What Value AML Policies, KYC and KYB Have for Customer Security

January 24, 2023

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When it comes to regulatory compliance, the most popular terms that business owners hear are “AML” and “KYC/KYB”. However, many people do not fully understand the definitions. This is not surprising, as Know Your Customer (KYC) and Know Your Business processes (KYB) are very similar to each other. Anti-Money Laundering (AML) regulations are managed by both national and international authorities across the world and impose a wide range of verification and monitoring obligations.

In this article, we will delve into these terms, their importance for compliance with the rules, and consider how the verification systems and advanced data protection mechanisms can help secure money flows.

What Is Anti-Money Laundering (AML)?

Anti-Money Laundering is a set of measures and procedures implemented by a government to prevent financial crimes in financial institutions and other regulated organisations. 

AML includes analysing customer transactions, keeping records, reporting to authorities on suspicious activity, and so on. These obligations also include a Know Your Customer process because it allows companies to identify their customers and understand their financial behaviour.

Regulated enterprises should develop their Anti-Money Laundering measures following the regulations of the country or region in which they operate. For example, there is money laundering and terrorist financing in the UK.

You can find the guidelines published by national authorities that help businesses understand their AML obligations on governmental websites. Additionally, it’s important to check the Financial Action Task Force (FATF) because it sets global standards.

What Is Know Your Customer (KYC)?

Know Your Customer is the process by which the firm obtains information about the customer and verifies their identity. KYC verification allows firms to apply a risk-based approach to combating money laundering so that they can both identify their customers and understand what level of money laundering risk each of them may pose. 

The scope of personal information required may vary depending on the jurisdiction. As a rule, businesses need at least the following data:

  • Name
  • Date of birth
  • Address

Customers need to provide companies with certain credentials; usually, they use their passports. Businesses check them to make sure that the submitted documents are not fake.

To pass KYC verification at Payrow you will need:

  • An ID document. It can be a passport, a national ID or a driving licence. 
  • Selfie. We need to make sure that the person uploading the documents is you. 
  • Proof of address. This can be a utility bill.
  • Bank or tax statement. It is not always necessary, but in some cases, you’ll need an official document that is no more than three months old.

What Is Know Your Business (KYB)?

Financial institutions and companies that carry out monetary transactions are obliged to check the organisations with which they do business, just as they check their customers. Similar to KYC, Know Your Business (KYB) is also a way to understand what they are dealing with and whether the company is real and trustworthy. In other words, to verify the legitimacy of a business. 

If you follow KYB processes, you can be sure of two things:

  1. The business you are working with is real, it is not an illegal company that exists only on paper, and it is safe to do business with it.
  2. The persons running the business are real individuals responsible for this particular company, and they are not involved in any offences or crimes, such as money laundering or financing terrorism.

KYB ensures that the firm is protected from both supply-side and demand-side risks. It is worth mentioning that the process is carried out in both directions. You should check your partners, and it’s likely they will check you as well. If you want to establish connections and interact with other firms, you may be required to pass KYB. 

To pass KYB verification with Payrow you will need:

  • Proof of Authority and Power of Attorney. The latter will be needed in case a company is registered or controlled by a third party.
  • Licence. This is provided when any of the company’s activities require governmental or regulatory licensing.
  • A document confirming the structure of the company. This is necessary for companies with complex ownership structures.
  • Company incorporation documents. Sometimes you need to provide them to clarify when and where your business was opened. 

What Is the Difference Between KYC and AML?

AML is an umbrella term for a broad range of measures and processes that firms must put in place to achieve regulatory compliance. It is also referred to as a compliance programme. 

In contrast, KYC is one of the components of AML and refers to the means by which companies establish and verify their customers’ identities. KYC may include transaction monitoring, screening measures, including sanctions screening, politically exposed person (PEP) screening, and adverse media screening.

AML programme requirements may vary across jurisdictions. Usually, they include:

  • Customer Due Diligence (CDD)
  • Enhanced Due Diligence (EDD)
  • Assessment of risk 
  • AML policies
  • Ongoing monitoring
  • A report on suspicious activity and transactions
  • AML compliance officer appointment
  • Training programmes for staff

During the Customer Due Diligence procedure, businesses identify and verify customers, carrying out KYC. At the same stage, companies must define the risk profiles of their customers.

Where and When Are KYC and AML Required?

Compliance with AML requirements, including KYC, is obligatory for regulated organisations under the AML and CFT rules. The scope of activity of regulated organisations varies depending on the jurisdiction. This usually includes:

  • Financial & credit institutions
  • Electronic money institutions
  • Insurance companies 
  • Payment service providers
  • Gambling service providers
  • Virtual asset service providers (VASP)
  • Art dealers

KYC or CDD are usually required in cases described by the National Anti-Money Laundering regulations. They include, but are not limited to:

  • Cases when a customer establishes a relationship with a business for the first time (the most common case). For example, a client opens a bank account or registers on a cryptocurrency exchange platform.
  • Cases when a customer commits a transaction exceeding the amount determined by the AML rules.
  • Cases when a customer raises suspicions concerning money laundering or terrorist financing.

Top Practices for KYC/AML in Banking and Fintech

Unfortunately, the banking & fintech sector and modern crypto platforms are most vulnerable to fraud and money laundering. Effective KYC/AML processes can help decrease the level of crime by: 

  • Reduction of legal and reputational risks. By complying with Anti-Money Laundering requirements, businesses can avoid large fines and other sanctions from regulatory authorities while maintaining their reputation.
  • Detection of fraudsters. In the financial services sector, fraudsters use not only fake identity cards but also apply various sophisticated schemes, for example, money muling. If a company ensures that only verified users can be its customers, businesses can stop even the most innovative fraud attacks.
  • Improving the user experience. When companies optimise their KYC/AML flows according to user risk profiles, their clients do not need to undergo additional checks. This reduces the number of drop-offs and enhances the user experience.

We believe that KYC/KYB and AML compliance is vital, but it should not take days to onboard a business customer in 2023. Time is crucial, especially for startups and SMEs. More than that, with modern technologies and software, these processes should be simple and smooth. That’s why the Payrow platform prefers new tools and data providers that can help identify persons and businesses. We can onboard business customers in as little as a few hours, seamlessly and efficiently, which is definitely an advantage we are proud of.  

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