What is the difference between KYC and AML?

The difference between KYC and AML is that Know Your Customer (KYC) focuses on verifying clients’ identity and assessing their risk, while anti-money laundering (AML) encompasses the broader set of policies and procedures a business implements to detect and prevent money laundering and other financial crimes.

The relationship between AML and KYC is a lot like the relationship between a car and its wheels. Just like a car isn’t a car without its engine, an AML program is nothing without KYC. A KYC program should be appropriate to the risks of its industry and the expectations of its regulators. 

AML and KYC are inextricably linked to one another, but it’s important to understand how they differ so you can craft the best strategy for your organization. 

Below, we present the basics of KYC and AML to inform your business’s KYC and AML procedures. 

What is anti-money laundering (AML)?

Anti-money laundering (AML) is an umbrella term that applies broadly to the policies, processes, and programs that a financial institution must implement in order to prevent criminals from using its products, services, or platforms to launder money. 

What is Know Your Customer (KYC)?

Know Your Customer (KYC) refers to the steps a business takes to collect and verify information about a customer’s identity, typically during the account opening process and then ongoing for the lifespan of that customer relationship.

Financial institutions are required by law to implement KYC as part of their AML program. 

The key differences between AML and KYC you need to know

To better understand the differences between KYC and AML, let’s take a closer look at this table to understand the purpose of each, as well as the industries they typically affect, the criteria they must typically meet, and the laws and regulations that establish them.

What is the purpose of AML and KYC programs?

The purpose of an AML program is to prevent bad actors from using financial services to launder money and engage in other financial crimes like terrorist financing and tax evasion. 

A KYC program has more specific outcomes: 

• To check a customer’s identity with identity verification (IDV) 

• To determine what risk, if any, a customer poses to the business

• To decide whether to work with that customer

Essential criteria for effective KYC and AML compliance

To maintain the integrity of the financial system and combat financial crime, institutions must implement strong compliance frameworks that encompass both Know Your Customer (KYC) and Anti-Money Laundering (AML) practices. 

While these two areas work in tandem, each has specific requirements under US law. A well-structured compliance program ensures that institutions not only meet regulatory obligations but also build trust with customers and protect themselves from reputational and financial harm.

The five pillars of AML compliance

Per U.S. law, an AML program must meet five key requirements, also known as the five pillars of AML compliance. These pillars create the backbone of any anti-money laundering strategy:

• Designation of a compliance officer: Every institution must appoint a designated individual responsible for overseeing AML efforts. This person ensures policies are followed, adapts the program to evolving risks, and serves as the liaison between the institution and regulatory agencies.

• Development of internal policies: Clear, written policies and procedures guide staff in recognizing, preventing, and responding to potential money laundering. These policies must reflect the unique risks of the institution and be updated regularly.

• Creation of a training program for employees: Employees must be trained to understand AML risks and their role in compliance. Effective training helps staff detect red flags, follow reporting procedures, and stay alert to new typologies of financial crime.

• Independent testing and auditing: Periodic third-party reviews or internal audits are necessary to assess the effectiveness of the AML program. This independent oversight helps identify weaknesses and ensures regulatory alignment.

• Deployment of an in-depth risk assessment: Institutions must regularly evaluate the specific risks they face based on factors such as customer base, geographic location, and offered services. This assessment allows for a more tailored and proactive AML approach.

These pillars collectively create a proactive system that not only detects suspicious behavior but also prevents bad actors from exploiting financial services in the first place.

Common components of a comprehensive AML program

Building on the five pillars, a mature AML program typically includes operational tools and procedures that enable institutions to monitor customer behavior and respond appropriately.

These include:

• A customer risk assessment: Institutions categorize customers based on risk factors such as occupation, geographic origin, and transaction behavior. A politically exposed person (PEP), for example, might be considered higher risk than a local retail customer.

• AML screenings: These involve checking customers against watchlists and sanction databases to ensure they are not involved in illicit activities or affiliated with banned entities. 

• Transaction monitoring: Software tools flag unusual or high-risk transactions, such as rapid movement of large sums or transfers to high-risk jurisdictions, allowing institutions to investigate further.

• Record keeping: Institutions must maintain detailed records of customer information and financial activity, often for five years or more. These records are critical in investigations and audits.

• Reporting of suspicious activity: When a transaction raises red flags, institutions are required to file Suspicious Activity Reports (SARs) with the Financial Crimes Enforcement Network (FinCEN). These reports help authorities investigate and dismantle criminal networks.

• Integration of a KYC program: AML and KYC go hand-in-hand. An effective AML program incorporates a robust KYC process that verifies who the customer is and evaluates their risk at the outset — and over time.

