What is AML KYC Compliance? Why Every Fintech Must Comply?

Looking to launch or scale your Fintech solution? Strengthen your defenses with a solid AML KYC compliance strategy that keeps both regulators and fraudsters at bay. We've got you covered with everything you need to know!

According to the United Nations Office on Drugs and Crime, 2 to 5% of global GDP, which translates to $2 trillion, is laundered every year. To keep this huge amount of money from being lost, Anti-Money Laundering (AML) regulations came into force.

Anti-Money Laundering (AML) is regulated by various financial regulators worldwide to control and eliminate money laundering incidents. Know Your Customer (KYC) is a part of this strategy. KYC gives financial institutions the right to verify their customers before dealing with them. It also makes it easy to keep track of owners of transactions made locally or overseas.

Whether you own a Fintech startup or manage a banking business, understanding the in-depth AML KYC process is non-negotiable.

So, let’s dive right into the details!

Breaking Down AML KYC Compliance Across Countries

Fintech companies and banks are continuously targeted by money launderers to move their black money. However, there are multiple regulatory bodies in place to shape guidelines around financial institutions of all kinds and help them prevent such incidents. To understand how major countries monitor money and the flow of finances, here’s an in-depth breakdown.

AML KYC Compliances in the USA

The USA has one of the most comprehensive sets of AML KYC guidelines in place. These laws are targeted at tax evasion, terrorist financing, and money laundering. Here’s a breakdown:

• Money Laundering Control Act of 1986

The very first law from the USA to criminalize money laundering directly ensured financial transactions involved in illegal activities were flagged. It puts critical guidelines in place for financial institutions to ensure proper measures are taken to prevent such crimes.

• Bank Secrecy Act (BSA), 1970

Regulated by the Financial Crimes Enforcement Network (FinCEN), BSA puts KYC and AML processes in place that make it mandatory for financial organizations to keep a record of transactions exceeding $10,000. 

Companies are also required to file Suspicious Activity Reports (SARs) under this guideline. These records are helpful for regulatory bodies to keep an eye on possible illicit financial activities. Furthermore, the law is globally recognized and enables global collaboration when it comes to tracking money laundering without disruptions.

• Anti-Money Laundering Act of 2020 (AMLA)

To modernize the old AML regulations, AMLA became a part of KYC AML compliances. It enhances control over non-traditional financial systems such as digital currencies like cryptocurrencies and NFTs. There are stronger incentives for whistleblowers and tighter penalties for incidents of non-compliance.

• Corporate Transparency Act

Financial Crimes Enforcement Network (FinCEN) implements tight guidelines to eliminate shell companies. The law ensures that businesses disclose their beneficial owners to FinCEN and maintain transparency in ownership structures. 

By reducing anonymity in corporate ownership, the act also curbs corruption and terrorist financing, ensuring a higher level of accountability for businesses operating within the USA.

• USA PATRIOT Act (2001), (Section 326)

The act was introduced after 9/11, mandating the implementation of Customer Identification Programs (CIP). It brought some strict AML and KYC regulations in place that required identifying customers. The step was to ensure no illegal transactions were facilitated unknowingly or knowingly by the institutions involved.

• Foreign Account Tax Compliance Act (FATCA)

The law becomes a block for US citizens to prevent tax evasion by opening foreign accounts. FATCA makes it mandatory for Fintech and banking platforms to report details of the US account holders. 

Institutions that fail to comply with FATCA might have to face a 30% withholding tax on specific US-sourced payments. Any US citizens or foreigners with US-based accounts are supposed to fill out Form 8938 annually along with their tax returns.

• Customer Due Diligence (CDD) Rule, 2016

CDD amends existing Bank Secrecy Act Regulations. The rule enforces strict regulations for US banks, mutual funds, brokers or dealers in securities, futures commission merchants, and commodity brokers. 

Financial Crimes Enforcement Network (FinCEN) introduced CDD in 2016 to strengthen AML frameworks by ensuring that financial institutions have to identify and verify the identities of beneficial owners.

