What is financial crime?
The definition of financial crime is any activity that involves fraud, deceit, manipulation, or similar to achieve a financial gain. For example, it could be illegally avoiding taxation or using fake invoices to gain money. Here are some of the common types of financial crime and a short definition. Money laundering: this is where the proceeds of crime such as trafficking, corruption, or theft are processed through legitimate businesses to clean them of their illegal origins. For example, money from drug dealing could be used to buy an expensive car in cash, and then, upon requesting a refund, the buyer would ask for it to be transferred into a bank account. Alternatively, they could make deposits to an online gambling account in cryptocurrency, make a few small bets, and then withdraw it all to a bank account in fiat, thus cleaning it. As a result, governments around the world have created Acts and various legislative packages to combat the phenomenon.
What is AML?
AML stands for anti-money laundering and is a series of rules, regulations, and laws put into place at an industry, national, or regional level to combat money laundering. These frameworks are typically created by authorities who then tailor them to specific industries and must be published on the company website. Each industry, for example, payments, iGaming, crypto, financial services, and retail, are then required to implement policies within their own companies that comply with the framework. AML policies aim to specifically crack down on money laundering, which is one of the most prevalent financial crimes in the world. It was developed as a concept following the significant growth and digitalization of the sector. It was also deemed necessary as a way to crack down on the funding of terrorism and the laundering of the proceeds of drug trafficking, human trafficking, and other serious crimes. Thanks to digitization and the growth of transactions that occur without being face to face, it has become necessary to be more stringent and enact more controls while conducting almost every kind of business. The true volume of illicit funds laundered every year is reported by the United Nations Office on Drugs and Crime to be up to 5% of the global GDP- that is around $2 trillion every year. But AML can pose a bit of a headache as it can be expensive, complex, and time-consuming, as this guide on AML in banking from SEON shows in its lengthy explainer. For example, in the banking sector, spending on compliance reached $214 billion in 2020 and is increasing every year. But as one of the main avenues for money laundering, it is necessary and a must. Failure to adhere to regulations from authorities can result in heft compliance fines, damage to reputation, and, of course, the risk of motivating crime and financing terrorism. In terms of fines, they are significant and can total $10 billion a year, just in the banking sector. In short, AML is a broad name for a series of laws and regulations translated into policies that are designed to prevent criminals from using legitimate companies to clean their illicit funds.
What is KYC?
KYC, or know your customer, is the abbreviated name for an area that falls under the broad umbrella of AML. Also, standing for know your client, as Thales states, KYC refers to specific guidelines that require businesses and professionals to verify the identity, risks, and suitability of each person they do business with. For example, when opening a bank account, the bank must know the name of the person, their date of birth, address, and where their money is coming from. They may ask to see an employment contract or payslips, for example. In addition, they will also request proof of address such as a utility bill or rental contract and documents like a passport or government-issued ID card. This information can be used to verify someone is who they say they are and that their funds are legitimate. KYC is usually carried out at the beginning of a business relationship before any transactions take place. But it can also take place periodically, such as every year or when significant transactions are being made. Companies and institutions can also request KYC when there is suspicious or unusual behavior or specific actions are carried out. KYC is typically decided by regulators and is mandated in law. Failure to carry out KYC when required or to store information gathered during the process can be a criminal offense and can also be punished with fines and revocation of licenses, administrative penalties, and as Forbes notes, of course, reputational damage.
So what is the difference?
The difference between the two is that AML is the name given to a broad framework of rules, laws, policies, and guidelines to protect companies and individuals against money laundering. KYC is one of the specific processes that is undertaken as a part of AML efforts to ensure that an individual is who they claim to be and that their money or assets are legitimate. Both are essential in the fight against financial crime, which continues to plague our society. As you can see, there is a difference between the two, but one cannot exist without the other. AML and KYC are both necessary if we want to fight back against financial crime in all of its many forms.
