KYC vs AML | Napier AI

KYC (know your customer) and AML (anti-money laundering) are two fundamental terms in financial compliance, but they are often confused.

KYC is the process of verifying a customer's identity, while AML refers to the broader framework of regulations and processes to prevent money laundering.

Understanding the difference between the two is crucial for complying with regulations, preventing financial crime, and avoiding penalties. In this guide, we explore in detail what they mean, how they differ, what challenges they involve, and how technology can help you manage them more effectively.

AML (anti-money laundering) refers to the laws, regulations and processes designed to prevent criminals from concealing the illicit origin of their funds and making them appear legal.

An effective AML compliance programme includes measures such as:

• Risk assessments: to identify the areas and customers most vulnerable to being used for money laundering.

• Example: An entity operating in several countries conducts a geographic risk assessment to identify higher probabilities of exposure in regions with weak regulatory controls.

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• Transaction monitoring: to detect suspicious behaviour in real time or on a regular basis.

• Example: An AML system detects a series of repetitive transfers of small amounts to the same beneficiary, which could indicate a structuring technique.

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• Suspicious activity reports (SARs): which must be sent to the competent authorities when a possible case is identified.

• Example: a bank files an SAR after observing movements of funds between accounts with no apparent relationship and no commercial justification.

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• Regulatory oversight: bodies such as the FATF, the EU (AMLD Directives) or FinCEN in the US impose standards and rules that entities must follow.

• Example: A European financial institution must adapt its policies to the requirements of the sixth Directive on AML/CFT to comply with EU regulatory frameworks.

Read more about AML and its importance in our the Napier AI / AML Index.

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KYC (know your customer) is the process by which organisations verify the identity of their customers to assess their level of risk and prevent illegal activities such as fraud or money laundering.

KYC compliance typically includes several key elements:

• Customer due diligence (CDD): collection and verification of basic information such as name, address, date of birth and identity document.

• Example: before opening an account, a financial institution asks the customer for their passport and proof of address to verify their identity.

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• Enhanced due diligence (EDD): applies to high-risk customers and requires additional checks, such as sources of income and purpose of the business relationship.

• Example: if a customer is resident in a jurisdiction considered high risk, the company requests additional documentation on the origin of their funds.

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• Documentary and digital verification: validation of documents submitted using technology or manual processes.

• Example: a fintech company uses biometrics and OCR software to validate the user's identity document in real time during digital onboarding.

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• Ongoing monitoring: continuous supervision of customer behaviour and updates to their risk profile.

• Example: a customer who starts making high-value transfers outside their usual pattern is reviewed by the compliance team to rule out suspicious activity.

Discover how Napier AI can help you strengthen your KYC process with NextGen screening.

Although often used interchangeably, AML and KYC are not the same thing.

The confusion is common: many people talk about ‘KYC compliance’ or ‘AML policy’ without distinguishing that AML is the general regulatory framework and KYC is a specific process within that framework.

To understand it better:

AML (anti-money laundering) is the set of laws, controls and procedures designed to prevent money laundering and other financial crimes.

KYC (know your customer) is one of those key processes: it focuses on verifying the identity of customers and assessing their risk before and during the business relationship.

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Although they are distinct concepts, KYC and AML are closely related and work together to prevent financial crime.

The KYC process is the first step in an effective AML programme: it allows you to know who the customer is, verify their identity and assess their risk level from the outset. This establishes a solid foundation for the rest of the AML controls.

For their part, AML measures, such as transaction monitoring and suspicious activity reporting, allow for continuous tracking of customer behaviour over time, identifying unusual patterns that may indicate money laundering or other illicit activities.

In summary:

• KYC focuses on customer onboarding and initial verification.

• AML encompasses broader and more continuous monitoring, relying on the information gathered during KYC.

Discover how Napier AI uses real-time transaction monitoring to strengthen AML compliance.

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Complying with KYC and AML requirements can be complex, especially as data volumes and regulations increase. Here are some of the most common challenges:

• High volume of false positives: Alerts generated by strict rules can overwhelm compliance teams.

• Example: A financial institution receives hundreds of alerts daily for name matches on sanctions lists, many of which are irrelevant matches.

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• Complex and evolving regulations: Keeping up to date with frameworks such as FATF, European AMLD, or FinCEN requires time and resources.

• Example: A company operating in multiple countries must adapt its policies to multiple regulatory frameworks, creating complexity in its internal controls.

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• High operating costs: Maintaining large compliance teams, especially without automation, can be unsustainable.

• Example: A growing fintech needs to expand its compliance team just to review manual alerts, affecting its scalability.

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• Slow onboarding processes: Manual verification controls delay the onboarding of new customers.

• Example: A neobank loses potential customers because identity verification takes several days.

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• Legacy systems and siloed data: disconnected platforms hinder a comprehensive view of risk.

• Example: the compliance team must review information in three different systems to make a decision about a customer.

These challenges can compromise both operational efficiency and regulatory compliance if not addressed with the right technology.

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Automation, artificial intelligence (AI) and machine learning are transforming the way organisations manage regulatory compliance. Implementing advanced technology not only streamlines processes but also improves accuracy and adaptability in the face of changing risks.

Key benefits of using technology in KYC and AML:

• Faster onboarding: Automated identity verification reduces new customer onboarding times.

• Example: A fintech company uses digital verification and biometrics to complete KYC in minutes instead of days.

• Reduction of false positives: AI models learn to distinguish normal patterns from suspicious behaviour, minimising irrelevant alerts.

• Example: A payment platform reduces its alert volume by 60% by implementing contextual AI screening.

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• Real-time monitoring: Immediate risk detection allows action to be taken before damage occurs.

• Example: A bank blocks a suspicious high-value transaction seconds before it is processed.

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• Operational scalability: the technology allows large volumes of customers and transactions to be managed without the need for proportional growth in staff numbers.

• Example: an international entity operates in more than 10 countries with a centralised compliance team thanks to automated systems.

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• Intelligent alert prioritisation: AI can automatically classify the most critical cases.

• Example: an analyst receives the cases with the highest probability of risk first, optimising their review time.

With solutions such as those from Napier AI, organisations can transform their compliance processes, reducing manual workloads and strengthening their defence against financial crime.

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