Glossary of KYC Terms: New to KYC - 5 minute guide.

In the rapidly evolving world of finance, KYC (Know Your Customer) and AML (Anti-Money Laundering) are two critical terms that often come up. They are frequently used interchangeably, but they have distinct meanings and implications. They are mandatory procedures, required by law, designed to mitigate the risks of banks and companies being used as vehicles for financial crime. This guide will help you understand the key differences and the importance of these terms in just 5 minutes.

Understanding AML

The Bank Secrecy Act of 1970, a landmark legislation in the United States, mandates financial institutions to cooperate with the U.S. government to help eliminate financial crime. Money laundering is a serious problem that includes a wide range of illegal activities such as terror funding, tax evasion, bank fraud and more. In order to prevent such activities, financial institutions are required to comply with Anti-Money Laundering (AML) regulations. They have to obtain and verify the data of each customer, keep an eye on their transactions and report any suspicious activity to the authorities. This helps ensure that everyone is playing by the rules and not engaging in any illegal financial activities.

AML can be considered a comprehensive framework rather than a single procedure. AML policies are typically comprised of several protective arms designed to intercept financial crime as or before it occurs. These include risk assessments during the onboarding process (KYC), detection of suspicious activity (such as flagged transactions), management of internal risk controls, compliance training for staff, and submission of regular independent audits. By combining these systems, financial entities have a far higher chance of immediate detection and reporting, leading to a greater prospect of preventing illegal activity.

Demystifying KYC

KYC or 'Know Your Customer' is one of the numerous AML mechanisms installed to meet regulatory compliance. It is most often used during application processes, where KYC procedures help to identify and verify customer identity. The purpose is to ensure that a potential or existing customer is who they claim to be. In this sense, KYC is predominantly an identity verification process. A thorough and necessary risk assessment, KYC is often, but not exclusively, applied during the customer onboarding process.

KYC procedures involve collecting and analyzing customers' 'Personally Identifiable Information' (PII). This stage is sometimes referred to with its own acronym: CIP or Customer Identification Program. There is no standardization for this step. Different institutions may request different forms of PII. Typically, this may include the customer's full name, address, date of birth, and so on. Customers must also submit supporting government identification to help verify this information, such as a passport, ID, driver’s license, and proof of address.

The Challenges with Current AML and KYC Landscape

Despite the pressing need for these policies, staying compliant with increasing KYC and AML regulation is extremely expensive and can take a long time. Employing multiple independent third-party verifiers and a whole team of compliance staff can be a big strain on a firm’s budget. Not only that, the back-and-forth of PII documents and unsophisticated centralized data silos can lead to data breaches, identity theft, and malicious interception.

The current landscape of AML and KYC is fraught with challenges. The manual processes involved are time-consuming and prone to human error. The lack of standardization across different institutions can lead to confusion and inconsistency. moreover, the increasing sophistication of financial crimes means that traditional methods of identity verification and risk assessment may no longer be sufficient.

The Solution: Automated Digital ID Verification

Automated digital ID verification solutions are the future of KYC and AML procedures. These systems significantly reduce the time, costs, and inaccuracies currently inherent in manual processing. With automated KYC processes, customers only have to create a verified digital identity once. Financial entities and service providers can now instantaneously access this verified identity. This virtually eliminates the time, cost, and potential inaccuracies of the manual KYC process.

Automated systems increase efficiency and security. They eliminate the need for customers to send their personal data multiple times for different applications. They also reduce the risk of data breaches and identity theft by securely storing and transmitting data. Moreover, they allow for real-time verification and monitoring, making it easier to detect and prevent financial crimes.

Conclusion

With the terms used interchangeably, KYC and AML are often confused. But, while KYC refers to the 'Know Your Customer' process of identity verification and risk assessment, AML refers to the entire range of 'Anti-Money Laundering' techniques used to help protect against, flag, and report financial crimes.

The distinction is important to understand as many financial entities fail to fully embody one or both of these aspects, mistakenly assuming they are the same task. However, not only do poor AML and KYC processes lead to a higher risk of financial crime and economic impact, but this kind of oversight can also lead to  hefty fines imposed by regulatory bodies.

Automated KYC and AML solutions, like the ones offered by Togggle, are the future of financial security. They provide faster, cheaper ID verification, on a highly secure platform, without any of the onboarding friction associated with manual KYC mechanisms. With Togggle, you can be sure that you're compliant with all KYC and AML regulations now and into the future.

In the end, understanding and implementing effective KYC and AML procedures is not just about compliance. Ensuring the financial system's integrity, safeguarding customers, and fighting against financial crime are all crucial aspects of our mission. We strive to build trust, promote transparency, and create a secure and safe financial environment for everyone.