KYC and AML Compliance: Guidelines for Businesses

Mariola
Mariola
Content Writer
Adam
Adam
CEO & Co-founder

There’s a lot of talk about KYC (know your customer) and AML (anti-money laundering) compliance these days. But what does it really mean? Do you need to comply with these regulations when running your business? Let’s take a look at what KYC and AML compliance entails.

KYC (Know Your Customer) and AML (Anti-Money Laundering) compliance are two important regulations businesses must abide by to ensure they remain compliant with local laws and regulations.

KYC is used to verify a customer’s identity, and AML aims to prevent criminals from using financial services to launder money. To comply with KYC and AML regulations, financial institutions must have processes in place to verify the identity of customers and identify any suspicious activities that may indicate money laundering.

The compliance regulations adhere to the evolving global business landscape.

The growing popularity of smartphones and technological innovations are increasing the use of e-wallets worldwide. As companies focus on diversifying their business operations, they increasingly use wireless and mobile processing technologies for payment processing. According to a Grand View Research, Inc. report, the global market for payment processing solutions is expected to reach $139.90 billion by 2030, registering a CAGR of 14.5% between 2023 and 2030. This growth can be attributed to the growing cashless economy initiatives undertaken by several governments worldwide. Thanks to such economic initiatives, the adoption of digital payments has increased, creating demand for payment processing solutions.

As a result, greater oversight is required in the fintech sector to ensure KYC and AML compliance and protect consumers and market integrity. To help protect consumers, increased supervision of consumer financial activities of non-banks is vital.

Some companies still perform identity verification and customer background checks (KYC) manually, requesting identity documents sent via email. However, this way is highly susceptible to human error and inherently insecure; there is a high likelihood that sensitive data will be leaked.

The alternative to manual KYC is automated identity verification. An automated KYC system uses an artificial intelligence (AI) algorithm to verify customer identities by comparing them to data from multiple sources, including public records, credit bureaus, and government databases. This way, companies can quickly and accurately validate customer identities while ensuring that sensitive information remains secure. Automated identity verification also enables companies to maintain compliance with industry regulations and prevent fraud. Let’s dig deeper into KYC and AML procedures and learn their benefits for your business.

What are the KYC requirements?

A customer must meet certain KYC (Know Your Customer) requirements to be approved for a financial transaction. These requirements are set by the customer’s financial institution and typically include providing proof of identity, proof of address, proof of source of funds, and other information.

KYC requirements typically include providing proof of identity, such as a passport or driver’s license, and proof of address, such as a utility bill or bank statement. In some cases, additional documentation may be required, such as proof of employment or sources of income.

The KYC requirements are:

  • Proof of identity (e.g., a valid government-issued photo ID)
  • Proof of address (e.g., utility bill, bank statement, etc.)
  • Source of funds (e.g., salary slips, bank statements, etc.)
  • Additional documents (e.g., birth certificate, passport, business license, etc.)

Importance of KYC compliance

  1. Minimize Financial Crime: KYC compliance helps to minimize financial crime and reduce the risk of money laundering, terrorist financing, and other illicit activities.
  2. Foster Trust: KYC compliance helps to provide assurance to banks and other financial institutions that their customers are legitimate and trustworthy. This helps build trust and strengthens customer relationships.
  3. Improve Compliance: KYC compliance helps ensure that financial institutions meet all of their regulatory requirements.
  4. Reduce Operational Costs: KYC compliance helps to reduce the amount of time and resources required to onboard new customers. This can help reduce operational costs and improve efficiency.
  5. Enhance Customer Experience: KYC compliance helps streamline the onboarding process and provide customers with a more positive experience. This leads to increased customer satisfaction and loyalty.

What are AML requirements?

Over the past few years, new regulations have been enacted to reduce money laundering, terrorist financing, and fraud. These regulations include requirements for businesses to verify the identity of customers, monitor their accounts for suspicious activity, and report any suspicious activity to the appropriate authorities. Additionally, financial institutions must

  – establish procedures to protect themselves from being used as a conduit for money laundering or terrorist financing: monitoring customer transactions, ensuring customer accounts are not used to move suspicious funds, and reporting suspicious activities to the proper authorities.

 – develop and maintain robust policies and procedures for data management and security.

 – collect and store detailed customer information such as name, address, date of birth, and other identifying information. This information must be regularly updated and verified.

 – implement internal controls to prevent money laundering and terrorist financing.

What are the KYC & AML compliance protocols?

