What is KYC (Know Your Customer) and how does it relate to AML?

The concepts of KYC(Know Your Customer) and AML(Anti Money Laundering) are closely related. If you manage to combine KYC and AML you will add value to your organization.

What is KYC?

Elvia Zacher, author of Compliance Without Borders, provides a comprehensive definition of KYC practice,"Know YourCustomer". She states that "it is a fundamental principle applied by financial institutions to carry out an adequate business risk management and minimize the organization's exposure, preventing illicit practices such as money laundering, corruption or terrorism financing".

It is possible to affirm that KYC or Know Your Customer, is a practice of exhaustive investigation of our clients, suppliers, employees, business partners, intermediaries and people of great implication in the business of our company, whatever the activity carried out, not only financial entities.

What is the Know Your Customer process?

The KYC practice, now required by international and local standards, as a preventive means to combat money laundering, terrorist financing, acts of corruption and other corporate crimes, is a simple and effective process that has been carried out for years in the auditing world.

Far from being exhaustive, it is possible to identify the essential steps in the Know Your Customer process:

1 - Interview with the client: it consists of making a first contact with the client, the supplier, the potential business partner, with whom there is the intention to establish commercial relations. This interview can be formal or informal, depending on the culture of the parties, the characteristics of the business, the way of contacting the customer. It can be face-to-face or virtual, held in an office, in a restaurant or even in recreational places.

2 - Request information relevant to the business: it is essential to know who are the shareholders or owners of the company, its directors, the organization chart, the personnel plant, the center of operations, the jurisdictions where it operates, the main and secondary activities, the complexity of the operations, the characteristics of the business, the services it outsources, the legal norms it applies, the financial statements, the tax situation, legal, economic, fiscal, reputational, technological and environmental problems that the company may have, relations with the government at local, national or international level, competition, the life cycle of its products or services, the compliance program, the certifications it has, among other information of interest.

3 - Cross-check with public records the information received from the client: all information must be verifiable with valid and publicly known sources of information. Some reliable sources of information are: local, national and international public records, databases of central banks, collection agencies, international organizations such as OFAC, among others.

4 - Prepare a report and a dashboard for decision making: business can be the gateway to the growth of the organization or can be the exit door of the business world, it all depends on the decision made. Having a complete, timely, efficient and clear report of the risks associated with a given business is essential to make effective decisions, which can be key to business success.

5 - "Living" information: Gustavo Regner, in Compliance Without Borders, states that risk maps are a "living animal". In this sense, the information gathered from the future client cannot be frozen in time. When starting a business, it must be taken into account that the information is "alive", that it is constantly changing, therefore, it is the client's duty to inform every change that occurs in the information, in a timely, safe, simple and complete way at the same time.

What is AML?

AML (Anti Money Laundering) is the set of local, national and international legal regulations that prohibit money laundering and terrorist financing.

In this regard, it is important to differentiate between these concepts:

What is money laundering?

It is the process of transferring illegally obtained money through legitimate persons or accounts so that its original source cannot be traced.

What is terrorist financing?

It is the process by which terrorists finance their operations, through funds obtained legally or illegally, to carry out terrorist acts.

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What are the differences between KYC and AML?

KYC and AML differ in the extent of customer knowledge and the justification of the procedure. 

Essentially, KYC or "know your customer" is a necessity for companies managing their business risks, in order to make effective decisions before, during and after the negotiation process with a customer, a supplier, an employee, a business partner, etc.

AML or "anti-money laundering" procedures, on the other hand, involve a series of measures that go beyond the usual risk management of the business. It involves investigating the possibility of suspicious transactions involving international money laundering and terrorist financing offenses. Affidavits and special contractual clauses, for example, are specific AML measures.

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Why are KYC and AML concepts related?

The procedures for the prevention of money laundering and terrorist financing (AML) include conventional KYC measures, but also specific investigations on money laundering, foreign trade, tax evasion, false balance sheets, relations with governments, among others. 

Companies must now jointly apply KYC and AML procedures to demonstrate proper management of third party risks, especially customers, suppliers, intermediaries, employees and business partners.

María Jaureguízar and Néstor Aparicio, at Compliance Sin Fronteras, present on money laundering and terrorist financing, and their relationship with KYC processes. "Transnational organized crime and international terrorism are a globalized plague that no company can ignore, in order to ensure integrity, peace and security for all its employees and stakeholders. In this regard, the parent company can implement the same KYC (Know Your Customer) reporting and transparency measures to ensure an international standard compliant with the FATF 40 recommendations."

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What are the benefits of KYC for companies?

Some benefits of KYC procedures for companies are:

- Efficient and timely risk management

- Effective internal controls

- Prevention of third party risks with indirect impact on the company.

- Improved corporate reputation

- Access to international markets

- Obtaining better business opportunities

- Increased Return on Investment (ROI)

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These KYC and Due Diligence processes in operations aimed at preventing the crime of AML must necessarily incorporate a technological element, thus eliminating manual aspects that expose us to unintentional errors and outdated risk maps. 

Technology will make our process more effective and efficient, so that we can have a dynamic snapshot of each of the processes and actors that can seriously damage our reputation. 

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