Core components of a KYC program

KYC is not a one-time event but an ongoing obligation. It forms the foundation for identifying customers, understanding their financial behavior, and ensuring that their activity remains consistent with their risk profile. 

A complete KYC program includes three interdependent stages:

• A customer identification program (CIP), wherein a customer’s identity is verified

• Customer due diligence (CDD), wherein a customer’s risk is assessed

• Ongoing monitoring, wherein the customer’s identity and activity are regularly monitored to ensure their risk profile has not changed 

Required customer information and verification methods

By law, financial institutions must collect and verify four pieces of information: 

1. The customer’s name

2. Date of birth

3. Address

4. Identification number, e.g., Social Security number (SSN), taxpayer identification number (TIN), or passport number. 

While financial institutions are largely free to decide which verification methods they use in their KYC and AML process, they will typically include some combination of government ID verification, document verification, database verification, and other methods. 

Industries subject to AML requirements

AML regulations in the U.S. pertain to financial institutions under the Bank Secrecy Act (BSA). Importantly, the BSA’s list includes some businesses with a high degree of money laundering risk that would not normally be considered financial institutions. 

Businesses subject to U.S. AML requirements include:

• Banks

• Credit unions

• Thrift institutions

• Broker/dealers

• Investment firms

• Currency exchanges

• Cryptocurrency exchanges

• Credit card companies

• Online payment portals

• Lenders

• Pawnbrokers

• Precious metal/gemstone dealers

• Travel agencies

• Insurers

• Telegraph companies

• Vehicle dealerships

• Art dealers

• Real estate agents/agencies

• Casinos and iGaming platforms

• Virtual assets service providers (VASPs)

These financial institutions are subject to KYC requirements as a subset of AML laws. Businesses in other industries may also implement KYC for reasons completely unrelated to AML — either to comply with regulations or to proactively protect their platform, community, and users.

Industries outside the financial sector where KYC can be found include:

• E-commerce

• Online marketplaces

• Online auction sites 

• Social media platforms

• Online dating services

• E-learning platforms

• Digital health providers

The laws that govern AML and KYC regulations

In the US, the most important AML laws are the BSA and the laws that have expanded it, including:

• Money Laundering Control Act (1986)

• Anti-Drug Abuse Act (1988)

• Annunzio-Wylie Anti-Money Laundering Act (1992)

• Money Laundering Suppression Act (1994)

• Money Laundering and Financial Crimes Strategy Act (1998)

• USA PATRIOT Act (2001)

• Anti-Money Laundering Act (2020)

These laws also establish KYC requirements for financial institutions, and are enforced by the Financial Crimes Enforcement Network (FinCEN). 

As noted above, businesses operating in a number of other industries may also be subject to laws establishing KYC requirements. Some of the most important federal and state laws in the US include:

• The INFORM Consumers Act, which requires online marketplaces to collect and verify key pieces of information for sellers who reach a certain threshold of sales or revenue

• Health Insurance Portability & Accountability Act (HIPAA), which requires a digital health provider to verify a patient’s identity before sharing protected health information (PHI) with them

• Arkansas’ Social Media Safety Act and Utah’s Social Media Regulation Act, which require secure age verification before a user is allowed to open an account

‍Global AML and KYC requirements

AML and KYC requirements elsewhere in the world vary greatly depending on local regulators and respective risks. 

That being said, many countries adhere to the Financial Action Task Force's 40 recommendations to limit money laundering and use those requirements to inform their own global KYC and AML regulations.

Most KYC and AML regulations will require some combination of the following components:

Customer identity verification for account creation

Identifying customers is a process featured in virtually all non-US KYC regulations as part of customer onboarding and account creation, although the identification documents and level of verification may vary depending on the country and local privacy laws. 

Like in the US, at a minimum, banks and financial institutions outside the US. require a customer to provide proof of their legal name, date of birth, and residential address using some form of government ID that includes a photo.

Some countries may require additional information, including proof of occupation, evidence of country of origin, or even biometric information to comply with their AML and KYC regulations.

PEP screenings, watchlists, and sanction monitoring

As part of the KYC and AML process, all individuals associated with a client must be cross-checked via AML screenings during onboarding and recurring reviews. 

This includes screening for the presence of politically exposed persons (PEPs) in the relationship and any inclusion on government watchlists, negative news reports, and sanctions lists that would indicate further risk for possible financial crimes. 

Enhanced due diligence (EDD) assessments

When a customer profile indicates an elevated likelihood of financial crimes, such as the presence of a PEP, negative news, or industry risk, EDD is required. 

As an additional level of verification, EDD is determined by each financial institution or their money laundering reporting officer (MLRO) based on their interpretation of local regulations, and thus can differ greatly depending on the risk appetite of the financial institution.