• Office of Foreign Assets Control (OFAC) Regulations

OFAC is regulated by the U.S. Department of the Treasury. The AML KYC compliance is in place to block terrorism funding. It has a Specially Designated Nationals and Blocked Persons (SDN) list that includes individuals, entities, and countries with a history or suspicion of involvement in arms trafficking, drug trafficking, and terrorism. 

OFAC ensures that financial systems are not supporting funding involved in terrorism or related activities. This is done by providing Fintech companies the ability to use KYC to verify their customers. 

KYC AML Compliances in India

India is an outsourcing hub for tons of IT services, including financial ones. That also makes it important for the government to keep an eye on the flow of money in this country. Therefore, there are a few regulations in place to meet that requirement.

• Prevention of Money Laundering Act, 2002 (PMLA)

PMLA implements a mandate requiring financial institutions to execute KYC verifications and keep customer data safe. The primary purpose of this act is to block any possible money laundering activities. It also includes the requirement to report suspicious activities to FIU-IND while keeping data security standards top-notch.

• Reserve Bank of India (RBI) Guidelines

RBI revamped AML KYC compliance guidelines launched in January 2004 and re-released the revamped version in February 2005. The Financial Action Task Force (FATF) recommended these revamps on Anti Money Laundering (AML) standards and on Combating Financing of Terrorism (CFT). 

Under these KYC AML guidelines, financial institutions, including banks, Fintech development companies, etc, are supposed to take care of these requirements:

• Customer Identification Program (CIP) is in place to mandate the collection of identity proofs such as Aadhar Cards, PAN Cards, and Passports. It is also crucial to gather data on house addresses, such as utility bills and voter IDs.
• The risk-based Approach requires financial institutions to prepare customers’ risk profiles by implementing a full-scale Customer Due Diligence (CDD) strategy. 
• High-risk accounts from high-risk jurisdictions or politically exposed persons (PEPs) require an extra layer of scrutiny. These accounts are covered under Enhanced Due Diligence (EDD) and require identification of suspicious transactions, regular monitoring of account activity, and verification of fund sources.
• In case of irregular activities, financial institutions are required to file Suspicious Transaction Reports (STR) and Cash Transaction Reports (CTR) with the Financial Intelligence Unit – India (FIU-IND).

• Foreign Exchange Management Act, 1999 (FEMA)

FEMA is in place to monitor all international transactions to ensure no illegal fund transfers or money laundering activities are happening. KYC and Anti-Money Laundering rules under FEMA are targeted to ensure the integrity of India’s foreign exchange market is maintained. 

Combined activities such as regulatory reporting, proper record-keeping, and compliance supporting international trade are in place to prevent any misuse of cross-border payments.

• Unlawful Activities (Prevention) Act, 1967 (UAPA)

UAPA is one of the specific laws targeting terrorism in the country. The act gives authorities the power to seize assets that can be linked to terrorism funding. It also enables strict KYC norms to keep a check on risks and eliminate them entirely from the financial ecosystem. UAPA is also used along with other AML acts, such as PMLA.

• Securities and Exchange Board of India (SEBI) KYC Norms

SEBI is for intermediaries in the securities market like stockbrokers, trading apps, portfolio managers and mutual funds. The regulation implements strict AML KYC compliance guidelines across platforms. 

The goal of these regulations is to ensure strict customer identification, risk profiling, and ongoing monitoring to identify and block any possible financial crimes, such as insider trading and fraud.

KYC and AML Policies in the UK

Before Brexit, the UK and EU had almost the same directives for AML KYC compliances. However, post-Brexit, the UK has slight differences that can be easily recognized. Let’s take you through them.

• Money Laundering, Terrorist Financing, and Transfer of Funds Regulations 2017 (MLR 2017)

MLR 2017 mandates UK-based businesses to verify their customers’ identities, assess risk profiles, and keep a close check on transactions. These regulations also have enhanced versions of directives that are targeted to high-risk profiles like Politically Exposed Persons (PEPs). MLR empowers transparency, which minimizes risks caused by money laundering or terrorist funding.

• Proceeds of Crime Act 2002 (POCA)

POCA gives authorities the right to confiscate money gathered from illegal activities and money laundering. Under the act, financial companies of any kind, whether financial institutions, banks, Fintech companies, or anything else, are required to report suspicious transactions through Suspicious Activity Reports (SARs). These reports are in place to help law enforcement keep a sharp eye on assets gathered illicitly.

