As the financial industry becomes increasingly more intertwined with digital and technological advancements, the possibility of falling victim to financial crime grows more ominous than before. Experts have forecasted that cybercrime will be one of the biggest threats throughout 2023. To take action, regulatory authorities are emerging with AML (Anti-Money Laundering) and KYC (Know Your Customer) regulations. In what follows, we take a deeper look at these concepts and discuss how they are implemented in the UK.
What are AML and KYC?
In order to understand what these terms mean, it’s important to speak about money laundering first. Essentially, money laundering is the illegal act of making crime-generated money appear as if it comes from legitimate sources. According to estimates by the United Nations, 800 billion to 2 trillion USD (2 to 5% of global GDP) are laundered yearly around the world, and only 90% of this amount goes undetected.
AML encompasses a series of regulations, laws and procedures which financial institutions must adhere to in order to deter, pinpoint and disclose any instances of money laundering. AML directives demand that financial establishments corroborate their customers’ identities, review their transactions for any suspicious activities and report any irregularities to law enforcement. Organisations that adhere to AML standards can prevent serious criminal endeavours, including tax evasion, drug-related crimes and terrorism financing.
KYC, on the other hand, is a key part of AML. It is the process of identifying and verifying the identity of customers, usually when they open a new account. Whilst KYC requirements vary from country to country, they normally involve collecting personal information and verifying it against reliable sources such as government-issued IDs and utility bills. KYC exists to prevent identity theft, account takeover and other forms of financial fraud. By “knowing their customers”, businesses and financial institutions can better assess their risks and tailor their products and services accordingly.
The benefits of Anti Money Laundering and KYC are numerous. Not only do they help financial institutions and other organisations comply with existing laws and regulatory requirements, but they also protect consumers from fraud and reassure them that their funds are being managed responsibly and ethically.
How do AML and KYC work in the UK?
Europe has established various AML and Counter-Terrorism Financing (CTF) regulations, including the 1AMLD, 2AMLD, 3AMLD, 4AMLD, 5AMLD, and 6AMLD, to combat money laundering and terrorism financing activities. These directives have set essential AML standards such as customer identity verification, record keeping, suspicious activity reporting and transaction monitoring, which European nations must follow in addition to their individual laws.
Similar to Europe, the UK has implemented regulations to combat money laundering and related activities through the Proceeds of Crime Act 2002 and the Electronic Identification and Trust Services for Electronic Transactions Regulations (2019). Financial service regulators like the Financial Conduct Authority (FCA), for example, oversee the local firms’ compliance with KYC and AML regulations.
In March of 2022, The Economic Crime (Transparency and Enforcement) Act 2022 was introduced. The bill aims to combat economic crime, corruption, and terrorism while creating a trusted environment for legitimate businesses. It includes reforms to prevent limited partnership abuse and powers to seize cryptocurrency assets.