There are many compliance protocols that financial institutions can implement to mitigate KYC/AML risk. Some common compliance protocols include:

  1. Risk-Based Approach to KYC: This approach involves individually evaluating customers and their transactions to identify and assess any associated risks.
  2. Customer Due Diligence (CDD): This involves verifying customer identity and taking steps to learn more about the customer’s background and financial activities.
  3. Enhanced Due Diligence (EDD): This approach involves extra scrutiny of customers and their transactions when they present a higher risk of money laundering and financial crimes.
  4. Transaction Monitoring involves ongoing customer activity monitoring to identify suspicious or unusual behavior.
  5. Know Your Business (KYB): This involves collecting information on the customer’s business and assessing the risk of money laundering or terrorist financing associated with it.
  6. Suspicious Activity Reporting (SAR): Financial institutions must report any suspicious activity to the relevant government authority.

Where and when are KYC and AML required?

KYC (Know Your Customer) and AML (Anti-Money Laundering) are required in many countries. Whenever a customer is onboarding with a financial institution or engaging in a financial transaction. Generally, this applies to banking, insurance, stockbroking, credit and loan providers, and cryptocurrency exchanges. KYC and AML requirements may also be enforced by governments and other regulatory bodies. They may also be required when a customer makes large transactions, sends or receives funds from an international bank, or participates in certain financial activities.

KYC is required in many of the cases described in national AML regulations. These typically include cases where a customer:

  • Establishes initial contact with the company (e.g., by opening an account with a bank or cryptocurrency exchange platform);
  • Makes a transaction exceeding the amount specified by AML regulations;
  • Is suspected of money laundering/terrorist financing.

Case Study: Meeting KYC & AML compliances for Malta Gaming Authority

Hurricane’s iGaming platform needed a robust and reliable KYC provider to operate in full compliance with ever-changing regulations. We developed a solution that provides many advanced functionalities, including transaction and user management, risk assessment, anti-money laundering (AML) identification, and integration with key payment providers. The casino can integrate with our platform and retrieve data from it (for example, games or providers). 

 It is a crucial feature due to requirements from the gaming control institution based in Malta – The Malta Gaming Authority (MGA). The company presented a set of regulations that must be followed in the casino & gambling industry. 

Learn more about the partnership between Studio Software and Hurricane by reviewing the project portfolio.

Benefits of KYC & AML compliances

Although keeping up with these guidelines can be daunting, it’s essential for protecting your business from potential financial crimes.  Businesses must comply with KYC and AML regulations to safeguard their customers and business. Adopting automated solutions for compliance can help businesses stay ahead of the curve and remain compliant with the latest regulations.

KYC & AML compliances provide various benefits

1. Increased trust and integrity: KYC & AML compliance help businesses to ensure they are dealing with legitimate customers and transactions. This improves the trust and integrity of the organization and its customers, as they are sure their data is being protected. This helps to create trust and confidence in the banking sector and helps to improve customer service.

2. Improved legal protection: KYC/AML compliance ensures that banks comply with global and local regulations. This helps to ensure that banks remain within the boundaries of the law and are not subject to financial penalties or penalties from government authorities. KYC & AML compliance can help businesses protect themselves from legal liability by helping them to detect and report suspicious behavior or transactions.

3. Reduced fraud: KYC & AML compliance helps businesses detect and prevent fraudulent activity by ensuring accurate and up-to-date customer information. Businesses can reduce the risk of criminal activity by ensuring that all customers are verified and that their transactions are legitimate.

4. Increased customer satisfaction: Customers appreciate organizations that take steps to protect their information and ensure the safety of their transactions. Furthermore, they are more likely to remain loyal to businesses that demonstrate they are taking the necessary steps to protect their customers’ data

5. Increased Efficiency: KYC/AML compliance can help to streamline the onboarding process by ensuring that all customers are verified and all transactions are legitimate.

Cooperate with an experienced partner in KYC & AML compliances

When it comes to working with an experienced partner in fintech compliance, there are several considerations. First, it’s crucial to ensure that your partner knows about the latest laws and regulations applicable in your jurisdiction. Additionally, it’s essential to understand how they might help you reduce risk and increase efficiency within your own operations.

Next, you’ll need to understand the type of support that the partner will provide. This could include things such as compliance audits, software development, or assistance with developing best practices.

Finally, you’ll want to ask questions to ensure that the partner is reputable and has the necessary expertise to provide your needed support. If you are interested in our experience, talk to our high-class specialists or check us on Clutch to ensure you’re working with a partner with the expertise to help you succeed in your fintech compliance efforts.

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