• Sanctions and Anti-Money Laundering Act 2018 (SAMLA)

After the UK was out of Brexit, SAMLA came into power to ensure the UK has an exclusive AML framework implemented that adheres to international standards. The act restricts businesses from transacting with any person or institution that is on the sanctioned list. SAML is the reason why the UK stands among the leading countries for AML efforts.

• Financial Conduct Authority (FCA)

In the UK, KYC and AML policies monitored by the FCA enforce strict compliance requirements across financial institutions. The policy provides a detailed description of KYC-based guides, monitors adherence to AML laws, and implements penalties for any possible breaches by keeping a vigilant eye to detect financial crimes. 

Importance of KYC and AML Policies in Making Fintech Safer

KYC and AML compliances are crucial in identifying possible cases of terrorism funding. It also saves owners of Fintech companies and products from sanctions and legal troubles. Here’s a deeper overview for detailed insights.

Predicting and Countering Possible Financial Crimes 

Fintech companies functioning in trading apps, cryptos, NFTs, and more are always at risk of supporting transactions that they should not have. That is where KYC and AML compliances become crucial. By identifying suspicious profiles and blocking transactions that are not usual, these companies create a safer environment for people around them.

Enhancing Customer Trust

Companies implement KYC and AML not only to detect illegal transactions but also to enhance security measures, indirectly reducing the probability of unauthorized transactions or fraud activities leading to data breaches.

Avoiding Penalties

Violation of AML KYC compliances can attract penalties. A Fenergo report states that 90% of AML KYC violators were Fintech platforms that included cryptocurrency firms and digital payment platforms. Proper implementation of AML KYC can help you avoid these penalties. There are tons of KYC and AML compliance companies to help you out with this.

Supporting Safer Digital Innovation

As digital currencies become the new normal, money laundering becomes a rising concern. With that in mind, AML and KYC compliances work like a defense system protecting digital transactions from getting misused. Implementing these compliances enables financial institutions to deliver a safer transaction system while remaining innovative.

Enhanced International Collaborations

Companies that adhere to KYC and AML compliances are more likely to witness a smooth collaboration with companies worldwide. This also reduces the probability of possible sanctions against them from governments of other countries. 

Improved Data Accuracy

More accurate data leads to improved quality of services. KYC regulations can help out with the same. KYC verification makes sure that the data of customers is verified and represents accurate statistics. This lets Fintech platforms ensure the data that is influencing their business decisions is shared by real individuals.

Best Practices for KYC and Anti-Money Laundering Regulations

Integrating best practices into your Fintech company reduces your chances of getting penalized by regulatory agencies. It also creates a safer financial environment. So, here are a few recommendations you can consider for your strategy to implement AML KYC compliances.

Go for a Risk-based Approach

Rather than keeping a static operation for each customer of each risk layer, go for a risk-based approach that is divided into multiple levels. According to the Financial Action Task Force (FATF) Guide, a risk-based approach allows countries, authorities, and banks to ensure their resources are used effectively to target customers based on their risks of money laundering, terrorism financing, etc. To simplify, resources are based differently on separate risk profiles.

Execute Ongoing Monitoring

Customer behavior can evolve with time, creating new risks for financial institutions. The Federal Financial Institutions Examination Council (FFIEC) BSA/AML Manual recommends ongoing monitoring to tackle possibly rising risks of customers. The practice recommends reporting transactions, suspicious financial activities, unusual transactions, etc, promptly.

Invest in Emerging Technologies

Investing in emerging tech trends such as Blockchain, Smart Contracts, High-quality Apps, AI-powered Cybersecurity, and more can significantly improve the quality of your KYC and AML compliance application across the business. 

The Association of Certified Anti-Money Laundering Specialists (ACAMS), in its whitepaper titled ‘A Global Study into AFC Culture,’ proposes that 58% of respondents of a survey recommended focusing on the implementation of modern technologies like AI to reduce compliance costs while keeping the process efficient.

