AML & KYC: The Compliance Duo Explained

AML (Anti-Money Laundering) and KYC (Know Your Customer) are foundational components of compliance frameworks deployed to combat financial crimes such as money laundering, fraud, and financing of terrorism. Together, they create a comprehensive system in which financial institutions and other regulated entities ensure transparency and security while adhering to local and global regulatory obligations.

• AML encapsulates a vast framework aimed at identifying and preventing illicit transactions and financial crimes.
• KYC is a subset of AML that specifically focuses on verifying the identity of individuals or businesses before engaging in a business relationship.

Example Scenario:

When opening a bank account, a customer is asked to provide identification documents. This step falls under KYC, which is part of the bank's broader AML strategy to assess and mitigate financial crime risks systematically.

To understand their interconnected nature, it's essential to distinguish AML and KYC explicitly:

Both AML and KYC are interconnected tools in compliance strategy for preventing financial fraud and ensuring regulatory adherence:

1. KYC Forms the Foundation of AML: Without a robust KYC system, AML frameworks are weakened, as the primary identification of risk begins with customer profiling.
2. Combined Strength: A thorough KYC process informs AML checks, allowing organisations to implement risk-tiered controls.
3. Saving Costs & Increasing Compliance: While standalone processes might seem sufficient, integrating KYC into the broader AML operations ensures time efficiency, cost management, and reduced fraudulent activity.

Example: KYC validation during onboarding by banks not only meets AML compliance but flags high-risk clients early.

Regulators worldwide set clear expectations for AML KYC processes to ensure consistent and fair practices in financial markets.

Regulatory Expectations:

1. Customer Identification: Collect full name, date of birth, proof of address, and valid identification.
2. Beneficial Ownership Declaration: Particularly important for businesses to declare all significant stakeholders to ensure transparency.
3. Sanctions and PEP Screening (Politically Exposed Persons): Minimises risk associated with individuals involved in sensitive or grey economies.
4. Suspicious Activity Reports (SAR): Institutions must report suspicious financial behaviours to regulatory authorities.

KYC and AML, though systemic policies, must operate seamlessly for practical applications:

Steps in the AML KYC Process:

• Onboarding Stage:
  Verify names and addresses using IDs like passports.
  Confirm the source of finances or origins of business capital.
• Screening Process:
  Compare applicants against watchlists, including UN or financial sanctions listings.
• Assigning Risk Scores:
  Customers are tiered into low, medium, or high AML/KYC risk brackets to enable due diligence accordingly.
• Monitoring Transactions:
  Daily transactions are tracked to flag irregular activities beyond a pre-set threshold. For instance, a sudden, unusual transfer to a flagged country may immediately trigger investigations.

Policies & Regulatory Bodies Worldwide:

• UK: Governed by the FCA, with Anti-Money Laundering Regulations (MLR) updated under the 4AMLD/5AMLD European directives.
• US: Banks adhere to BSA (Bank Secrecy Act) and FinCEN standards involving layered AML approaches.
• EU: Led by MLD mandates, digital tools like e-KYC solutions are increasing.
• Global Level: FATF sets the global bar with its emphasis on combating terrorism financing.
  

Key Challenges:

1. False Positives:
   Unnecessary alerts during sanctions or politically exposed individuals screening.
2. Data Quality Issues:
   Lack of consistent customer data from various jurisdictions.
3. Compliance Costs:
   Manual processes continue increasing the burden on organisations.

Addressing Issues:

• AI-Based Automation: Using machine learning to minimise false positive cases and refine risk scoring.
• LSEG Risk Intelligence Solutions: Tools that leverage global data insights to streamline sanctions screenings and enhance eKYC processes. These may help in automating updates to improve AML remediation.

Conclusion

AML and KYC remain interdependent pillars in financial compliance strategies. With evolving threats and increased scrutiny, these tools not only guard institutions against liabilities but enhance market trust and develop stable growth. As financial environments grow complex, organisations need to rely on robust solutions like LSEG World-Check to stay adaptive and efficient, paving the way toward safer financial operations globally.