KYC and AML procedures explained

13 September 2019

Over the past decade, legislators and regulators made a lot of efforts to fight financial crimes, such as money laundering and terrorist groups financing. As a consequence, KYC and AML procedures became stricter and stricter.

Different jurisdictions require different AML compliance measures, and businesses invest a lot of money in effective programs, software, staff training, and legal and compliance consultants, but there are some general rules and policies a serious AML procedure should comply with. Let’s see some of them.

What is AML?

AML (Anti-Money Laundering) refers to all measures imposed by legislation and eventual additional checks used by financial institutions and some particular categories of private companies to prevent and fight money laundering and other kinds of illicit trading, like drug dealing, smuggling, terrorist organisations funding, human rights violations, gunrunning, and so on.

Every company is exposed to these risks, and what a good AML policy should do is not only complying with what laws and regulations require, but also to actively identify and report to the authorities any kind of suspect activity.

How to develop a good AML policy and how Blockchain can help

First of all, the company and its legal and compliance team and consultants should make a list of any kind of suspicious activity they want to be able to detect. The purpose of this phase is making a list of potential indicators of money laundering activities, which will be at the base of the AML policy.

Examples of suspect activity indicators are:

  • Increases in cash deposits without apparent reason;
  • Fake or incomplete information on bank account applications;
  • Payments to untrustworthy organisations.

Do not underestimate this activity, because it is part of the risk assessment, which gives a full understanding of the risks the company is exposed to when onboarding a customer. Risks that must be evaluated with a proper KYC policy. You may think the risk assessment has a secondary role, but it is not true: the risk assessment is the first thing practical thing you do when drafting an AML policy. Think about it as a preliminary stage.

We always say a shared database on a blockchain across every industry could radically change AML procedures as we intend them today.

Let’s focus on KYC for an in-depth analysis.

What is KYC?

KYC (Know Your Customer) is part of the AML measures a company must take and the most important step of any client onboarding process: it is basically the process companies put in place to verify the identity of customers and suppliers. 

When some identity checks must be made, but in a system where records can be manipulated without leaving any trace, even such checks are unsafe. Blockchain, with its immutable record and distributed ledger, make any KYC and AML safer and faster than traditional methods.

In a nutshell, with a KYC policy in place, customers are required to provide a proof of ID and eventually other specific documents in order to use a certain service offered by the company. While laws and regulations might change from country to country, it could be said that KYC measures are applied when it comes to ICOs and other token generation events, with subscribers’ ID verification, and when opening a bank account, when they ask for an ID document and proof of address.

Actually, any Fintech company has AML procedures (including a KYC policy) in place, simply because the law requires them to do so.

Differences between AML and KYC

Many companies, including legal and compliance sector, tend to make the line between KYC and AML thin and blurred, and when this happens, companies can incur in unpleasant fines.

So, just to make it clear: KYC is the identity verification process of a new customer and it is part of a broader regulatory compliance requirement: AML procedures.

A full AML procedure should consist of:

  • Risk assessment;
  • KYC policy;
  • AML policy;
  • Internal and/or external audits;
  • Training courses for employees;
  • Any other checks aimed to evaluate or dispel any suspect patterns;
  • Any other topics required by the applicable law and regulations.

KYC and AML procedures can all be made easy by implementing Blockchain. Contact us for a free introductory consulting.

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