Regulated entities who are involved in financial activities are required to carry out risk-based customer due diligence. It helps to prevent their businesses from being successfully targeted by money launderers, terrorism financiers, and other fraudulent activity. It also protects society : people in many sectors are regarded as “gatekeepers” and are required to carry out risk based due diligence in order to protect the public from bad actors. In essence, it ensures that business operations are legitimate.
However, as the financial system is becoming more connected with the help of Fintech, different measures are being taken when it comes to identifying and knowing your customer.
Compliance laws and regulations are being updated to better understand the customer’s business practices. It is also important for the customer to understand why all the due diligence procedures are necessary.
Why are KYC and AML checks important?
As mentioned before, KYC (Know Your Customer) and AML (Anti Money Laundering) checks are important as they help to identify and prevent fraudulent activity. They help to reduce the threat to society from illegal activities such as identity theft, money laundering, terrorism financing, and tax evasion.
Due diligence is an ongoing process of collecting the available data on a customer and continuing to monitor the data during the relationship.
It is also important to understand that the due diligence process is not the same for every customer. Some customers might be faced with enhanced due diligence as they are confined to high-risk jurisdictions or industries.
What is the difference between KYC and AML?
The KYC process is to verify your customer’s identity. There are four primary objectives of performing KYC:
- Identify the client;
- Verify the client’s true identity;
- Understand the client’s activities and source of funding, and;
- Monitor the client’s activities.
Each customer is required to provide credentials such as a passport or ID to verify their identity. Additionally, other documents can be requested, such as proof of address.
AML compliance on the other hand is a regulatory requirement for such entities who are involved in financial, consulting and advisory, real estate activities. The main purpose of AML is to identify and prevent fraud. Depending on jurisdictions and regulations, AML procedures can involve document gathering such as registration documents, shareholder information, and cash flow statements.
There is a difference between KYC and AML. The term AML is an umbrella term for the full range of regulatory processes that firms must implement to carry out legitimate business. While, KYC is a smaller component of AML that consists of entities verifying their customers’ identity.
How are KYC and AML procedures changing?
In the past, KYC and AML procedures were viewed as cost centers for businesses. However, now with changing regulations, heavy penalties, and other sanctions, KYC and AML have become a critical business component.
Modern fraud prevention methods would not be possible without the developing technology. Today’s technology is allowing different entities to carry out KYC checks in a way that does not disturb the customer experience.
Today we can see KYC being done using a mobile camera to scan your face and credentials. The technology allows companies to execute and comply with regulations easily. Moreover, it seems that the process of doing KYC and AML will only become easier as new methods of compliance are being developed in the robust Fintech and Regtech scene.
Additionally, many companies have found KYC procedures to be helpful for business growth. The gathered information about the customer is helping to identify target segments as well as provide customers with services based on their needs.
To achieve compliance with regulatory requirements, a significant amount of effort and resources are required. Many companies choose and adapt the newest automated technology to prevent human error and potential penalties. Today’s technology not only ensures security and safety of the process but also adds speed and efficiency to the onboarding process of the customer.
Be sure to check out how PayPugs handles KYC and AML procedures on the highest level.