With the increasing adoption of cryptocurrency by institutions, the demand for robust regulation rises. Both institutions engaged in crypto investments and crypto exchanges and service providers must adhere to standard anti-money laundering (AML) programs. Today, we will explain the terms AML and KYC and their differences.
What are AML and KYC?
AML is a range of procedures companies implement to prevent money laundering. These regulations were established to counteract terrorist financing and funds generated through crimes such as human trafficking.
Since the crypto industry is still young, it has many loopholes for criminals who use digital assets to hide the origin of money. AML rules aim to identify such actions and report to relevant authorities. For example, an AML check Ethereum address is conducted to assess the transactions, sources of funds, and overall activity of the given address. This verification helps ensure compliance with AML regulations and prevents involvement in money laundering connected to the Ethereum address.
KYC is one of the components of AML checks. When a crypto platform implements KYC verification, it aims to understand who its clients are and guarantee they are who they claim to be. It is especially important before providing users with any financial services or access to funds.
Companies conduct KYC in the following cases:
- When a client makes an unusually large transaction, AML regulators ask to conduct KYC.
- When a client registers a bank account or a crypto exchange account (onboarding).
- When a client is abnormally active.
Identity verification ensures that a company knows its clients and their transactions, making such companies more aware of any unusual activity. It helps reduce the risks of being used by financial criminals.
The Difference in KYC AML Compliance
AML compliance includes a range of actions aimed at detecting and preventing money laundering, including:
- KYC verification
- Transaction monitoring
- Reporting
- etc.
AML has a broader purpose and includes a wider range of measures to detect and prevent money laundering. It’s not only about clients’ identity but also tracking transactions and finding suspicious activities.
KYC, as a crucial element of AML, plays a significant role in confirming user identity, particularly helping in the identification of suspicious activities. KYC is used by financial companies and crypto exchanges to comply with regulations and protect from financial crimes. AML requires those institutions and exchanges to identify users, track their activities, and report if any suspicious activity is detected.
Together, KYC and AML measures protect financial institutions and crypto companies against fraud.