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Anti-Money Laundering (AML) & KYC

Anti-Money Laundering (AML) and Know Your Customer (KYC) procedures have become paramount in today’s increasingly digital financial landscape. In recent years, the enforcement of AML and KYC regulations has become more rigorous, resulting in record-breaking penalties for non-compliance. Consider that in 2022 alone, penalties for AML violations amounted to an astounding $4 billion. This underscores an organization’s need to prioritize AML and KYC as critical components of its risk management and operational strategies.

What is Anti-Money Laundering (AML)?

Anti-Money Laundering (AML) is a set of laws, regulations, and procedures aimed to prevent income generation through illegal means and ensure that financial institutions or other regulated entities are not used for money laundering activities.

The primary purpose of AML is to detect and deter illicit financial activities within the global financial system. AML aims to prevent criminals from disguising the origins of illegally obtained funds by transforming them into legitimate assets. Key goals of AML measures include identifying suspicious transactions, verifying the identities of customers (Know Your Customer or KYC), monitoring financial activities for unusual patterns, reporting potential money laundering activities to authorities, and ultimately, safeguarding the integrity and security of the financial sector while contributing to the global fight against financial crimes.

What is Know Your Customer (KYC)?

KYC stands for “Know Your Customer,” a process that regulated entities, such as financial institutions, must follow to confirm their customers’ identity and assess potential risks.

KYC, which is an important part of customer identification and due diligence, is an essential process to maintain the integrity of the financial system and prevent financial crime. Regulated entities, like banks, insurance companies, and money service businesses, must follow KYC regulations to verify their customers’ identities and identify risk of money laundering. KYC is the “who” of identifying risk in AML. Transaction monitoring is the “how” of how money laundering is accomplished. Both components are critical to success. The KYC process also helps prevent money laundering, terrorism financing, fraud, and other financial crimes that can harm businesses and individuals.

To ensure a robust KYC framework, you must first identify the regulatory framework applicable to your business. From there, you can determine the risk posture that your organization needs– for example, eCommerce and retail organizations are not required to comply with KYC rules. Still, they may wish to implement this framework since these organizations are increasingly targeted for fraud.

Once an organization has decided on risk management, it can codify a detailed customer acceptance policy for the organization and deploy KYC solutions that address threats as they evolve. This will make it easier to identify good users at onboarding and help the company effectively monitor accounts.

KYC is an ongoing process. An organization must keep records, conduct regular risk management evaluations, and appropriately train staff. As the first step of KYC, you will also need a Customer Identification Program (CIP). CIP collects and verifies consumer-provided information to establish a reasonable belief that the consumer is a real person with a legitimate identification. It’s the first step in a strong KYC program, followed by customer due diligence and ongoing monitoring to ensure no unusual activities are on the customer’s account.

The connection between AML and KYC

AML is the overarching regulation that attempts to prevent money laundering. KYC is a part of that legislation and is one of the many tools used to prevent financial fraud. And CIP? That’s part of KYC. You need CIP for KYC, and you need KYC for AML.

As a business, you have a role to play in preventing money laundering. This includes designating a senior AML office and an MLRO– a money laundering reporting officer– as part of your business’s architecture. Your organization is also responsible for thorough customer due diligence, transaction monitoring, risk assessment, keeping customer information and transaction records, and reporting suspicious activities. You must stay abreast of all regulatory changes and adhere to them (which is one place your compliance officers can come into play). You must provide training and education for your employees to effectively implement AML and KYC requirements in their work. Finally, your business must comply with all regulatory authorities and be as transparent with them as possible.

Businesses can refer to the FFIEC BSA/AML manual to ensure compliance with AML/KYC requirements.

Importance of Anti-Money Laundering & KYC

Money laundering and financial crimes pose significant risks to businesses and the overall global financial system. Money launderers seek to legitimize the proceeds of illegal activities by disguising their origins through a series of complex financial transactions. By doing so, they not only taint the legitimacy of the financial system but also enable and fund various criminal enterprises, including terrorism and drug trafficking. These risks extend beyond financial consequences for businesses and encompass reputational damage, legal liabilities, and potential regulatory actions.

They also may impact your organization’s ability to function as a business. Regulatory authorities and government agencies take AML violations seriously and can impose hefty fines, suspend operations, or, in extreme cases, revoke an organization’s ability to conduct business entirely. When organizations, especially financial institutions, fail to implement robust AML programs, they can lose their charter or license. This effectively shuts down a business completely, as it cannot legally carry out its operations (as discussed in the BSA/AML manual). This gives organizations a compelling incentive to establish and maintain AML programs.

Robust AML and KYC practices are critical to your operation’s ability to grow and effectively serve customers. Socure’s KYC solution focuses on CIP and sanctions within AML, which helps your organization maintain compliance, avoiding fines and other legal troubles. Doing so helps bring on safe new business and allows for precision identification to segment risk effectively. The solution extracts the layer of risk with precision to provide a positive customer experience for legitimate customers while dynamically applying friction to bad actors.


Complying with AML and KYC policies isn’t just compliance with the law. These regulations and programs will also protect your organization’s ability to grow. Compliance will ensure access and limited friction for good customers while effectively preventing financial crimes. Socure is the most inclusive KYC solution and helps companies achieve up to 98% frictionless auto-approval and unmatched coverage and data quality, unlocking customer growth while bolstering compliance.

If your organization needs to maintain AML and KYC compliance, check out our complete KYC checklist.

When are AML and KYC required?

AML and KYC measures are applicable in various situations and industries where financial transactions occur, including banking, insurance, real estate, and investment firms, as well as virtual currency exchanges and online payment processors.

Examples of businesses and sectors subject to AML and KYC obligations encompass anyone offering financial services or accepting payments, such as commercial banks, insurance companies, cryptocurrency exchanges, money transfer services, and even online marketplaces facilitating transactions with financial implications.

What are the AML and KYC Regulations?

In the United States, AML codes originated primarily from the Bank Secrecy Act (BSA) of 1970, The BSA established the framework for reporting cash transactions and suspicious activities, thus laying the foundation for the comprehensive AML framework we have today.

Additionally, subsequent legislation, such as the USA PATRIOT Act in 2001, further expanded and strengthened AML requirements, emphasizing the need for financial institutions to implement robust customer due diligence and advanced due diligence, transaction monitoring, and enhanced reporting mechanisms.

International money laundering promotes terrorist funding, organized crime, and other illegal activities. As such, the US regulations are influenced by the international FATF Recommendations, which set out a comprehensive and consistent framework of measures to combat international financial crime.

What is AML & KYC compliance?

AML compliance refers to how a company follows a set of regulations and practices designed to prevent the illegal conversion of illicitly obtained funds into legitimate assets. KYC compliance involves verifying customers' identities to ensure their legitimacy and detect potential suspicious activities.

Non-compliance with AML and KYC regulations can result in severe consequences. Financial institutions may suffer damage to their reputation and loss of license, while individuals may face imprisonment and significant fines.

Maintaining AML and KYC compliance is crucial because these frameworks protect financial institutions and businesses from facilitating financial crimes, reducing legal and reputational risks. An effective AML and KYC compliance framework typically comprises a customer indentation program, customer due diligence, risk assessment, ongoing monitoring, reporting of suspicious activities, employee training, and appointing a designated compliance officer, all working together to create a robust system for preventing financial crimes.