KYC & AML Compliance in the USA

KYC & AML Compliance in the USA
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Today it's already a common practice for financial systems to use tools for clients' verification to prevent fraud and fight money laundering. The conditions of the current state of the banking system involve the absence of operations anonymity, financial organizations fighting for transaction transparency, moreover, it's possible to take out a loan by presenting specific documents. This all means the occurrence of KYC & AML principles based on regulations compliance for companies and individuals.

First, let's outline what these two abbreviations mean and what are their key features.

KYC, known as Know Your Client/Customer is an operating principle of financial institutions that obliges them to identify the person before they can make any operation.

The major goal of the KYC approach is to understand a company's customer base, operation monitoring, risk mitigation, anti-bribery and anti-corruption policy. The notion appeared first in 2016 in the official documentation of the US Treasury Department of the Financial Crimes Enforcement Network.

Although, the financial institutions themselves decide what data should be presented, i.e. name, birth date, email, phone number, country, and ID. With the help of the KYC approach, banks can define who can become their client, get clients' databases, and track, and estimate their transactions by promoting their security.

AML which is Anti-Money Laundering works against money laundering obtained by criminal means, terrorism financing, and producing weapons of mass destruction. AML procedure includes identification, data storage, and sharing about the customers, their income rates, and transactions between organizations. Financial institutions use this approach to check business activity, especially those that deal with cash payments or have money on various credit cards.

KYC & AML Regulators and Conditions to Meet the Regulation Norms

Banks, financial companies, and unions have to comply with requirements and regulations norms of the KYC & AML approaches to avoid fines and fraud risks, and gain clients' trust. To comply with the set KYC rules, there's an approved regulatory framework to withstand financial crimes.

For instance, to guarantee a secure KYC system, enterprises should follow 92 Recommendations by the FATF ( Financial Action Task Force) presenting global safety standards to combat any illicit financial operations. Besides the FATF requirements, every country has its own regulatory body that controls all financial operations.

For more information, FATF was established in 1989 to fight money laundering and later to quit terrorism financing. Another organization called the IMF,  International Monetary Fund, has the same goals as FATF. Later in 2021, the Corporate Transparency Act was launched to control shell companies' creation by trying to evade economic sanctions.

There's the US regulator called FinCEN, the Financial Crimes Enforcement Network that is the US Department of the Treasury authority responsible for collecting and analyzing information about financial activities to prevent any financial crimes on the domestic and international levels.

AML rules were presented in 1970 to fight money laundering. After the 9/11 terrorist attacks, the US government initiated more severe measures for the KYC rules to be a part of the Title III of the Patriot Act. These requirements involve two main points:

  • CIP (Customer Identification Program) verifies the identity when opening a ¬†new account;
  • CDD (Customer Due Diligence) outlines the nature of a client's profile, and their financial goals to build a customer's risk profile.

Extra legislative rules were launched in the 1980s because of the increasing drug trafficking, and in 1990 financial monitoring was expanded to combat terrorism.

Also, the final stage of the KYC process is to perform constant monitoring of the transactions to prevent any suspicious activity. Compared to the updated requirements, the current KYC rules counteract:

  • Illegal identity, i.e. prevent fake accounts, stolen and forged documents;
  • Money laundering: preventing money storage for narcotics, human trafficking, smuggling, blackmailing, etc.
  • Fighting financial fraud as usage of the stolen or fake IDs to get funding.

Why Are KYC & AML Vital for Financial Activity?

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The KYC & AML approaches are common legal regulations for all trusted financial entities to guarantee clients' identity and foresee possible risks. They're useful for eliminating any kind of financial crimes, i.e. financial scams, personal data theft, money laundering, and even terrorism financing. If not following the requirements, such neglect will result in heavy fines and penalties.

What's the difference between KYC and AML rules?

The distinction between these two notions is that KYC deals with issues related to who the financial organizations cooperate with, and verifying the client's identity. KYC is the main component of the AML framework that defines risk factors for clients and eliminates rackets. Meanwhile, AML's task is to monitor the activity of financial institutions and fight money laundering. The shared feature is verifying the client's identity.

What institutions need to comply with the KYC regulations? Generally, these protocols are necessary to follow for all financial organizations of all levels, especially for banks, credit unions, brokers, fintech applications, wealth management companies, insurance providers, and private lenders.

Does the crypto market require specific KYC or AML regulations? Like any bank or monetary company, the crypto exchange industry adheres to KYC to identify its clients. Considering the fact that the crypto market is quite risky and scammers are trying to pull money out of the bank clients' assets via financial fraud means, it's crucial for financial organizations to apply specific regulations to mitigate and fight the risks their customers may face.

Being an innovative financial exchange medium, crypto should comply with the KYC policies to appeal to a wider audience. Moreover, the cryptocurrency area comes under the gray zone that escapes from the attention of the governmental and private companies' surveillance.

It's needed to state that apart from crypto-to-crypto operations, fiat-to-crypto exchanges must be regulated by the KYC rules.

Although, financial institutions should consider numerous rules and laws that may differ in several countries because of their personal interpretation and understanding of the regulations. Still, there're common stable requirements for clients to present when executing any financial operation: first and last names, photo with person's ID, date of birth, phone number/ email, current physical address, and utility bill copy.

Conclusion

Considering today's security challenges, the KYC & AML regulations stay stable and unchanged. Even though some regulatory bodies argue that it's difficult to collect the needed data about clients from different countries because of diverse KYC requirements there, these protocols guarantee strong safety standards to combat malicious acts with data transfer, identity verification, and performing financial transactions.