40. Know your customer (KYC) and Anti-money laundering (AML) what are they in the cryptocurrency industry?

The terms “know your customer” (KYC) and “anti-money laundering” (AML) are very often used synonymously. In practice, they mean something completely different. Especially when it comes to the cryptocurrency market.

The regulations for cryptocurrencies vary all over the world. These regulations are not always consistent and prepared in the right way. In today’s lesson, we will focus on KYC and AML. These are processes that are essential to protect against criminal activity.

Anti-money laundering (AML) – definition

AML are processes designed to counter money laundering. AML describes a set of actions that cryptocurrency institutions must take to assure regulators that they will not indulge in illegal financial activities in the provision of their services. So what do we find in terms of anti-money laundering?

• AML is supposed to keep all customer data secure. It doesn’t matter whether they are shared digitally or physically.
• The process is designed to create automated services to detect financial fraud that may occur, such as identity theft.
• AML is designed to use global customer databases to check customer backgrounds and compare them to sanctioned lists.
• Anti-money laundering closely monitors transactions and reports illegal or suspicious ones immediately.
• It enhances a brand’s reputation and maintains positive shareholder value. Entities that use AML in their operations have no links to criminal activity.
• AML procedures monitor customer transactions and report suspicious ones to regulators.
• The process is designed to set up automated services to detect financial fraud such as identity theft.
• AML uses global client databases to check clients’ backgrounds and compare them against sanctions lists.
• Anti-money laundering monitors transactions closely and reports illegal or suspicious transactions immediately.
• It strengthens a brand’s reputation and provides positive shareholder value. Companies that use AML in their operations have no links to criminal activity.
• AML procedures monitor customer transactions and report suspicious transactions to regulators.

Each company must develop its own AML policies in accordance with the regulations of the country or region in which it operates. Country authorities also issue guidelines to enable companies to understand their responsibilities in terms of AML processes. The Financial Action Task Force (FATF) is responsible for global anti-money laundering standards. Other countries adopt their guidelines.

Know your customer (KYC)

Must be AML compliant, but focuses more on verifying the identity of the client in question. One of the most important activities related to KYC is Customer Due Diligence. CDD involves gathering various identifying information about a customer who wishes to join a cryptocurrency exchange, for example. Of course, this includes individuals as well as companies or partnerships. Know Your Customer (KYC) activities include:

• Collecting personal information to verify the identity of the customer in question.
• Verifying customer data against global watch lists or imposed sanctions.
• In the case of a business customer, gathering information to understand the business structure, funding sources and actual owners.
• Conducting a risk assessment. Enhanced due diligence (EDD) can be conducted at this stage. This is done for high-risk clients. An FTX exchange coming back to the market would go through such a process.
• As part of KYC, customers are regularly checked for suspicious activities or even signs of illegal financial activities.
• Know Your Customer also takes care of updating customer profiles.

If a potential customer is in a high-risk group, additional steps are applied to them:

• More information is collected about the client in order to impose stricter requirements on him or her.
• A detailed report is prepared and forwarded to the supervisory authorities.
• A detailed EDD is carried out.

Even with KYC, the amount of identity information varies by world region. However, companies usually focus on personal information, date of birth and address. During the know-your-customer process, customers provide certain proofs, such as an identity card or passport. Businesses need to make sure that the documents presented are not fake and that the customers are who they claim to be.

AML and KYC in cryptocurrencies

The regulations for cryptocurrencies are very inconsistent and often unclear. Governments are obviously trying to bring everything together and make the regulations more transparent for companies trading in digital assets.

The FATF is responsible for the first global AML regulations. It established them in 2014. Since then, they have been adopted worldwide by authorities such as the Financial Crimes Enforcement Network (FinCEN) and the European Commission. The above organisations work with cryptocurrency exchanges and other digital asset service providers (VASPs).

As soon as financial crimes are discovered by VASPs or other cryptocurrency entities, they are immediately reported to FinCEn, FATF or other institutions. Such persons or entities are registered in a global database for illegal money laundering activities.

Interestingly, such organisations typically use blockchain technology in their activities.

KYC controls for cryptocurrencies look a little different. Unfortunately, there are no ready-made solutions here either. So you ask yourself – what do such companies use then? They use existing identity verification solutions that include:

• Document verification using a global database of identity documents.
• Checking credit bureaus for verification.
• They use FaceMatch technology.

Of course, as the cryptocurrency industry evolves and new regulations are enacted, digital asset providers must have the right technologies in place to verify. All this to ensure compliance, detect fraud quickly and prevent financial crime at an early stage.

Key differences, between AML and KYC

Anti-money laundering covers a wide range of measures that an institution must implement. KYC is one of the elements, which is why it is nevertheless covered by AML. The requirements for both processes can vary depending on the region of the world. A basic KYC check looks like this:

• Verification usually takes place online.
• The user selects a type of identity document and then uploads a photo of the document to the relevant cryptocurrency entity, e.g. Kanga Exchange.
• The respective platform checks the documents for KYC.
• The user uploads a photo of themselves holding the previously uploaded document.
• The platform verifies the authenticity of the received photo.

Interesting fact: KYC can also include biometric checks. One of these is Liveness, a facial authentication method.

Basic AML checks, on the other hand, include:

• PEP list.
• Lists of sanctions imposed, if any.
• Watch lists.
• Transactions made.

The banking, FinTech and cryptocurrency markets are the most vulnerable to money laundering and financial fraud. KYC and AML procedures are designed to reduce this.

Summary

You now know the basic differences between the two procedures. As you can see, such verification is inevitable and required when you register. Therefore, there is no way to bypass these procedures.