KYC and AML are essential components of successful compliance management, allowing businesses to take proactive steps in preventing financial crime. By adopting these measures organizations can gain peace of mind that they have fulfilled industry regulations and set a strong foundation for secure operations.
Today, we delve into the essential compliance implications of two terms that are aiding individuals across a variety of industries – especially in cryptocurrency. Exploring their role and relevance will provide invaluable insight to any professional looking to stay ahead of today’s ever-changing trends.
A Deeper Dive Into Know Your Customer (KYC)
KYC is a process of gathering and verifying customer information to validate the identity of individuals. Through KYC, businesses can confirm their customers’ authenticity while ensuring they adhere to compliance regulations. The scope of the identity information which needs to be obtained does vary from one jurisdiction to another on a global basis.
However, businesses or online services that people will typically use will need at least some basic data, which includes the name, date of birth, and address of the person.
It is important to note that, throughout the verification process, each customer or user of a specific service will provide the business with credentials. This can include their ID, driver’s license, or a bill that confirms their address.
The business needs to ensure that the documents submitted are not fake and that the customers are who they claim to be.
Customer due diligence (CDD) is one of the aspects surrounding the KYC procedure.
First, there is KYC, wherein the company collects information about the customer during the onboarding process. The second part of the process is CDD, wherein the company performs identity verification to ensure that the person is not pretending to be someone else.
KYC can even include Enhanced Due Diligence (EDD) for high-risk customers. Throughout this phase, companies can determine how to work with customers by applying stricter rules when monitoring any of their financial activity.
A Deeper Dive Into Anti-Money Laundering (AML)
Anti-Money Laundering (AML), on the other hand, is described as a series of procedures that get carried out by financial institutions, as well as other regulated entities, as a means of preventing any crimes related to finance.
Financial service providers face increased pressures to comply with Anti-Money Laundering (AML) legislation, as enforcement is no longer a choice – but an imperative. This involves scrutinizing customers and their transactions while keeping records of all the aforementioned activities to accurately report any suspicious money laundering to AML authorities. Consequently, regulated businesses must now actively prepare for these new standards or risk serious legal consequences.
There are also national authorities that exist that issue specific guidelines as a means of helping businesses understand all AML obligations in a more precise way.
Key Differences Between KYC and AML
AML stands out because it includes and provides a wide range of measures, referred to as an AML compliance program, while KYC is a component of the aforementioned program and is part of AML.
Keep in mind that each jurisdiction might have rules that are a bit different, but in general, each AML program will require Customer Due Diligence (CDD), Enhanced Due Diligence (EDD), Risk assessment, AML policies and internal controls, ongoing monitoring or even suspicious activity and transactions reports.
Additionally, in some cases, there will need to be an AML compliance officer appointment procedure alongside AML training programs for any employees. Throughout the CDD procedure, each business has the role of identifying and verifying customers through the completion of a KYC procedure. At this point, businesses can define any customer risk profiles as well.
There is also the Know Your Business (KYB) process, which differs from KYC in both purpose and intention within the process. It focuses on identifying companies and suppliers rather than just individuals. This is a reference to the due diligence review of a business with which a company is dealing.
Where People Will Typically Encounter KYC and AML Requirements
At this point, we are aware that KYC is a part of AML, and these are typically mandatory for any regulated authorities under AML or Combating the Financing of Terrorism (CFT) regulations. The scope of these regulated entities, as with everything else here, will vary across each jurisdiction.
However, when looked at from a global perspective, the most common services or companies in which people will begin encountering these KYC and AML requirements include financial institutions, credit institutions, or insurance companies.
Why KYC and AML Are Commonplace in Crypto-Related Projects and Services
Having these regulations in place to verify the identity of recipients, and ensure that checks are done to prevent money laundering, as well as other fraud, is an essential part of building trust in the consumers.
To increase the trustworthiness of cryptocurrency, major stakeholders in the industry have taken steps toward establishing a regulatory framework. Through this initiative, they seek to legitimize virtual currencies and assure investors that their capital is well-protected.
In the case of crypto, these KYC and AML regulations and practices are designed in a way through which they can stop criminals from converting any cryptocurrencies that they have obtained illegally and ensure that they are unable to convert them into FIAT currencies.
The Financial Action Task Force (FATF) began publishing guidance on cryptocurrency AML as far back as 2014. Today, numerous policymakers implement regulatory guidelines for AML recommendations and push them into law.
This is of high importance, as cryptocurrency remains appealing to criminals due to its pseudonymous functionality, as well as the ease at which it enables users to send funds anywhere.
United States Property Coin (USP) for example, is a real estate-backed cryptocurrency, which by design, provides fractional ownership of a real estate portfolio.
As such, anyone who wishes to buy fractional ownership over the securitized pool of assets with USP is required to register an account with the USP Investor Portal.
Each user goes through an onboarding process, which includes automated KYC verification steps. Additionally, while USP requires KYC for individuals to protect investors, it also requires the KYB and AML procedures for businesses and organizations.
Moving Forward with KYC and AML Compliance
Security tokens are emerging as a revolutionary new form of digital asset, combining the trust and security provided by traditional financial markets with decentralization achieved through groundbreaking technologies like blockchain. As these tech-finance hybrids gain visibility around the world, we’re witnessing the beginnings of an exciting transformation in how the mainstream financial activity is conducted.
However, as they evolve and begin penetrating traditional markets, there are a lot of rules and regulations that need to take place for them to operate efficiently within regulated markets. The goal of these compliance rules is to ultimately ensure a higher level of trust and to provide a bridge through which all investors can efficiently gain access to cryptocurrencies.
USP is a project that embraces the regulatory requirements, and all token holders of the securitized pool of real estate assets, as a result of this, will be subject to the same regulated due diligence. Each investor will, as a result, know that every other investor in the pool of real estate assets has also undergone the same regulatory requirements and, as such, are in a safer environment.
So, to conclude, although KYC and AML regulatory requirements are sometimes seen as tedious, they play a crucial role in the crypto industry. The ability to protect user funds, prevent fraud and money laundering, and increase trust between investors is key to increasing the mass adoption of cryptocurrency. Through implementing KYC measures, projects like USP ensure that each investor can feel secure about their investments and the trustworthiness of the industry.
By taking these steps, we can look forward to more secure crypto transactions in the future.