Given the proximity of the terms “Know Your Customer” (KYC) and “Anti-Money Laundering” (AML), and the fact that they are often used interchangeably, it can be difficult to distinguish the differences between the two in a regulatory context.
AML is an umbrella term for the range of regulatory processes companies must have in place to deter criminals from money laundering, which is the surreptitious processing of illegally obtained money to wipe away traces of criminal activity and make it appear legitimately obtained. By default, this implies not only financial crime, but also indicates criminal activity in the acquisition of the illicit funds.
To keep pace with the tactics of money laundering criminals, banks must innovate by implementing robust AML policies and practices—including, for example, KYC. Fully tracking and breaking down money laundering efforts is a difficult process, especially when multiple counts of money laundering and interrelated criminal activities become interwoven. As a result, enforcement actions in the last decade related to AML have been on the rise.
Understanding the global AML landscape
Achieving AML compliance requires close collaboration with financial regulators and a thorough understanding of relevant legislation imposed at both national and international levels. The Financial Action Task Force (FATF) is a leading organization in the fight against money laundering. With 37 member countries, the FATF sets standards for AML compliance around the world and monitors their effective implementation. In pursuing that objective, the FATF regularly issues updated AML recommendations. To comply with FATF regulations, financial institutions are, among other standards, required to implement KYC identity verification measures.
Another legislative body that requires robust KYC practices is the European Union. The EU Anti-Money Laundering Directives (AMLD) are published periodically and reflect the current money laundering, terrorism financing, and criminal risks facing financial markets. Following the rollout of AMLD5 in 2018, AMLD6 has been drafted and will come into effect in June 2021.
Unraveling the true identity of your customer
KYC is a fundamental component of AML regulations that require businesses in sectors most vulnerable to financial attack to assess their customers’ personal information. In doing so, regulated institutions verify their customers’ identities, their financial activities, and the risk they pose to a given institution.
A successful KYC provider collects customer data, including government-issued identification documents, birth dates, social security numbers, and whereabouts during the customer account activation process to evaluate whether an individual may be involved in financial crime. A thorough KYC process also includes some form of biometric verification in order to assess a person’s liveness and compare their ID document with their physical biometrics to determine if they are who they say they are. Ideally, a KYC provider also checks whether the individual is known for corruption, on a list of (international) sanctions, associated in the media with a crime, or at high risk of partaking in money laundering due to prominent public function (Politically Exposed Persons, or PEPs).
Flagging high risks: Politically Exposed Persons
As part of their customer due diligence obligations, financial institutions must establish whether their clients are Politically Exposed Persons, or PEPs. A PEP status is not indicative of criminal behavior, but the additional risk requires financial institutions to take proactive measures and apply additional AML/CFT measures when establishing a business relationship. A PEP represents a higher risk for financial institutions because they are more likely to become involved in financial crimes like money laundering or terrorism financing. It also means that these institutions must conduct ongoing monitoring to ensure that they do not miss a change in a PEP’s risk profile.
Ideally, the KYC provider will flag individuals who are, or have previously been, entrusted with prominent public functions domestically, by a foreign country, or by an international organization. Because there is a tendency for friends and family to be involved in, or drawn into, financial crimes perpetrated by others, KYC providers should also flag relatives and close associates of PEPs.
Choosing the Right KYC Provider
Each regulated institution has unique KYC requirements, depending on a wide range of factors, from countries of operation to business activities, customer profile, technical configurations and capacities, risk appetite, operational setup and beyond. The right KYC provider can detect and prevent fraud effectively while reducing inefficiencies within customer onboarding and the handling of customer data.
Fourthline offers a modular solutions architecture that allows its clients to pick and choose the KYC components that suit their needs. From simple ID&V to end-to-end, bank-grade KYC, Fourthline offers customized solutions that bolster customer conversions and detect fraud at industry-leading rates. Meet local and international compliance standards and participate in the global fight against fraud by adopting efficient and effective KYC practices with Fourthline.