KYC and AML – what are the differences and applications?

Know Your Customer (KYC) and Anti-Money Laundering (AML) are closely related concepts, but they are not the same. AML and KYC processes work together to protect our economy from the consequences of money laundering. Understanding the differences between them is crucial for compliance with KYC and AML regulations and for implementing effective identity verification and fraud prevention frameworks.

This article presents the relationship between KYC and AML, their application in various industries, as well as the processes, requirements, and best practices for each.

In this article we will present:

• Key information
• What are KYC and AML?
• How do KYC and AML differ?
• Applications, processes, and best practices of KYC and AML

Key information

• KYC and AML are initiatives aimed at preventing financial crimes.
• KYC focuses on identity verification and is part of broader AML activities aimed at preventing money laundering, fraud, and other crimes.
• Industries such as finance, e-commerce, and real estate use KYC and AML to screen clients and monitor their behavior and transactions.
• Following established procedures and best practices helps companies remain compliant with applicable KYC and AML laws and industry regulations.
  

What are KYC and AML?

AML and KYC refer to policies, rules, and regulations intended to prevent criminals from hiding their identity and committing financial crimes.

Definition of AML

AML (Anti-Money Laundering) refers to regulations intended to prevent criminals from disguising illegally obtained funds as legitimate income.

What is KYC?

As part of broader AML procedures, KYC (Know Your Customer) is the required process of identifying and verifying a customer’s identity—both when opening an account and throughout the business relationship. It typically involves the customer presenting official documents (e.g., driver’s license or ID card) that include:

• First and last name
• Date of birth
• Address
• Photo
  

The goal is to ensure the customer is who they claim to be. It is the company’s responsibility to verify the authenticity of documents and check the information against government records or other databases—even in electronic processes (eKYC).

KYC also requires banks and brokers to screen new clients against databases of suspected criminals, sanctioned individuals, and so-called politically exposed persons (PEPs), meaning individuals who currently or formerly held public office and may potentially pose a higher risk of corruption.

Ongoing analysis of the risk of money laundering associated with each customer is essential as part of Customer Due Diligence (CDD), and clients identified as high-risk should be examined more thoroughly.

Global differences

It is important to note that AML guidelines and requirements vary depending on the country and region. The European Union, the United Kingdom, and the United States each have their own regulations.

How do KYC and AML differ?

Although KYC and AML are technically two different terms, the most accurate way to describe them is that KYC forms the foundation of AML procedures. Both aim for the same goal: preventing fraud, money laundering, and the financing of terrorism.

• KYC focuses on verifying a customer’s identity and assessing risk at the start of a business relationship. It is a part of broader AML activities.
• AML covers a broader and ongoing range of actions aimed at preventing, detecting, and reporting financial crimes, including:
  • Continuous monitoring of financial transactions and related behaviors
  • Enhanced Due Diligence (EDD) for high-risk clients
  • Screening clients against sanction and watch lists
  • Identifying politically exposed persons (PEPs)

Applications, process, and best practices of KYC and AML

Applications of KYC and AML

KYC and AML are used in various industries connected with financial transactions, banking, and investments:

• Financial institutions – ensuring regulatory compliance and preventing fraud, money laundering, and terrorism financing
• Banks and credit institutions – assessing creditworthiness, preventing credit fraud
• Insurance companies – verifying customer identity, preventing false claims
• Electronic money institutions – verifying the legitimacy of fund usage
• Gambling industry – monitoring betting patterns, identifying players, detecting suspicious transactions
• Luxury goods vendors – conducting thorough KYC and AML analysis to prevent money laundering (e.g., in the trade of artwork or real estate)

AML/KYC process

Companies implement a set of key steps to conduct KYC and AML verification and comply with regulations. Some of these activities may be carried out internally, while others are handled with the help of external providers:

• Collecting customer data – name, address, date of birth, identity documents (for companies: registration documents, information about ultimate beneficial owners)
• Identity verification – comparing data with trusted registries
• Watchlist screening – sanctions, PEP lists
• Risk assessment – assigning a risk level to the customer
• Enhanced Due Diligence (EDD) – for high-risk clients: additional information, sources of funds, financial history
• Continuous monitoring – real-time analysis of transactions and behaviors
• Suspicious activity reporting – creating procedures to document and report information to the appropriate authorities

Compliance with KYC and AML

Compliance with KYC and AML regulations is not just a matter of security – it is also a legal obligation. Negligence can result in:

• Financial penalties
• Legal consequences
• Loss of reputation
• Customer attrition
  

Regulations vary by industry and country. Typically, companies must implement internal processes, identity verification policies, monitoring, and reporting of suspicious activities.

Best practices for KYC and AML

• Understanding regulations – knowledge of the rules in a given country and industry (e.g., AML Act in the U.S.)
• Customer Identification Program (CIP) – risk-based procedures using modern technologies (biometrics, decentralized identity)
• Internal audits – regular reviews and adjustments of procedures to keep up with changing laws and risks
• Automation – AML/KYC platforms for automated verification, liveness tests, monitoring, and transaction analysis

SIGNIUS supports companies and institutions in identity verification, ensuring complete process security. Contact us to learn more about the details and capabilities.