KYC and AML: Overview, Key Differences, Challenges and Importance

The Internet is incredible for it fosters a global network, enabling people from all over the world to connect, communicate and share information. With each stage of evolution, the web grows stronger, spawning unprecedented digital innovations; web 3.0 and metaverse being the latest additions. However, with online spaces becoming increasingly mainstream, they have also become the breeding grounds for misinformation, scams and data theft.

Anonymity is deeply interwound into our digital world. Using the shield of anonymity, thousands or millions of exploiters sneak through unchecked gaps such as fake accounts and execute exploitations such as identity theft, scams, trolls, financial crimes, and so on.

So, by promoting anonymity, is digitization enabling internet-led crimes, particularly financial offenses? Misuse of internet-based anonymity is a flaw that must be addressed! With blockchain technology, anonymity can be viewed in a new light: as a facilitator of user data security and privacy.

So, how do we strike a balance between promoting user sovereignty and anonymity while establishing and enforcing KYC and AML regulations, necessary for tracking and combating financial crimes. NamaChain’s blockchain and oracle-powered hybrid AML/KYC solution aims to provide the solution.

NamaChain is the next paradigm in self-sovereign identity. Its KYC/AML solution is designed to assist governments and businesses in digitizing and automating their KYC/AML compliance processes, while ensuring maximum user data security and privacy.

Read on to learn about the significance of KYC and AML regulations and how NamaChain helps Govt and Financial institutions implement automated KYC/AML solutions, achieving maximum user data security, governance over users, and compliance with global KYC/AML regulations.

Understanding KYC and AML

As we talk about compliance, there are many different regulations that companies need to abide by. KYC and AML are the two very important compliance regulations applicable to worldwide businesses, Govts and users.

AML, or Anti-money laundering, refers to the measures that financial institutions and other businesses must take to prevent criminals from depositing or transferring funds obtained through illegal activities. AML regulations, in particular, are intended to uncover and prevent the proceeds of crimes such as terrorist financing, human trafficking, tax evasion, public corruption, and so on.

KYC, or Know Your Customer, refers to the procedures that a company employs to ensure that its customers are who they claim to be and do not pose a risk to the company. The KYC procedures screen the identity documents such as passports, driver’s license, etc. to verify a customer’s identity components such as name, address, age, nationality, etc.

What is the difference between KYC and AML?

Even though the terms AML and KYC are frequently used interchangeably, KYC falls under the larger umbrella term of AML; basically, KYC is a component of AML.

While AML efforts aim to prevent money laundering, such as preventing criminals from becoming customers and monitoring transactions for suspicious activity, KYC is for customer identification and screening, so businesses can transparently understand individual customers’ risks to their business. In this way, KYC compliance is one of the ways to prevent money laundering and fraud.

Understanding an AML program

It is always a challenge for criminals to spend their ill-gotten gains because illicit fund transactions can expose them. As a result, criminals constantly look for new ways to deposit their illicit funds into a country’s legalized financial system, which help them legitimize their dirty money. AML compliance policies are imposed on businesses so that they can aid in uncovering and combating such advances of criminals. For example, AML policies require businesses to report when a customer deposits large sums of cash or to review and revise their AML compliance programs and risk management approach on a regular basis.

A typical AML program will include the following components:

  • Stringent KYC procedures during customer onboarding and throughout the customer lifecycle.
  • On-going monitoring of customers’ financial transactions.
  • Prompt reporting of suspicious activity to regulators.
  • Methodical recordkeeping of data for facilitating transparent auditing.
  • Policies and training programs for the employee to keep them up to date.

Understanding a KYC program

A KYC process overlaps heavily with the AML compliance program. In different countries, KYC programs may include various terminologies such as Customer Due Diligence (CDD), Politically Exposed Person (PEP) and Enhanced Due Diligence. Regardless of what terminologies are being used, a typical KYC program includes:

  • Preventing fraud by verifying the customer’s identity.
  • Customer screening against prohibited lists
  • Evaluating the customer’s risk profile to see if they are at a higher risk
  • Continuous monitoring, including transaction monitoring, ensures that a customer’s risk profile has not changed.

Why are KYC and AML compliance important?

Whatever your industry is, if you allow customers to transfer money, you may be a target for money laundering. Adherence to KYC and AML compliance is essential for preventing fraud, money laundering, and other forms of financial crimes. Whether you are a bank, fintech, or marketplace, KYC and AML regulations apply to every financial institution, service provider and Govts across the globe.

The Financial Action Task Force (FATF) is an international watchdog organization that collaborates with over 200 countries and jurisdictions worldwide to set standards for preventing money laundering and other illegal activities. In addition, the FATF conducts outreach and training to help government agencies and financial service providers understand best compliance practices.

Penalties for KYC/AML compliance violations

Financial institutions that fail to perform proper KYC and AML are subject to severe penalties. Over the last decade, global regulators have imposed nearly $26 billion in penalties on financial institutions for AML and KYC violations. In total, 28 financial institutions were fined in 2020 for AML violations. In 2020, 14 countries’ regulators imposed AML-related fines.

