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The financial services industry is heavily reliant on its security infrastructure. The business and its customers must be protected and secured at all times, requiring security policies guided by industry regulations. This includes continuous security checks, lengthy verification processes, and regular updates of security measures that make it harder for authorized users to access their accounts. While it may be tedious, security is necessary to avoid any form of monetary fraud and illicit activities from entering your system.

Since financial institutions are often targeted for crimes such as money laundering, new processes and tools were established to help prevent them. This includes Know Your Customer or Client (KYC) and anti-money laundering (AML) policies that provide you and your customers with a more secure way to create and access your accounts. 

But what are the differences between the two protocols?

What is Anti-Money Laundering?

Anti-money laundering pertains to a set of policies that financial institutions need to comply with as part of a legal requirement to monitor any suspicious activity. This was established to stop criminals from disguising money obtained illegally as legal income.

Financial organizations use AML methods to protect their brand reputation, prevent civil and criminal penalties due to negligence or non-compliance, and comply with international standards for monitoring transactions and customers.  

How AML Works in Financial Institutions

Generally, AML policies will require financial institutions to collect the personal information of a customer and regularly monitor their accounts for illegal activities. This can include their previous and current transactions like deposits, transfers, and withdrawals.

Unusual activity can include out-of-the-ordinary transaction patterns or transactions involving an individual or country marked as high risk. If there appears to be suspicious activity, your organization will need to report this activity to the proper authorities.

Anti-Money Laundering Act (AMLA)

According to the Anti-Money Laundering Act, all financial institutions are mandated to investigate any suggested money laundering activities and other acts against the stated regulations. This is to protect the confidentiality and integrity of the organization as well as the accounts of its customers. 

However, the regulations can vary according to the local jurisdiction depending on which country you are from.

What is Know Your Customer or Client?

Know Your Customer or Client is a security protocol used to establish and verify the identity of your customers. For instance, customers of financial entities will be required to go through a verification process before they can use services like credit cards or using their checking accounts. 

Through this, financial institutions can make a more accurate assessment if a customer is at risk of committing money laundering, fraud, corruption, and terrorist financing activities.

What are the Requirements for KYC? 

KYC compliance is essential to assessing the credibility of real-time and cross-border payments. By establishing KYC within your organization, you can gain better transparency and trust between you, your customers, and your team. This can also give you better and more efficient ways to manage your financial systems and security.

The KYC process follows a secure procedure requiring users to provide proof of identity with a photograph and a legitimate address associated with the account. This can include ID, facial, and document verification to ensure only authorized users can access an account or service. Additional information like biometric verification can also be used for tighter security.

What is the Role of KYC in the Banking Industry?

Adopting KYC protocols helps prevent financial institutions from being a gateway for criminal activities involving money laundering, fraud, and other financial crimes. When a customer opens a new account, all information can be used to determine if they are at high risk of committing a felony.

The Relationship Between Anti-Money Laundering and Know Your Customer

Given their definitions and uses, AML and KYC protocols complement one another, with key differences between the two. 

AML focuses on protocols, policies, and technologies that help financial institutions prevent money laundering. Meanwhile, KYC is primarily seen as a way to avoid money laundering by making sure a financial institution’s clients are who they claim to be.

Both are required in many financial organizations to enhance security. This also helps you comply with mandated regulations that can otherwise damage your reputation and lose the trust established with your customers.

Prevent Fraud with the Right Protection 

Financial institutions need to ensure that their organization and its customers are safe from illegal activities such as money laundering and fraud. This involves addressing security gaps when customers use the organization’s services.

Issues like this have led to the development of new security protocols like KYC and AML. If you want to learn more about how you can effectively implement these tactics into your organization, reach out to our team of experts at Q5id and see how our identity management solutions can work best to give you what you need.

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