EDD requirements can range from requesting an additional form of identification or a signature to an additional form or even a documented site visit, which is a time-consuming and often costly process.

Read also: CDD vs EDD: What’s the difference?

Eliminate false-positives through automation

EDD can be a complicated step in an already complex onboarding process with financial institutions. Even the process to avoid EDD can be rocky due to the imperfect nature of manual data gathering, data entry, and screening. 

If a client named “Michael Jones” is screened, it could take exponentially longer for an analyst to manually weed through the many criminals with the same name vs. adding his middle name from the onset as it appears on his ID and quickly determining that he is the only “Michael Xavier Jones.” 

Providing context with more complete information helps reduce the frequency of false positives in the screening process, which reduces the time between onboarding and going live in the KYC and AML process.

Consequences of not complying with AML and KYC regulations

If your business is subject to laws or regulations requiring that you perform AML or KYC, failure to establish an adequate program can lead to serious repercussions, including:

Regulatory fines and legal penalties

Regulators often use financial penalties and fines to incentivize businesses to comply with both AML and KYC regulations. How severe these penalties are will depend on a variety of factors, including:

• Guidance established by the law

• The severity of the violation

• Whether the violation was made knowingly or unknowingly

• Whether or not the business takes any corrective actions. 

Generally speaking, the more severe or willful the violation, the greater the penalty will be.  

Other legal penalties

Regulators are not limited to issuing financial fines against businesses that violate AML and KYC regulations. Another potential penalty is jail time for individuals involved in the violation, although that is typically reserved for the most egregious examples. 

Likewise, the business itself can be punished — for example, by having its growth limited or by having mergers and acquisitions denied. One recent example is when TD Bank was hit with a $434 billion asset cap after failing to comply with AML regulations. 

Reputational damage

Another important consideration is the potential damage to brand reputation if customers discover that you failed to comply with the relevant laws and regulations — particularly if your non-compliance made it easier for fraudsters to engage in crime. In a worst-case scenario, this reputational damage can even cause customers to stop referring your business to their network or even leave for competitors, hurting your bottom line.  

6 best practices for KYC and AML compliance

When it comes to actually implementing Anti-Money Laundering and Know Your Customer processes, you have a lot of flexibility to design the program that makes sense for your business, industry, and customers. However, following best practices like the ones below can make KYC and AML compliance easier and reduce the risk of non-compliance.

1. Understand the regulatory landscape: If your business operates in an industry that is subject to regulations requiring you to perform AML or KYC, those regulations should inform the foundation of your strategy. If you operate in multiple jurisdictions, understand how regulations vary from country to country and tailor your strategy to each locale. 

2. Take a risk-based approach: A risk-based approach to AML and KYC allows you to design your CIP, CDD, and transaction monitoring strategies in such a way that they are tailored to the unique risks posed by each of your customers. This makes it easier to control friction for low-risk customers while imposing greater friction for higher-risk customers.

3. Communicate your policies and procedures: Once you have designed your AML and KYC procedures, it’s important to document and communicate these clearly with your employees to ensure internal compliance. At the same time, explaining these policies to your customers or end users — for example, being transparent about why you need to collect certain information during account creation — reduces frustration and builds trust.

4. Run periodic internal audits and gap assessments: AML and KYC aren’t something that you can establish once and then forget about. Periodic audits and assessments allow you to gauge the effectiveness of the systems you have in place so that you can identify any weak spots, bolster your defenses, and perpetually improve.

5. Monitor evolving threats: As new technologies emerge, like generative AI, you need to understand the potential for these technologies to be used against your systems. At the same time, consider how you may be able to incorporate these new technologies into your own toolkit to fight fraud more effectively. 

How Persona can help you get AML and KYC right

Identity verification (IDV) is a central component of any AML or KYC program. Designing an IDV process that suits your business needs should take into account:

• The local laws and regulations affecting your business and industry

• Your company’s unique risk profile

• The expectations of your customers or users

Here at Persona, we understand the importance of having a flexible identity infrastructure.

That’s why our ID verification solution is fully customizable. Pick and choose from a variety of verification strategies — including government ID verification, database verification, document verification, selfie verification, and even video verification — to build the verification flow that’s right for you. 

Incorporate supplemental checks where it makes sense with our global AML watchlist screening solution to gain a deeper understanding of who your customers are and what risks they pose. 

Want to tailor your verification flow to each individual customer? With a dynamic flow and risk-based segmentation, you can do just that — without tapping product or engineering resources or overburdening your team. Serve the right level of friction to each customer based on the risk signals you detect in real time.

Streamline and scale your efforts with automated workflows where it makes sense, while reserving configurable case management capabilities for edge scenarios. 

Interested in learning more? Start for free or contact us to get a demo today.