Many penalty cases have been covered in the news; for example, Goldman Sachs was fined USD $2.9 billion and penalized to return USD $1.4 billion in assets to 1MDB by October 2020. Then in September 2020, HSBC admitted to FinCEN that it had violated AML procedures and aided a massive Ponzi scheme while on probation for ties to drug kingpins, settling and paying a USD $1.9 billion fine. BitMEX agreed to pay USD $100 million as part of a settlement with FinCEN and the CFTC in August 2021 for multiple violations of the Bank Secrecy Act (BSA) and another anti-money laundering (AML) laws.

What are the challenges with existing KYC/AML solutions?

AML and KYC compliance policies and laws have evolved over time to combat the rise of online money laundering and financing of illicit activities. Policy evolutions are also needed to keep them relevant with new-age financial structures such as decentralized finance.

While compliance with KYC/AML regulations is critical for every financial institution or service provider, the execution of KYC/AML processes frequently, if not always, tends to complicate customer onboarding. It often results in the loss of new customers or an unsatisfactory customer experience.

With digital onboarding, service providers seek to provide their new and existing customers a smooth and hassle-free experience, but reports reveal that ground reality is different. 63% of banking customers tend to abandon the process of creating an online account due to difficulties such as a lengthy onboarding process or disclosing too much personal information.

Lengthy onboarding processes

KYC and AML processes are lengthy and time-consuming. KYC can take days or even weeks because it involves verifying various identity documents obtained from reliable sources. Furthermore, service providers cannot even choose to circumvent KYC/AML procedures because doing so can result in hefty fines as well as the risk of becoming unintentionally involved with financial crimes.

Too much personal information revelation

Customers in the digital financial world are always hesitant to disclose too much personal information to centralized bodies or intermediaries. Once the customer’s data is shared with a third party, the customer loses control over PII data sharing and has no visibility into where and with whom his data is shared.

Heavy costs

Implementation of proper KYC and AML systems is also high on costs. Subscription- based third party solutions are also expensive, and again rises the concern of disclosing customers data to a third party.

Compliance regulations in DeFi

DeFi, or decentralized finance, is frequently referred to as the future of financial industry because, through the use of blockchain technology, DeFi eliminates the role of intermediaries, decentralizes financial processes, and increases the security of user data by enabling user anonymity.

DEXs perform automatic price matching, allowing users to stake token pairs to earn yield in order to facilitate trading transactions. Traders only need to connect their wallets to the exchange to trade crypto assets in order to participate. While the advent of DEX provides a hedge against exchange and centralized risk, it also keeps traders hidden, posing a compliance issue for regulatory bodies.

Regulators like US SEC, UK FCA, and Singapore MAS have imposed compliance regulations on centralized cryptocurrency exchanges for activities such as P2P lending, trading, and crypto-to-fiat conversion. While some cryptocurrency exchanges tried to challenge the regulator’s decisions, most of them have complied with these new requirements.

Since DEXs are also capturing phenomenal trading volume, there is speculation in the market that the US Securities and Exchange Commission may begin tracking them. It means that in the future, DEXs will be required to follow KYC/AML procedures. In that case, even DeFi will require proper compliance protocols to address the conflicting needs of preserving user anonymity while disclosing trader identity in order to comply with regulations.

How does NamaChain’s KYC/AML solution help?

Whether it is the requirement of traditional financial institutions or centralized exchanges or DeFi trading platforms, NamaChain provides self-sovereign identity verification and login solutions that are privacy-focused, environmentally sensitive, and socially responsible. NamaChain’s KYC and AML system is a hybrid blockchain and oracle-enabled solution that is made non-custodial to ensure the maximum security of users’ data. It enables financial service providers to strengthen their governance over their traders, thereby enabling them to improve their own compliance with jurisdictional regulations.

With the integration of NamaChiain’s KYC/AML solution, service providers can perform frictionless KYC/AML checks of traders, reducing customer-onboarding time to under five minutes. Furthermore, as a non-custodial solution, it gives users complete control over their data. Without the users’ explicit consent, no third party or service provider, not even NamaChain, can access the user’s data.

Salient features of NamaChain’s KYC and AML solution

Non-custodial

Without the user’s explicit consent, no third party, not even NamaChain, can access or share users’ data.

Data Residency Compliance

NamaChain’s KYC/AML solution is fully compliant with global data-residency laws.

GDPR compliant

It is compliant with privacy regulations, including GDPR, in over 200 countries.

Quick Verification

It runs users’ KYC identity verifications and checks AML status within seconds, facilitating customer onboarding in less than 5 minutes.

Cost-effective

The solution is available at half the cost of standalone competing KYC/AML solutions, and for the end-users, it is always free.

Auditability

It allows businesses to audit data for seven years, however it can be extended, if they require.

Active Monitoring

It allows enterprises to perform active monitoring of customers’ KYC and AML status on an ongoing basis.

Endnote

NamaChain’s KYC/AML solution is designed to help businesses provide their consumers with a fast-tracked digital onboarding experience without encountering friction under stringent KYC/AML regulations. It is a solution to overcome the limitations like overstretched customer onboarding time, over-the-top KYC/AML implementation expenses and heavy default fines.

To know more about NamaChain’s KYC/AML solution, Connect with us today. 

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