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February 22, 2022

Explained: KYC and AML - Different But Better Together

KYC and AML are both crucial to fight money laundering and fraud. Let's find out the key differences and how to have a more efficient anti-money laundering system by knowing your customers better!

Have you ever heard the concepts of KYC and AML? Do you know what they mean exactly? If you don’t know what they mean and how they’re related, it’s okay. You’re about to find out.

KYC (Know Your Customer or Know Your Client) and AML (Anti-Money Laundering) are two close concepts. That's why they often get mixed up. Let’s discover both of their functions and their relation to one another.  

What’s the Difference between KYC and AML?

AML vs. KYC: Differences

KYC (Know Your Customer) is a practice to confirm a financial services user’s identity and other credentials. It's a regulatory procedure for learning the identity and other information of a client. As a result, KYC process assists against money laundering. It also prevents countless crimes such as financing of terrorism, fraud, corruption, drug trafficking, tax evasion, human trafficking, etc. Numerous countries apply KYC processes to make sure that the clients are really who they are claiming to be.

AML (Anti-money laundering) on the other hand, represents all policies, regulations, processes, and technologies to stop money laundering. We can say that AML activities include KYC procedures, hence KYC is a part of AML.  

KYC and AML terms are often confused. The difference between KYC and AML is that AML refers to all efforts to stop money laundering. However, KYC refers to client identification and screening. Thanks to client identification and screening, businesses can understand if or how much their customers pose risk to their business. In other words, they can know their customers better.  

  • Governments
  • Fintech firms
  • Investment companies  
  • Marketplaces
  • Financial institutions
  • The banking sector

usually benefit from AML compliance programs and tools.  

Additionally, they benefit from KYC compliance except for governments as KYC is a crucial part of AML.  

The Sectors Using AML Compliance Tools

How to use KYC in AML Processes?  

In many jurisdictions, AML policies force companies to develop and execute an AML program. It should be customized to their individual business needs as well as being competent in handling certain potential risks. Furthermore, a corporation's AML program should simplify the everyday screening and monitoring practices required by the AML law under which it runs.  

KYC is a significant part of AML processes. KYC permits corporations to take a risk-based methodology to AML so that they can understand who their clients are, and what level of money laundering threat they represent. Moreover, firms need to use KYC compliance for customer onboarding processes. They should also keep using KYC processes during their entire business relations with customers.  

Role of Customer Due Diligence (CDD) in KYC and AML  

CDD (Customer Due Diligence) is a part of KYC. KYC is a part of AML. Therefore, CDD is also a part of AML. CDD is the act of executing background inspections and other assessments on the client to guarantee that they are accurately risk-assessed before being onboarded. Authorities can catch fraudsters and criminals thanks to background inspections in CDD without giving fraudsters the opportunity to commit a crime. These background checks and enhanced CDD works might prevent businesses to lose millions of dollars. Therefore, CDD is a very vital part of AML.

Why Do You Need KYC and AML?  

KYC and AML are so significant as they prevent money laundering and help to fight heavy crimes like terrorist financing, human trafficking, fraud, corruption, tax evasion, and drug trafficking. Using KYC and AML tools and software not only prevents money laundering but also maintains the reputation of banks and financial institutions especially. If there is no money laundering in place, there is no reputation loss for that organization. Besides, banks and other financial organizations become guilty too when money laundering happens under their roof. This occurs due to their lack of AML and KYC compliance. For businesses to effectively fight money laundering, KYC and AML are excellent solutions. KYC compliance is complementary to AML compliance and they work great together.

In addition, when there is no money laundering in a business, there is no loss of customer trust as well. When customers start to lose their trust and loyalty towards the organization they are doing business with, they mostly don’t hesitate to abandon that firm completely. Money laundering can cause businesses to lose their customers forever. Since their reputation will be harmed due to money laundering in place, gaining new clients will also be difficult.  

Did you know that banks can save at least $10 million annually by enhancing their KYC and AML systems? Yes, it’s true. Another interesting fact is that big banks spend $88 million yearly on AML-related data storing.  

Mastering KYC and AML Processes with Artificial Intelligence

Furthermore, artificial intelligence (AI) can be used for KYC and AML operations. Artificial intelligence can help banks and other financial institutions to operate AML and KYC compliance. In addition, for the objectives of anti-money laundering, AI systems can dig out massive volumes of data for risk-relevant facts, shortening the practice of identifying high-risk customers.  

Natural Language Processing (NLP) which is a study area of artificial intelligence, can read immense amounts of information in any language. It can boost the KYC procedure for new customer onboarding applications via smart document scanning and improve its capability to filter through an extensive range of outside data sources. This can enhance the whole customer onboarding experience considerably.

Customer onboarding is becoming more and more difficult, with financial bodies expending too much time and money manually handling checks. Thanks to the automation artificial intelligence (AI) and machine learning (ML) technologies brought, customer onboarding processes and document management are way easier for banks now. Besides, benefiting from AI is less costly for financial organizations compared to implementing traditional procedures.