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In terms of compliance, there are several requirements that businesses must navigate to stay in compliance. The numerous compliance jargons, which may imply different things in different contexts, add to the complexity.
What is AML?
AML’s full form is anti-money laundering. The Money Laundering Act has been put in place to reduce the possibility of money laundering and terrorist funding. When it comes to money laundering, financial institutions must keep track of their clients and report any instances of financial crime to the appropriate authorities.
The location of a business determines the local and international regulations that it must adhere to to continue operating. Following the formation of the Financial Action Task Force (FATF), anti-money-laundering regulations were brought to the forefront of global policymaking. The Financial Action Task Force is an international organization that monitors money laundering and terrorist financing.
The task force’s list of 97 Recommendations reflects the international community’s agreement on global standards for combatting money laundering and terrorist financing, and it is available online. They offer governments the framework they need to develop an effective system to fight money laundering and terrorist funding and the tools they need to put such systems in place. FATF now has 37 member states and two regional organizations, representing the vast majority of critical financial centers worldwide.
What is KYC?
KYC’s Full Form is Know Your Customer or Know Your Client. To authenticate a person in most regulated financial markets, organizations must conduct an online KYC. The identity of its consumers must be verified before any commercial connection can be established; normally, clients are expected to produce credentials such as identification papers to utilize a company’s service. eKYC means electronic KYC. STR eKYC means Suspicious Transaction Reporting. CKYC means Central KYC.
These checks assist businesses in complying with KYC and AML standards while also reducing fraud. KYC Verification regulations have been growing in importance for some time now, and they are becoming more vital across the world. The use of Know Your Customer helps businesses protect themselves by verifying that they are doing business lawfully and with genuine organizations and safeguarding their consumers who could otherwise be affected by financial crime.
How are KYC & AML connected
KYC and AML are very deeply connected. This is mainly because KYC acts as the first step in the AML process. KYC is done to understand the financial status of clients on a deeper level. This allows institutions to properly assess and prevent AML risks. Overall, AML is a large umbrella term under which KYC falls. Two major processes come under KYC:
- Customer Due Diligence (CDD)
- Enhanced Due Diligence (EDD)
How to do KYC online
1. Tap the KYC icon.
2. Enter your Aadhaar details and validate your OTP.
3. Verify your information and provide us with a few more details.
4. That’s it, your KYC check is complete.
What is the difference between anti-money laundering and KYC?
AML is an umbrella phrase that refers to the various regulatory procedures that businesses must have in place. At the same time, KYC is a component portion of AML that refers to how businesses authenticate their clients’ identities.
The interaction between anti-money-laundering programs and the Know Your Customer process should be one of constant feedback. As a component of anti-money-laundering (AML), Know Your Client may be used to adapt an AML program to the specific requirements of a company, refining customer risk profiles and improving compliance performance.
Most crucially, anti-money-laundering measures have suddenly risen to the top of the list of regulatory bodies’ priorities. Furthermore, AML screening is performed as part of the KYC compliance authorities’ duties. Additionally, if a customer is deemed high-risk, organizations are obligated to do anti-money laundering screening. Otherwise, a simple KYC is sufficient for compliance.
To prevent their enterprises from being effectively targeted by money launderers or terrorist financiers, regulated organizations that engage in financial operations are expected to have risk-based client due diligence policies and procedures. Business owners may significantly decrease the financial, reputational, regulatory, and strategic risks associated with other organizations by undertaking extensive eKYC and AML checks.
| Difference | KYC | AML |
|---|---|---|
| Origin | First and foremost, the origins of Know Your Customer may be traced back to the 1970 passage of the Banking Secrecy Act (BSA) in the United States. Furthermore, the legislation was enacted to reduce the amount of black money that was being laundered due to drug sales. Above all, the legislation was enacted to combat drug trafficking and money laundering, both illegal activities. Furthermore, according to the legislation, banks and other financial intermediaries were required to keep an eye on transactions across countries. | However, AML restrictions were adopted in 2003 following the US Patriot Act, based on the Banking Security Act of 2001 (BSA). In other words, the AML requirements are derived from the KYC regulations. |
| Purpose | At a glance, the primary goal of Know Your Customer legislation is to reduce fraud and financial crime. Furthermore, it is ensured that all business partners and counterparts agree with anti-bribery policies and procedures. | However, anti-money laundering and counter-terrorist financing rules aim to prevent money laundering and terrorist funding. There are also money transaction and activity detection to aid in preventing corporate crimes and funding of terrorists. |
| Process | In the first instance, the primary objective of KYC is collection of information on clients and customers. As a bonus, this involves confirming their identities. | However, in anti-money laundering (AML), the procedure is intended to prevent the conversion of proceeds from criminal operations into income from legitimate sources. |
| Scope | The breadth of KYC and AML differs from one another. That is to say, the KYC laws apply to all sorts of organizations, and the execution of these regulations is mandatory. On the other hand, the depth of screening is determined by the business model and the level of risk associated with it. | In contrast, AML standards are predominantly implemented in the financial sector, including institutions such as banks, insurance firms, brokerage houses, etc. Additionally, it has operations in real estate, legal, fintech, precious metal dealings, and other areas that fall within the ambit of global anti-money-laundering rules. |
Conclusion
Anti-money laundering or AML refers to the processes that financial institutions and other organizations must undertake to prevent criminals from depositing or moving money gained via unlawful methods. Policymakers are using anti-money-laundering measures to prevent terrorist funding and laundering of proceeds from crimes such as human trafficking.
KYC stands for “Know Your Customer” and refers to the steps taken by a company to ensure that its customers are who they say they are and do not pose a threat to the company. Although AML and KYC are frequently used interchangeably, KYC is a component of the broader anti-money-laundering umbrella phrase.
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FAQs
What are AML and its objective?
AML, commonly referred to as anti-money laundering, is the completion of transactions with the ultimate goal of turning money received unlawfully into legitimately earned money.
What are the three phases of AML?
Placement, layering, and integration are the three processes that commonly makeup AML (anti-money laundering).
Which three elements make up KYC?
Identification document verification, face verification, utility bills as evidence of address, and biometric verification are all part of the Know Your Customer process.
What exactly do AML checks include?
An anti-money laundering check is a procedure your company must go through to prevent money laundering. It must include Know Your Customer (KYC) processes to ensure you know who you’re dealing with.
