Introduction to Anti-Money Laundering (AML)
and Know Your Customer (KYC)

In recent years, stricter compliance requirements have been introduced by various directives and regulations across the globe to combat financial crime, including PSD2 (the revised Payment Services Directive) and EU’s 5th Money Laundering Directive.

Banks, financial institutions and payment service providers have been assigned further responsibilities and greater accountability to actively monitor for potentially fraudulent activity and report and investigate suspicious transactions. It’s the responsibility of firms to carry out robust due diligence in assessing and minimising risk concerning payments and customer onboarding.

Organisations are expected to operate comprehensive Know Your Customer (KYC) procedures for customer onboarding, including due diligence and screening activities, which aim to prevent and identify potentially fraudulent activity and comply with anti-money laundering (AML) regulations. Firms need to get a full picture of corporate structures, to reveal potential risks, identify UBOs and screen for PEPs, sanctions and adverse media.

We’ll explore the key responsibilities and solutions for organisations to meet AML compliance requirements throughout this page.


What is AML compliance?

Pillar-page_Icon_Question_lightblueAnti-money laundering (AML) compliance refers to the preventative laws and processes established for tackling financial crime where funds have been illegally obtained and disguised as legitimate income. These laws set out regulations that must be followed by certain organisations to be AML compliant.

The purpose of AML regulations is to ensure that firms and individuals are not aiding or impacted by money laundering, and banks and other financial institutions that issue credit or accept customer deposits are expected to follow regulations and implement security measures to minimise risk, protect themselves and others from financial crime, and to actively monitor, identify and report suspicious activity.

The types of criminal activities that these AML regulations aim to counter include:

  • Market manipulation
  • Trading in illegal goods
  • Corruption of public funds and tax evasion
  • Concealing crimes and the money derived from criminal activity

AML compliance is making organisations accountable for meeting their responsibilities and ensuring they are following the rules and regulations assigned to their processes in their particular jurisdiction.

Know your customer (KYC) and AML are intrinsically linked. KYC comprises processes aimed at revealing the full picture of customers/clients, verifying identities, minimising risk and uncovering potential suspicious activity, to feed into the broader AML goal of preventing and combating money laundering, terrorism financing and other financial crimes.


Why is AML compliance important for my business?

There are very tangible financial implications for firms that don’t meet their AML requirements. Serious fines for failing counter-terrorism financing (CTF) and anti-money laundering compliance are handed out - running into the billions of dollars! Plus, you can incur reputational damage if you fall foul of AML compliance. 

However, in a fast-evolving digital landscape with ever-changing regulations, remaining AML compliant is not simple. What makes things difficult is that manual KYC and AML compliance processes can’t be scaled and audited to provide the level of protection required with today’s regulatory complexity. This is why firms are turning to software solutions to automate processes and help them to meet increasingly challenging AML compliance demands.

When you’re talking about assessing risks and applying risk policies to all your key KYC processes, such as unwrapping corporate structures, carrying out due diligence and monitoring and screening data to discover potential red flags, manual processes are no longer fit for purpose. 

Not only do these time-consuming activities slow down customer onboarding but they’re prone to error. Without an efficient approach to AML compliance, you’re liable to expose yourself to financial and reputational risks, customer dissatisfaction and penalties from regulators.

You need to establish your AML compliance responsibilities, have clear policies in place and ensure your processes are aligned and that you have demonstrable compliance (a clear audit trail). Learn more about establishing clear AML and KYC policies below.

How to establish clear AML and KYC policies and procedures

Although specific AML requirements and regulations differ depending on your jurisdiction, it’s good to understand AML best practices to create clear AML and KYC policies for your organisation. Below are six key things to consider.


1 - Assign an AML Compliance Officer (if you don’t already have one)

If you don’t already have an AML Compliance Officer, we recommend assigning one. Having someone essentially owning the system and procedures for meeting your AML compliance requirements helps to ensure processes are followed properly, every time. Plus, it means that this officer can monitor the policies, identify when they need to be updated, initiate training to new members, troubleshoot and be responsible for reporting and auditing.

The AML Compliance Officer is there to hold the company accountable for maintaining and updating AML and KYC policies and reiterating the importance of remaining AML compliant.


2 - Ensure your policies are clearly documented

It might sound obvious, but your AML and KYC policies must be clearly documented for all key members of your team, stakeholders and regulators.

This helps to keep processes aligned with policies, minimise errors and compliance missteps, and demonstrate compliance to auditors. So, from record retention and reporting to communication and onboarding processes, your policies must be comprehensive, clearly documented and easily accessible.


