When you signed up on an exchange or other fintech app, do you remember being asked for an official identity document to complete your verification/signup process? Afterwards, they might have asked for a picture or you to fill out an online form with your basic details. That entire process you had to go through is called know-your-customer, or KYC.

KYC is a process of identifying who you are before gaining full access to specific services, especially in the finance industry. Financial services (including crypto exchanges) are mandated to collect this information from you as part of AML (anti-money laundering) policies to prevent money laundering by being able to track transactions to the person(s) and also verify that you’re who you say you are.

Since this policy is important, it is essential to know important facts about KYC and AML, as they’re needed for verification in today’s finance and are crucial to the future of digital finance. This article teaches you everything you need to know about KYC and AML, including their differences, processes, and where they’re required.

KYC And AML – What’s The Difference?

KYC (Know-Your-Customer) is a verification process that requires an official document, pictorial evidence, etc., to verify a customer’s identity and make sure they’re who they say they are. This process is commonly done by financial institutions when onboarding customers so they know who exactly is signing up on their platform. Typical KYC requirements include name, date of birth, photographs, official documents, etc.

AML (Anti-Money Laundering) is a set of rules that guide financial institutions to help them track money laundering and other finance-related crimes. AML involves closely monitoring possible fraudulent activities like illegal transfers, terrorism financing, money laundering, and other suspicious financial activities.

AML and KYC are intertwined because KYC is part of AML policies. So, one could say that AML is the mother of KYC. But, you might ask, if they’re related, then how are they different? Well, AML is a more detailed process than KYC. KYC is a primary identification and verification process to verify and know the customer they’re dealing with. This helps for easier tracking in case any fraudulent activity is suspected.

AML, on the other hand, is a process that involves:

  • Understanding proper financial transaction processes in a financial institution and improving KYC procedures to ensure more accuracy.
  • Providing accurate info to guide AML teams on how to detect fraudulent activities.
  • Keeping records of accounts that carry out suspicious transactions or have done so in the past.
  • Doing due diligence by reporting and documenting fraudulent cases.
  • Updating outdated systems and carrying out periodic training for AML teams.
  • Conducting internal audits, and so on.

Viewing them side by side, one can conclude that while both KYC and AML help fight financial crimes, they’re still different, as AML is a detailed process that also involves KYC.

How Does a Typical KYC Process Work?

Know Your Customer (KYC) involves procedures that primarily consist of identity verification and are essential for major cryptocurrency exchanges. The KYC process aims to assess customer risk and protect and maintain the customer’s privacy, interests, and assets. In crypto, KYC also helps to know the customer’s financial activities and is a fast and secure process.

The faster the procedure is completed, the sooner it will be possible to make any transactions, including crypto payments and withdrawals.

The documents that are required for this procedure vary, but in general, they include the following:

  • Full legal name
  • Birth date
  • Residential address
  • Social Security number
  • National ID number

All of these documents may not be required. Still, the basic KYC requirement for exchanges includes a photo of a current and valid government-issued identification, such as a passport or driver’s license. The requirements also differ from country to country.

Afterwards, the exchange verifies your identity, which can take several minutes. The entire KYC process consists of the following:

  • Identification— Acquisition of customer data, which can be done either manually, or by an image capturing if photos are required.
  • Prechecking— This involves checking for common errors or issues on the document.
  • Liveness Check— Determining that the customer is a human, not a bot.
  • Verification— Using an identity verification service to compare the acquired data to government-issued ID to ensure it is accurate and legitimate
  • Address verification— Confirm the customer’s address and ensure they are who they claim to be.
  • Risk screening— Determining the customer category based on the above steps.

Businesses that carry out KYC procedures do so either manually or using automation. Manual checks take much longer and have a higher error rate because another human does them. Automation is much faster, doesn’t allow room for errors, and makes the onboarding process much simpler. In addition, Crypto companies often hire third-party services to conduct the procedure efficiently.

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What Does a Typical AML Program Look Like?

A typical Anti-Money Laundering (AML) program aims to keep a business fraud free by detecting and responding to any threats from money laundering, fraud, and terrorist financing.

An effective AML program doesn’t allow suspicious individuals to make transactions. However, fraudsters are constantly coming up with new ways to escape the AML programs, so it is crucial to develop one that can detect complex fraudulent activity.

Failure to meet the system’s requirements can leave a company in debt and tarnish its reputation. Some of these include;

  • Money laundering risks
  • Compliance laws both locally and globally, and the punishment for offenders
  • suspicious or potential fraud in the organization

An AML program involves five steps, which shall be explained accordingly.

1. Appointing an AML Compliance Officer

Many countries require the appointment of a compliance officer to handle the details of the compliance program, such as employee training programs, internal audit management, and analysis. Therefore, the ideal candidate for this position must understand analysis tools and regulatory data sources.

2. Employee Training

Employees in contact with customers, audit teams, management teams, complaint teams, and other high-risk departments should be trained according to the current laws. Doing this is essential, especially if there has been a recent case of money laundering within the company.

3. Risk Assessment

Risk assessment is vital to identify all money laundering risks and is done by using factors related to customer identity, location, and transactions, among others.

4. Detection and Reporting Of Suspicious Activity

An effective system for reporting to the management and the authorities is essential, as it helps catch offenders quickly. Any suspicious activity is first reported to management, who decides whether or not to notify the authorities.

Red flags include:

  • Abnormally huge transactions
  • Inadequate client information on accounts
  • Fake data acquired from the customer

5. Internal Audits

An independent auditor should do internal audits to review the company’s systems for risk assessment, compliance training, and reporting systems. 

Where Are KYC And AML Required?

KYC and AML are generally used in the finance sector for anything finance-related, as that’s the center where financial crimes are committed.

As such, all financial institutions worldwide are mandated to follow KYC and AML policies. Other sectors that must also comply with KYC/AML policies include;

  • Retail finance
  • Banking and Finance
  • Gambling and social gaming
  • Cryptocurrency/virtual assets service providers
  • Digital payment platforms

Final Notes on KYC and AML

KYC and AML policies are essential in finance, as they help agencies fight financial crimes. Knowing what is involved is important, as it helps you understand what you’re getting into. If you have further questions about KYC, you can do your research or contact your financial advisor.


Updated on: December 28, 2022