AML & KYC – What is the Difference?
22nd June 2018 2333 - Blog Posts - Knowledge Library
‘Anti-Money Laundering’ (AML) and ‘Know Your Customer’ (KYC) are terms at the forefront of the financial industry, as institutions take firm steps to crack down on financial crime and the financing of terrorism. There can be some confusion sometimes, though, about the difference between KYC and AML, so in this blog post we will explain what that is.
What is AML?
Essentially, AML refers to the whole framework put into place to prevent money laundering. The latest guidance refers to the Anti-Money Laundering Regulations 2017, which were updated last June to encourage firms to take a more risk-based approach to AML.
Regulated financial institutions and law firms must adhere to the new AML rules, and there can be increasingly serious consequences for not having the correct policies in place, as it is a criminal offence to give a willfully false or negligent statement regarding money laundering.
These regulations include reporting risk and performing certain aspects of due diligence as a mandatory requirement. AML also includes appointing senior staff to certain designated roles, so they can be accountable for recording and reporting suspicious activities.
The Anti-Money Laundering regulations are a broad topic but some of the key requirements are:
- Taking a risk-based approach and recording information about customers, their sources of finance and their jurisdictions.
- Taking note of particularly complex or high-value transactions.
- Appointing a designated MLCO and MLRO, at board-level, who can file a Suspicious Activity Report with the United Kingdom Finance Intelligence Unit.
- Carrying out in-depth checks on Politically Exposed Persons.
What is KYC and how does it differ from AML?
In general terms, Know Your Customer refers to the process of identifying and verifying customers. KYC is a part of due diligence that ensures that financial institutions gather detailed information about their clients, but it is not a regulatory framework in its own right. It is used by a diverse range of companies, across many sectors, as a way of detecting fraud, but often also to verify customer viability or for market segmentation purposes.
In a financial context, KYC and AML are often used together. KYC is also risk-based, like AML, with the key elements of a robust policy including client acceptance, client identification, transaction monitoring and risk management.
KYC is a compliance process that makes up one aspect of the overall AML framework. Performing KYC checks is an important part of meeting AML requirements, but it is not the whole picture.
KYC is good practice for many organisations, but it is a tool rather than a mandatory regulatory requirement. It stands to reason, though that any institution that adheres to good AML compliance practices will have accurate, in-depth and up-to date information about their clients, which will help them to detect irregularities which could point to money laundering or the financing of terrorism and other illegal activities.
Lawson Conner are compliance experts who carry out outsourced AML and due diligence, including KYC and AML checks and monitoring for many global high-profile clients.
If you would like to know more about KYC and AML solutions, and how outsourcing all or part of your compliance process can reduce your risk and cost, please contact us. To find out more about how we could help to reduce your regulatory burden, talk to us today.