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What is KYC and AML?

by Alan Daniel
, What is KYC and AML?

The world of money and banking is becoming more transparent and regulated regarding understanding customer information and the overall flow of money. As such, terms such as KYC and AML are a few phrases customers, business professionals, and other are bound to run into.

Most widely utilized by businesses dealing with financial information, money transfers, or funding, these terms refer to essential practices that help entities steer clear of potential dangerous regulatory waters.

So what exactly are these concepts and how do they help?

Let’s find out.

What is KYC and AML Anyway?

To understand what KYC and AML really mean, let’s first understand the full form of these acronyms.

KYC

KYC is an acronym of “Know Your Customer”. This refers to a process of organizations doing their due diligence and learning about the background information of their customers before conducting continuous business with them.

This process helps organizations do business with individuals who are compliant, safe, and free of criminal and illegal activities.

Given the implications of using funds from such people or helping the transfer of funds for them, all financial institutions prefer doing background checks on their customers to ensure they are not dealing with potentially shady entities.

As such, whenever you open a bank account or are about to invest your money into a financial organization, you complete a KYC procedure.



AML

AML stands for “Anti-Money Laundering”. Unlike KYC, which refers to an actionable practice, AML is a complete set of holistic rules and regulations that work to prevent the movement and use of illegal money.

AML has an array of policies that work towards preventing money laundering, which is when illegal money is “cleaned” by investing into legitimate endeavors. This minimizes the usage of money earned through illicit means, such as drug or human trafficking.

Constricting the flow of this money stops criminals from using their illegal funds in a legitimate way. If a proper source of income isn’t provided or if there are any reported issues on record with the owner of the funds, then legitimate businesses minimize or eliminate their interactions with these suspicious accounts.

Since AML is comprised of a wide array of different policies, it is different than KYC.

When Did the KYC Trend Start?

KYC and AML have been a part of financial institutions’ best practices for quite a while.

In the United States alone, KYC was famously adopted as a practice of AML as well as counter financing of terrorism (CFT) in 2002, when KYC procedures were mandated across all domestic banks.

Seeing the effectiveness of the practice, other financial institutions have also adopted it in their operations. In addition to managing bank accounts, KYC is now widely used by entities that are raising funds or selling equity.


Different Governmental Institutions That Are Involved in KYC

The direct regulatory authority for US Banking institutions seems to be the Office of the Comptroller of the Currency. Depending upon the jurisdiction and the bank’s status, they could also report to the Federal Deposit Insurance Corporation or the Federal Reserve Board.

State-level financial watchdogs may also be involved.

In addition to this, organizations such as the Security and Exchange Commission (SEC) also oversee KYC for companies that are dealing in investments or securities.

Pertinent Facts about KYC and AML

KYC and AML, along with CFT, are widely used throughout the world to minimize and eliminate the movement of illegal funds and their financing of further illegal activities.

Financial Action Task Force (FATF), World Bank, International Monetary Fund (IMF), and the Interpol are a few organizations that closely contribute to the implementation of KYC and AML on an international level.

High Profile Cases

Ironically, some of the most high profile cases in money laundering have come from some of the largest international banks.

HSBC, one of the largest banks in the world, was involved in a case where it worked with drug lords to launder at least $881 million. As a result, the bank ended up having to pay $1.9 billion in fines to the U.S. government.

Another large scale international bank, Standard Chartered Bank, was fined $4 million by the Singaporean government for its lapses in AML procedures.

Bank of Credit and Commerce International (BCCI), a Luxembourg registered bank with international ties, essentially operated as a money laundering operation across multiple continents, including Africa, America, Asia, and Europe. The bank was closed down after it moved billions of dollars in money laundering activities.

What Does This Mean for Traditional Finance and Cryptocurrency?

KYC is not just limited to traditional banking or conventional financial institutions. It is now being applied to the emerging decentralized sector, relating to segments such as blockchain and cryptocurrency.

Initial coin offerings (ICOs) and security token offerings (STOs) require their customers to go through a KYC procedure.

KYC, AML and CFT are all important procedures to make sure that institutions are not unknowingly or knowingly transacting with an illegal entity.

While a certain level of transparency is needed within the finance sector, there are those who believe that privacy and forms similar to cash are needed within the digital age.

Striking a balance between transparency and privacy in the digital age is the present challenge.

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