A guide to KYC and AML compliance

Thanks to the internet, business is no longer constrained by barriers of borders, language, or distance- instead we have created a world where business happens 24-7-365, creating unprecedented economic opportunity. But with this opportunity comes a significant increase in the risks and complexity.

Companies are under increasing pressure and scrutiny to quite rightly, identify, analyse and understand who they are doing business with. Many service providers never even meet their clients face-to-face so knowing who you are working with and if they are who they say they are is very important, especially as most jurisdictions insist on doing so. This results in what is known as Know Your Customer (KYC)  regulations as well as Anti Money Laundering directives.

Whilst the laws vary from region to region, the core requirements remain fairly uniform. 

What is KYC?

In layman’s terms, KYC refers to a process that allows people to determine the difference between a potentially favourable and unfavourable client. Unfavourable can refer to someone who has a criminal or political connection, or a history which means they could be high risk for the business. Finding the information to make a KYC decision however, can be a long and arduous process but financial institutions are still required to do it.

Lending money or providing services to someone who is a high risk or who could be involved in illegal activities can be very damaging for a business and its reputation. As businesses become more and more globalised, they find themselves required to adhere to more and more KYC regulations. For many, this is unchartered territory which leaves them unsure of how to acquire, collate, and analyse the information they receive.

Each company or organisation is required to demonstrate its compliance with KYC and to ensure that everyone has done their bit. This involves carrying out thorough checks and then keeping extensive records on the client including the type of business, the type and size of transactions, details on Directors, executives, and shareholders, and information on their clients.

Failure to adhere with these core requirements can result in fines, legal action, and reputational damage.

The four primary objectives of KYC are identifying the customer, verifying their true identity, understanding their activities and where their funds have come from, and monitoring their ongoing activities.

In cases where the client is a politically exposed person (PEP), is from a High Risk Third Country, or has an existing relationship with a competitor that you are aware of, it is advisable to undertake enhanced due diligence (EDD) which delves significantly deeper.

What is AML?

AML is the general term for regulations and laws that are in place to prevent money laundering and other kinds of financial crimes. AML compliance is significantly more broad than KYC and actually includes it as one of its many requirements. 

In Europe, AML is defined by the 5th Anti Money Laundering Directive (5AMLD) which is drafted at EU level and then enacted into each member states national law by a set deadline. It covers everything from KYC to crypto and blockchain, as well as defining company internal policies to specifically address money laundering and the financing of terrorism.

The requirements change every few years and it is important that businesses with operations in the EU stay up to date with AML compliance as the intricacies can vary from state to state. 

Fast Offshore has been working in the ever-changing AML and KYC landscape for over 21 years with a focus on ethics, compliance, and transparency. We are able to assist our clients with their regulatory requirements in a number of jurisdictions spanning Europe, America, and Central America.

We are on hand to assist with regulatory reporting, AML and KYC policy creation, Terms & Conditions, compliance audits, liaison with the authorities, providing reporting officers, and much much more, Contact us today to find out more.