KYC vs. AML: What are the Differences?

Know your customer (KYC) and anti-money laundering (AML) are closely related concepts, but they’re not the same thing. AML and KYC processes work hand in hand to protect our economy from the consequences of laundered money.

Understanding the differences is critical for KYC and AML compliance and implementing effective frameworks for identity verification and fraud prevention.

This article breaks down the relationship between KYC and AML, how they’re applied across various industries, and the processes, requirements, and best practices for each.

Key takeaways

• KYC and AML are both initiatives designed to prevent financial crimes.
• KYC focuses on identity verification and is a subset of larger AML efforts to prevent money laundering, fraud, and more.
• Industries like finance, e-commerce, and real estate use KYC and AML to vet customers and monitor their behavior and transactions.
• Following established processes and best practices can help businesses comply with all applicable legal requirements and industry regulations regarding KYC and AML.

What are KYC and AML?

AML and KYC generally refer to policies, rules, and regulations aimed at stopping criminals from masking their identity and committing financial crimes.

AML defined

AML specifically refers to regulations intended to stop criminals from disguising illegally obtained funds as legitimate income.

What KYC involves

As a part of these wider AML procedures, KYC is a specific required process that involves identifying and validating a client’s identification both when they create an account and at certain moments thereafter. That often includes requiring customers to provide official documentation (such as a driver’s license or government identification card) showing their:

• Name
• Date of birth
• Address
• Photo

The idea is to ensure clients are indeed who they say they are. It is the business’s responsibility to ensure the documents are genuine and check the information against government records and other sources, even when submitted electronically under eKYC processes.

KYC procedures also require that banks and brokers check new clients’ names against databases of criminal suspects, people and businesses that are subject to sanctions, and “politically exposed persons” (PEPs) — individuals who hold or have held high-profile public positions and may present a higher risk of corruption.

Continuous examination of each client’s potential for money laundering is necessary for customer due diligence (CDD), and clients recognized as having higher non-compliance risks should receive a more thorough investigation.

Global variation

Note that AML guidelines and requirements vary by country and region. The European Union has its own laws, as do the United Kingdom and the United States.

What makes KYC and AML different?

While KYC and AML are technically two different terms, it’s most accurate to say that KYC is the basis for AML procedures and regulations. Both aim to achieve the same thing: to prevent fraud, money laundering, and terrorist funding.

That said, KYC refers specifically to verifying a customer’s identity and evaluating their risk at the beginning of a potential business relationship. It’s a part of broader AML requirements.

AML involves a much wider and ongoing range of actions designed to prevent, detect, and report money laundering and other financial crimes. It goes beyond customer identity verification and risk assessment to include:

• Ongoing monitoring of financial transactions and related behaviors
• Enhanced due diligence for high-risk customers
• Checking customers for inclusion on sanctions and other watch lists
• Screening for potential PEPs

KYC and AML applications

KYC and AML screening has applications across industries that involve financial transactions, banking, and investment.

• Financial institutions use KYC and AML to ensure compliance with laws and industry regulations to prevent crimes like fraud, money laundering, and terrorism financing.
• Credit institutions apply KYC and AML verification processes to vet potential borrowers, assess their credit risk, and prevent loan fraud and other financial crimes.
• Insurance companies use KYC and AML screening to verify that policyholders are who they say they are, prevent false claims, and make sure payouts go to the legal beneficiaries.
• E-money institutions that offer digital payment services verify users and ensure they are using electronic funds for legal purposes only.
• Gambling service providers implement KYC and AML for everything from monitoring betting patterns and verifying player identities to flagging high-risk transactions.
• Vendors of high-value commodities such as art and real estate engage in enhanced KYC and AML due diligence to prevent money laundering.

The AML KYC process

Businesses follow a series of key steps to conduct KYC and AML screening and maintain compliance. Some may take on all or some of these tasks in-house, while others may outsource them to a KYC AML provider:

• Collect customer information. This includes names, addresses, dates of birth, and copies of government-issued identification for individuals. For businesses, that might be registration documents and beneficial ownership details.
• Verify identities. Compare collected data against trusted records and other databases to ensure accuracy and KYC AML verification.
• Screen against watch lists. Cross-check data against global sanctions and PEP lists to identify potential high-risk individuals or businesses.
• Conduct risk assessments. Using the collected data, assign each customer a risk level. Higher-risk individuals or businesses may require deeper dives into financial backgrounds and documentation of proof of income.
• Perform enhanced due diligence as needed. For higher-risk profiles, gather additional information like sources of funds, financial history, and records of significant transactions.
• Implement ongoing monitoring. Institute a program to continuously monitor customers’ transactions and behavior for suspicious activity using automated tools and ongoing risk assessments.
• Report suspicious activity. Develop a framework and guidelines for flagging, documenting, and reporting concerns to authorities according to applicable laws and regulations.

KYC and AML compliance

Compliance with KYC and AML regulations is a must, not just to keep businesses and their customers safe but to avoid financing illegal activities that can have devastating effects around the world. The consequences of ignoring or avoiding these requirements can be severe, including fines, legal repercussions, a negative professional reputation, and lost customers.

KYC and AML compliance regulations vary by industry and country. Generally, though, companies must establish internal processes, including developing policies and procedures for identity verification, ongoing monitoring and risk assessment, and reporting suspicious behavior to the appropriate regulatory entity.

Best practices for KYC and AML

Following these best practices can help businesses maintain KYC and AML compliance and optimize their resources:

1. Understand relevant regulations. Knowing and comprehending the implications of laws and requirements that apply to your industry and jurisdiction — like the Anti-Money Laundering Act and Beneficial Ownership Information Reporting in the U.S. — is essential. Companies in highly regulated sectors like finance and insurance may want to seek assistance from lawyers or other experts to ensure they are compliant with all applicable laws.
2. Build and implement a customer identification program (CIP). It’s not enough to collect IDs and other documentation. A structured, comprehensive CIP has different policies and processes based on risk categories and other factors. It may also incorporate technology like liveness checks, biometric verification, and decentralized identity to give users more control over their personal data while maintaining compliance.
3. Conduct internal audits. Risk levels change, new laws and regulations are introduced, and threats evolve, which means businesses must adapt their KYC and AML programs accordingly. Carrying out internal audits to identify gaps and weaknesses can ensure KYC and AML workflows and processes are always up to date with both risks and requirements.
4. Take advantage of automation. Using KYC and AML platforms to automate routine identity verification, conduct liveness tests, and monitor customer accounts and transactions for unusual activity can help businesses onboard new customers faster, detect signs of fraud earlier, and scale operations for growth.

Supporting KYC with Entrust

Entrust helps businesses take control of identity verification without compromising security or slowing down operations. Our end-to-end identity verification solution integrates document and biometric verification, trusted data sources, and passive fraud signals into a unified experience, leveraging AI-powered technology to streamline the KYC process while reducing operational costs. 

Whether you're validating new customers or screening for high-risk activity, Entrust’s Identity Security solutions are here to empower your organization to navigate KYC and AML regulations more efficiently, and at scale. Take a tour of Entrust Identity Verification to learn more.