Regular Staff Training

Your staff should be well aware of what’s going on in the Fintech industry to leverage the best efficiency of AML KYC guidelines. That is possible by implementing regular training sessions. To emphasize the same, here’s a quote by ‘The Basel Committee on Banking Supervision’ published in its report titled ‘Sound management of risks related to money laundering and financing of terrorism’:

“All banks should implement ongoing employee training programs so that bank staff is adequately trained to implement the bank’s AML/CFT policies and procedures.”

Maintain Effective Record-Keeping

The Financial Action Task Force (FATF) Recommendations highlight the importance of maintaining records of at least five years. These records should have the strength to reconstruct patterns of transactions executed by targeted individuals, companies, or countries in specific timespans. 

The organization recommends including CDD measures (which include copies or records of official identification documents like passports, government IDs, and more) in AML KYC compliance guidelines.

Future of AML KYC compliances in the Fintech Industry

The one thing that remains constant about the Fintech industry is its evolution. As new technologies evolve, especially focused on improving digital security, the Fintech industry evolves in parallel. 

The integration of blockchain in Fintech is the perfect example. But beyond often-heard names like blockchain and AI, there are more trends that are influencing the future of this industry. 

Here’s an overview:

Rapid Growth of Digital Identity Verification

Fintech frontrunners are getting hold of technologies that enable digital identification and make it safer. This reduces the need to visit physical locations, resulting in speedy verification processes. 

As a result, the Digital Identity Solutions Market is rising at a CAGR of 21.2% between 2024 and 2030 globally. These solutions include the rising usage of technologies like biometrics, AI, ML, blockchain, and more.

Increasing Regulatory Collaboration and Harmonization

In 2021, the European Commission presented a legislative package to strengthen the EU’s rules for anti-money laundering and countering the financing of terrorism (AML/CFT). The goal was to enable a smoother global collaboration. 

The package focused on bringing more governments on board and keeping a keener eye on money laundering incidents. In 2024, the European Parliament and the Council of the EU approved it. As a result, the AMLA Task Force came into existence.

Now, this task force has a timeline that states that between 2025 and 2028, AMLA (Anti-Money Laundering Authority) is very much focused on creating a team of 430+ people who will contribute to ramping up the system of monitoring the IT industry. By 2028, it aims to begin direct supervision by making AMLA a fully operational body.

Heightened Use of Automation

AI-powered automation is rising in the financial sector. The industry is increasingly using AI to keep a careful eye on suspicious financial transactions. Between 2022 and 2027, the market is projected to achieve a CAGR of 57%, reaching an investment of $10 billion by 2027. 

In 2022, the projected size was $6.2 billion. Major operations of the tech involve fraud detection, AML activities, KYC verifications, ensuring the accuracy of AML KYC compliances, etc.

Massively Dynamic Penalties

Penalties throughout a few years fined by regulators around the world have been very dynamic. Across the USA, Europe, APAC, and the Middle East, $10 billion in financial penalties for AML/KYC violations were fined in 2020. 

However, in 2021, fines came down to $5.4 billion, followed by just a little over $4 billion in 2022. The majority of these fines came from the USA. As for the breaches, almost 99% were related to AML violations.

Now, it might seem like from the amounts that AML/KYC awareness was at its peak in 2022. Things looked quite different from that, as most fines were issued worldwide in 2022.

To put all of it in perspective, while fines might be getting less due to the reduction in the seriousness of violations, numbers are still rising.

Emphasis on Biometric Technologies

As KYC is getting more critical, the integration of biometric technologies like automated fingerprint scanners is rising. Between 2022 and 2028, the Automated Finger Print Identification Systems (AFIS) market is projected to rise from $5.32 billion to $15.42. 

Biometric technologies like fingerprint systems are enabling more authentic KYC verifications even without having to be present on-site. As a result, Fintech companies and banks are increasingly adopting them.

Wrapping Up: Leveraging AML and KYC Compliances to Steer Towards a Safer Financial Future

As hinted by the laws and rules we went through above, implementing AML KYC guidelines isn’t just a legal requirement. These guidelines are the shield that protects modern financial institutions from being a part of activities that could lead to incidents like money laundering or financial terrorism. 

Across the world, most economic leaders are using standard practices in their AML KYC compliances to enable a more collaborative financial environment. This makes sanctions more powerful, banking operations smoother, and Fintech approvals faster.