more about this, feel free to drop us a note and allow us to better understand your situation and where you stand to benefit from our assistance.

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