Anti-money laundering (AML) procedures are required in New Zealand (through the Anti-Money Laundering and Countering Financing of Terrorism Act of 2009) and around the world. These regulations place a wide variety of screening and monitoring obligations on financial institutions to avoid possible fraud risks.
Customer verification, often called Know Your Customer (KYC), and other anti-money laundering (AML) procedures are used to screen clients and client transactions. While the terms are sometimes used interchangeably, they mean different things. As compliance is critical, from a legal and business perspective, it’s essential to understand the difference.
KYC vs AML – what’s the difference?
AML is an array of regulatory processes that businesses need to have in place to meet the requirements of the AML/CFT Act. KYC is a component of this. Many companies have a patchy understanding of the difference between KYC processes and AML practice, which can result in errors and regulatory fines.
What exactly is KYC?
KYC is the initial step in the implementation of a broader AML compliance process. It refers to understanding and figuring out the potential risks associated with a customer. This includes factors like verifying the customer’s identity and understanding their financial dealings to effectively manage risk. It’s a fundamental part of any AML programme.
Enhanced due diligence in KYC
If a customer is considered high risk, a greater level of scrutiny and verification is required. As a result, the KYC process needs to involve enhanced due diligence (EDD). This can consist of the following:
- Requesting additional customer identification
- Analysing and verifying the source of funds
- Conducting on-site visits to verify physical addresses
- Monitoring ongoing transactions
Where does KYC fit into AML?
An AML compliance program is everything a company does to meet AML requirements. This includes the following:
- Implementing the KYC procedure
- Risk-based AML policies
- Ongoing risk assessment and monitoring
- AML compliance training for staff
- Internal controls and audits
Getting it right
AML and KYC misunderstanding is just one of the many ways that AML requirements can be complex and confusing for businesses. Knowing the requirements and creating a functional, sustainable AML programme can be complicated and time-consuming, taking time away from other crucial work.
Working with an AML expert can help streamline your AML processes and ensure all requirements are met, without the time investment. First AML offers specialised software to do just that, eliminating the confusion and ticking all the right boxes. Need help understanding and refining your AML processes? Get in touch with us today.