KYC vs AML: Understanding the Differences and Key Concepts

KYC and AML are two of the most commonly used terms in the compliance industry. KYC and AML processes are different, as KYC is a component of the AML framework.

KYC concentrates on client identification, and AML concentrates on the wider set of measures used to prevent financial crimes, including money laundering and terrorism financing.

It is essential to understand the distinction between KYC and AML to comply with the latest global regulatory frameworks like FATF, as well as local laws and industry regulations.

Let’s go through an example of the difference between them.

Imagine a high-tech bank with a multi-layered security vault. The fingerprint scanner confirms the identification of anybody requesting to use the system, functioning similarly to KYC. But, if someone uses credentials that have been stolen to go around the fingerprint scanner, they may still be able to access the system, proving that KYC is insufficient to prevent attacks.

This is where AML comes in. Consider security personnel, motion sensors, and alarms. Taking preventive steps like warning employees, blocking accounts, or looking into possible dangers in real time, AML continuously keeps an eye out for questionable activity.

KYC entails continuous risk assessment and monitoring to make sure your clients stay compliant over the course of their business relationships.

Contrarily, AML acts as a security system that actively tracks every transaction, identifies questionable activity, and guarantees compliance by stopping illegal financial activity before it gets out of hand.

In short, KYC is a critical component of border-term AML, which prevents financial crimes such as money laundering, terrorist financing, and fraud. KYC collects data to identify and verify clients’ legitimacy.

AML measures are a series of procedures and regulations conducted by Financial and Designated Non-Financial Businesses and Professions (DNFBPs) to protect against financial crime exploitation.

How Does Know Your Customer (KYC) Work?

The Know Your Customer KYC meaning in the compliance industry is a verification process of the client’s industry.

The Know Your Customer process involves collecting government-issued identity documents (like a passport or national ID) and confirming the identity by verifying additional relevant information, including residence address, tax documentation, or business activity.

Financial institutions must conduct a Know Your Customer (KYC) process before starting any business deal with a client.

This helps companies avoid inadvertently engaging with criminals or money launderers by verifying customers’ identities and assessing risk.

The steps for conducting KYC are mentioned below:

• Verify the clients’ identities to prevent fraud.
• Screen clients and employees against sanctions, PEP, and other Watchlists.
• Assess the risks associated with a client.
• Constant monitoring of transactions allows businesses to assess their current risk status.
• If suspicious activity is detected and flagged, further measures such as filing an SAR with relevant authorities for further investigation are taken.

Manually finding authentic information related to clients to verify their identities from different sources, such as social networks, search engines, or public databases, is a time-consuming process.

Regtech automates and streamlines multiple compliance procedures like KYC to improve accuracy, reduce errors, and increase efficiency.

It makes it easier to manage huge client data quickly and accurately. It saves time, reduces errors, and improves the quality of data.

Overview of AML Process

Financial organizations, businesses, and other firms must comply with a set of mandatory rules and procedures called Anti-Money Laundering (AML) enforced by law authorities.

AML meaning refers to the framework of regulations, rules, and procedures intended to detect, track, and stop money laundering and terrorism funding in the financial system.

In 1989, FATF was established to unite different nations and countries against financial crimes like money laundering.

The initial focus was to establish international rules and regulations for performing AML and KYC procedures to prevent financial crimes.

Post-9/11terrorist attacks significantly expanded its scope to address terrorist financing as well. FATF enhanced its rules and regulations covering AML/CFT measures in October 2001.

It sets global AML standards for countries to adopt according to their requirements. FATF provides guidance to perform AML procedures, such as assessing risks associated with their clients and transactions, to various entities like banks, financial institutions, and DNFBPs

Keeping records of all customer data, such as transactions, and reporting to AML compliance authorities about suspicious transactions related to money laundering and other financial crimes.

Other illicit activities are terrorist financing, manipulations in the market, or security fraud.

Businesses should conduct AML procedures focusing on the following four main compliance areas for robust AML compliance.

• Know Your Customer (KYC)
• Customer Due Diligence (CDD)
• Transaction monitoring of clients
• Suspicious activity reporting

Business and financial organizations must follow all AML laws and government rules to monitor clients’ transactions. All client risks must be assessed by screening individuals against different AML watchlists, and report detected suspicious activities with relevant regulators or authorities.

How KYC and AML Differ: A Comparison

The key Difference Between KYC and AML is that financial institutions and DNFBPs use KYC AML checks to verify clients’ identities and prevent illicit activities.

In the debate of KYC vs AML, KYC prioritizes customer identification, whereas AML aims to identify and block illicit financial activities.

Different countries have different requirements for the KYC AML  program. However, commonly, the following procedures are performed.

• CDD and EDD measures
• Risk Assessment of Clients
• Transaction Monitoring
• Suspicious Activity reports
• Appointment of Compliance Officer
• AML training programs/workshops for staff

During the CDD process, the business identifies the clients and verifies their identities, you can also say they performed KYC checks. Along with these,  financial organizations must assess their risks.

What is the Significance of AML & KYC Compliance?

Clients’ Risk profiles are regularly updated, and internal AML policies are established to ensure robust AML compliance. The identities of clients are verified, and client transactions are monitored to detect any suspicious activity.