3 - Train key members of your organisation on your AML and KYC policies

With such complex AML regulations, and considering the penalties and risks involved in AML compliance failures, it’s vital for every employee within your organisation who deals directly with customers, clients and or payments and transactions to be trained up on your AML and KYC policies, and on anti-money laundering techniques operated by criminals.

This ensures a uniform approach to AML compliance and empowers your staff to identify, combat and report suspicious activities. Training programmes should also build in regular refreshers to cover the latest regulatory changes and policy reviews and updates.


4 - Get independent advice and review your policies

It’s good practice to seek independent advice from legal or compliance experts. This will further ensure that your AML and KYC policies and procedures are sound, and these experts can periodically check the policies to keep them up to date with regulatory change.

Having this third-party view from someone that’s not directly involved in your day-to-day KYC processes will give you an unbiased perspective to help reveal issues that your team may miss.


5 - Align your KYC processes with your AML policies

Once you’ve established, documented and reviewed your AML policies, you need to align your KYC processes with them so that your business can always be confident of compliance with AML regulations.

6 - Demonstrate compliance with comprehensive audit trail

A great way to boost your AML compliance is by making sure that you can provide demonstrable compliance to auditors. Having a comprehensive audit trail is essential to prove to auditors and regulators that your KYC processes are compliant with AML regulations, as you’ll have visibility of each action taken, tracked and reported.

If you’d like more information on how you can automate processes based on your AML and KYC policies, get in touch with Encompass.

Find out more

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Financial crime compliance and management for customer onboarding

In today’s digital landscape, it’s vitally important to implement measures to prevent fraud and money laundering in your customer/client onboarding process to minimise risk and meet the requirements of modern financial crime compliance regulations.

Pillar-page_Icon_Onboarding_lightblueGaining the full picture of your customers ensures you’re fully prepared for identifying potential fraudulent activity. Solid KYC management for customer onboarding empowers businesses in their fight against financial crime.

Encompass was founded on the back of learnings from the damage that can be incurred by firms when they don't have the full picture. Encompass’ mission was (and still is) to enable organisations to comprehensively detect and prevent financial crime and reduce regulatory risk.

We created and developed software solutions to streamline time-consuming and error-prone manual KYC processes. We powered the software with automation and wide-reaching and trusted global data sources and partnerships, to give firms fast, effective and comprehensive KYC capabilities that are AML compliant and dynamically documented by a digital audit trail.

What are the key KYC compliance requirements?

Firms and financial institutions have extensive KYC activities to carry out to ensure they remain compliant with AML regulations.

Pillar-page_Icon_Checklist_lightblueBelow are the key KYC compliance requirements to be aware of:


How to make sure your KYC processes meet AML compliance requirements

On 10 January 2020, in the UK, changes to the Government's Money Laundering Regulations came into force. This update was to incorporate international standards set by the Financial Action Task Force (FATF) and to transpose the EU’s 5th Money Laundering Directive

If your firm is based in the UK, familiarise yourself with the latest UK AML regulations from the FCA here. If your organisation is based elsewhere, make sure you’re aware of your responsibilities in your jurisdiction.

One of the best ways to make sure that your KYC processes meet AML compliance requirements is to introduce automation to each of your KYC process steps. This enables you to speed up time-consuming processes, ensure they’re aligned with your AML policies and procedures, and reduce errors and risks. 

The following KYC compliance process steps can be automated:

  • Client initiation and identification
  • Risk assessment
  • Due diligence
    • Identifying UBOs/ownership structures
    • Identity verification
    • Risk screening (PEPs, sanctions, adverse media)
  • Report building/data visualisation
    • Risk rating
    • KYC profile creation
    • Audit trail

The importance of KYC due diligence in AML compliance

In today’s fast-paced business world, the ability to conduct the required due diligence quickly and effectively can be the difference between winning and losing a valuable client. When there’s pressure to get results quickly but regulations and best practices are constantly evolving, KYC due diligence can start to feel like a box-ticking exercise. But it’s hugely important.

Due diligence refers to the reasonable care that should be taken before entering into an agreement or a financial transaction with another party. Obtaining and understanding the full picture of clients through strong KYC compliance checklists and processes is vital. When performed correctly, it goes a long way towards reducing the possibility of falling victim to fraud and other financial crimes whilst also safeguarding against fines and reputational damage.

The problem is that KYC due diligence is time-consuming. But the good news is that intelligent process automation is helping organisations to automate key due diligence processes, to follow AML compliance and speed up customer onboarding. 

