If you work for a financial institution of any kind, you may be tired of hearing about “AML” and “KYC” requirements, and the criminals desperately trying to figure out how to get around them. Either way, you’re in luck because we are going to dive a little deeper into the world of AML and KYC compliance.
So what are AML and KYC? “AML” stands for Anti-Money-Laundering, and it refers to the set of laws, regulations, and procedures that financial institutions and other regulated entities use to prevent, detect, and report money laundering activities. “KYC”, on the other hand, stands for Know-Your-Customer, and its purpose is to verify the identity of your clients and to make sure they are who they say they are; a deterrence against financial crimes. Both AML and KYC requirements are meant to ensure proper and legal usage of the global financial system. They help prevent both terrorist and proliferation financing (i.e. the spread of nuclear, radiological, chemical or biological weapons), among other illegal activities.
Why are AML and KYC so important?
Well, let’s start with money laundering. Firstly, it is estimated that every year money laundering costs 3% to 5% of the global GDP, which is more than $2 trillion! Money laundering is essentially the process of disguising the proceeds of illegal activities as legitimate funds. It’s a way for criminals to “clean” their dirty money and make it look like it came from a legitimate source. And it’s not just drug dealers and mafia bosses who are involved – money laundering can be perpetrated by anyone from corrupt politicians to terrorists to human smugglers.
The 3 stages of typical money laundering activities are as follows:
- Placement (i.e. moving the funds from direct association with the crime)
- Layering (i.e. disguising the trail to foil pursuit)
- Integration (i.e. making the money available to the criminal from what seem to be legitimate sources)
Source: United Nations Office on Drugs and Crime
But here’s the thing, money laundering doesn’t just harm the individuals and organizations involved in the illegal activities. It can also have serious consequences for the entire economy. When dirty money is introduced into the financial system, it can distort prices, disrupt financial markets, and undermine public trust in the financial system. That’s where AML comes in – by helping to identify and prevent money laundering, financial institutions can protect themselves and the broader economy from the negative effects of this illegal activity.
And what about KYC? The Federal Trade Commission has reported that in the US alone, identity theft cases registered in 2021 were 22% more than in 2021, costing users $56 billion. As mentioned earlier, KYC is all about verifying the identity of your customers and making sure they’re not involved in any illicit activities. KYC standards are put in place by industry, and enforced by governments, to verify customer identities in order to better know the potential risk and financial profile involved. The KYC process typically includes some form of obtaining customer biographic information and government-issued documents for assessment, completing verification and identity checks to assess risk profiles associated with suspicious account activity, and in some cases, deeper checks against government threat databases and other high-risk ledgers. The U.S. Financial Crimes Enforcement Network (FinCEN) requires both customers and financial institutions to comply with KYC standards to prevent illegal activity, specifically money laundering.
This is so important because it helps to prevent financial institutions from being used as a conduit for money coming to or going out of illegal activities. By conducting proper KYC checks, financial institutions can ensure that they’re not unknowingly facilitating criminal activity.
But KYC isn’t just about protecting the financial system – it’s also about protecting the customers themselves. By verifying the identity of their customers, financial institutions can help to prevent identity theft, fraud, and other types of financial crimes. And in today’s digital age, where identity theft is more common than ever, this is more important than ever.
A Safer World
So there you have it: the importance of AML and KYC, and their symbiotic relationship, in a nutshell. But let’s be honest – compliance can be a large burden for both individuals and organizations. Endless forms, verification processes, and hoops to jump through… it’s enough to make even the most diligent financial compliance employee want to pull their hair out. That said, AML and KYC compliance isn’t just about following the rules – it’s about making the world a safer and more transparent place. And that’s something we can all get behind.
The next time you’re feeling overwhelmed by the demands of AML and KYC compliance, remember: you’re not just checking a box for checking a box’s sake – you’re making the world a better place.