Effective KYC and AML compliance protect businesses by following strategies.

• Complying with AML laws, business can protect their reputation by lowering the legal and reputational risks.
• Identifying fake people who use fake IDs and employing complicated procedures such as money muling.
• Businesses can mitigate all the financial risks by ensuring that only an authentic client’s whole identity is verified and enters the company.
• Enhancing user experience as businesses tailor their AML/KYC process according to clients’ risk profiles, High-risk clients need to pass through additional checks, and low-risk clients can skip these extra checks.

Consequences of AML KYC Non-Compliance

AML KYC compliance is essential to mitigate financial risks and prevent illicit activities such as fraud. Following are the repercussions of Noncompliance with AML and KYC.

• Hefty fines are imposed for violating AML regulations and laws.
• Businesses may face sanctions or license suspensions.
• An individual may face legal actions such as imprisonment for years
• Violations cause reputational damage to the institution.
• Businesses can also lose potential clients.

Case Studies of Deutsche Bank and BitMEX

U.S. Federal Reserve took enforcement action against Deutsche Bank due to its deficiency in AML controls. Banks was penalized $186 million on July 19, 2023.

The reason for the penalty was to mandate financial institutions to evaluate risks regularly and take proper measures for risk management in their AML compliance program.

BitMEX, a cryptocurrency exchange company, violated the Bank Secrecy Act and failed to maintain an adequate AML and KYC program. The bank was penalized $100 million on  January 15, 2025.

KYC Breakdown: The Three Components

The KYC process consists of three main components such as;

Customer Identification Program (CIP)

Customer Identification Program (CIP) was established after the September 11 attacks and under the USA Patriot Act in 2001 to prevent financial crimes.

Clients’ Identities are verified using their name, date of birth, address, social security number, or other documents.

This program aimed to protect financial organizations from terrorist financing and money laundering.

Per the USA Patriot Act, all banks must implement written CIPs according to the bank’s size and customer base. It mandates banks to impose CIPS into their AML policies as well.

Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD)

The second main component of  KYC is Customer due diligence (CDD). All authentic data about clients is collected for identity verification and asses their risk profiles.

Simplified due diligence (SDD) is usually used for accounts that are at low risk, as they have low chances for money laundering and terrorist financing, such as standard bank accounts or low-value bank accounts.

Clients expected to be at higher risk are monitored through the Enhanced Due Diligence (EDD) process. Additional information is required for higher-risk clients. Regular transaction monitoring is mandatory in EDD.

The transaction pattern is monitored regularly so that if it deviates from the regular pattern, it requires further investigation to detect any suspicious activity.

Evaluation of the risk profile of clients is necessary in financial organisation to asses either SDD or EDD.

A Closer Look at Ongoing Monitoring

Checking the client’s transaction or sanction status at one time is not enough. Continuous Ongoing Monitoring is needed to ensure proper security.

Continuous monitoring of the activity of the client’s accounts allows us to find irregularities early and mitigate risks.

Financial organizations and businesses face challenges in implementing KYC AML regulations. Challenges like quality data access and evolving regulatory landscapes need reliable solutions for risk mitigation and the implementation of robust KYC AML compliance.

The following are possible challenges:

• Keeping clients’ data authentic and accurate is difficult as it can contain mistakes or outdated information.
• Manual handling of large transactions can slow down the process and cause errors.
• Too many false positive alarms can overwhelm the teams and waste time and resources.
• Rules and laws of KYC and AML are usually changing, and it’s challenging to cope with them.
• Limited staff and budget create hurdles in risk management

The Impact of Automation on KYC/AML Compliance Efficiency

Businesses can implement automated AML/KYC checks using robust AML solutions.  Automated AML solutions are capable of screening clients and mitigating risks.

Significance of Automated AML Screening

Automated AML and KYC screening solutions allow businesses to cut costs and increase task efficiency. AML checks have become more efficient, helping companies to detect and report suspicious transactions quickly.

Manual efforts are reduced, and Solutions provides reliable data from authentic sources such as PEP lists, sanctions lists, and adverse media lists. That’s how it protects businesses from financial crimes.

How AML Watcher Can Help In AML Compliance

AML Watcher provides a comprehensive suite of features designed to enhance your AML/CFT compliance efforts:

• Access to over 3,500+ global watchlists for comprehensive and accurate AML screening.
• Coverage of more than 230 sanction regimes to ensure adherence to global financial sanctions.
• Access to over 2.6 million+ Politically Exposed Person (PEP) profiles to mitigate high-risk exposures.
• Integration with over 50,000 negative media sources to find risks from a range of local media sources.
• Evaluation against 400+ risk categories to provide a more granular and tailored risk assessment for your business.
• Continuous updates from these extensive data sources ensure you have the most up-to-date risk information for AML compliance.
• Ability to screen entities against a wide array of global sanctions, PEPs, and adverse media to ensure global regulatory coverage.

• Improved risk detection with a wide variety of data sources, reducing any gaps in AML compliance.
• Real-time screening and filtering to identify high-risk individuals, ensuring effective AML risk mitigation.
• Customizable risk assessment to give high-risk transactions and organizations priority for more targeted AML compliance initiatives.
• Advanced fuzzy matching algorithms to reduce false positives and improve the efficiency of AML screenings.