We have a handy blog on the topic, with a checklist of things to help you improve KYC due diligence, such as: 

  • Take a risk-based approach
  • Understand the benefits of using automation
  • Harness open-source media screening
  • Maintain audit trails
  • Use electronic identity verification (IDV)
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AML data remediation and ongoing monitoring for KYC

KYC is often considered an onboarding activity, whereas to be effective, it has to be maintained and updated for the duration of a customer relationship. Businesses with compliance programmes need a solution that speeds up their KYC processes without compromising on the quality of due diligence. To minimise risk, you need control, visibility and transparency.

The fast pace of regulatory change has left many firms with outdated customer files that no longer offer protection from risk. A common driver why some firms are beginning to look at the concept of perpetual KYC (pKYC)

Your internal policies need to mirror the regulations that apply to you. These form the backbone of your AML data remediation process and have to evolve as regulatory requirements evolve. This means fully understanding regulations in your industry, and the regions in which you and your customers operate. 

The stringency placed on the Banking sector has led to rogue customers setting their sights on FinTech, Property, Law and Accountancy firms, where they hope to find fewer barriers to their fraudulent intent.

Regulations driving the need for AML data remediation and ongoing monitoring for KYC vary by region but will typically fall under the following categories:

  • Anti-money laundering (AML)
  • Tax evasion
  • Anti-bribery
  • Data protection
  • Counter-terrorism financing (CTF)
  • Anti-corruption

How businesses are future-proofing their AML compliance capabilities

Watch our video on future-proofing AML compliance in our ever-evolving regulatory landscape, featuring co-founders, Wayne Johnson and Roger Carson, sharing the story of Encompass, plus former Chief Risk Officer for Macquarrie and industry advisor, Stephen Allen, who discusses the benefits of RegTech to banks.

 

AML compliance software solutions

RegTech software is helping banks, financial institutions and corporations to stay on top of the latest AML rules and regulations and future-proof for ongoing compliance requirements.

There are AML compliance software solutions available to businesses to keep up to speed, streamline KYC processes and ensure they have demonstrable compliance at their fingertips.

For example, Encompass uses powerful automation tools and extensive data source partnerships and integrations to empower firms to carry out their AML compliance responsibilities swiftly and with ease, confidence and full visibility. Our time-saving software ensures that you don’t compromise on your customer onboarding experience.


KYC automation: How intelligent process automation can improve AML compliance

Pillar-page_Icon_Automation_lightblueIntelligent process automation is being used by more and more businesses, across industries, to reduce the burden of time-consuming, repetitive manual processes. And automation can be leveraged for streamlining KYC processes too. Requirements for AML compliance are becoming increasingly complex and take a lot of time and effort to carry out manually.

RegTech software that utilises automation can not only significantly reduce the time spent on KYC compliance but also reduce errors, minimise risk and save you money. In turn, the faster you can carry out KYC activity the less time it takes to onboard clients - boosting revenue and growth.

Encompass’ AML compliance software leverages automation to supercharge your KYC activity.


Maintaining a clear audit trail of AML and KYC compliance activities

Keeping a clear and thorough audit trail of your KYC processes and AML compliance activities is crucial for when you need to demonstrate compliance to regulators and auditors. It also helps you to get a clear picture for internal efficiency and make sure that AML policies are being followed. 

Our KYC automation platform dynamically creates a digital audit trail for enhanced AML compliance, capturing and time-stamping every KYC compliance activity you carry out. Read about how our dynamic audit trail works.


Top AML compliance solutions and RegTech software

As regulatory change is evolving at a fast rate, businesses increasingly need smart software solutions to help them keep pace. Luckily, we’re in the midst of a RegTech boom and Encompass is proud to be a big part of this. Check out our blog on the growing impact of RegTech

There are various RegTech providers out there and AML compliance solutions to support banks and businesses to enhance their abilities to comply with new regulations.


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WEBINAR

Data and technology

The perfect partnership for AML compliance

With ever-changing regulations impacting the information you need to gather for KYC purposes, it has never been more important to get your AML compliance processes right, and to take advantage of how technology, and the right data sets, can power your compliance programmes.

Watch the webinar »

AML compliance software case studies

Encompass is trusted by leading banks, financial institutions, legal firms and tech service providers.

Take a look at the benefits of our AML compliance software for:

If you’d like to dive deeper and learn about the impact our software has created for leading names like Santander, Brodies LLP and Accuity, browse our range of case studies.

Read our case studies

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Get in touch!

Speak to our anti-money laundering compliance experts

If you’d like more information about any of the topics discussed on this page, you can get in touch with the Encompass team. Our anti-money laundering compliance experts will be able to answer your queries and advise you on all things related to KYC and AML. We’re here to help!

Request your consultation »