AML vs KYC: Understanding the Differences, Ensuring Compliance, and Adopting Best Practices

In today’s fast-evolving global financial environment, safeguarding the integrity and security of financial transactions is critical. Two foundational processes underpinning financial crime prevention are Anti-Money Laundering (AML) and Know Your Customer (KYC). Although these terms are often used interchangeably, they serve distinct yet complementary functions within a financial institution’s compliance framework.

This article by One-Constellation delves into the key differences between AML and KYC, their respective roles in financial compliance, and the best practices organizations should adopt to meet evolving regulatory demands.

What is Anti-Money Laundering (AML)?

Anti-Money Laundering refers to the set of laws, regulations, and procedures aimed at preventing criminals from disguising illegally obtained funds as legitimate income. AML initiatives require financial institutions and other regulated entities to detect suspicious activities and report them to relevant authorities.

Regulatory frameworks such as the Financial Action Task Force (FATF), the EU’s Anti-Money Laundering Directive (AMLD), and the U.S. Anti-Money Laundering Act (AMLA) guide institutions in establishing effective AML programs. Failure to comply can result in hefty fines, legal penalties, and reputational damage.

What is Know Your Customer (KYC)?

KYC is a process through which financial institutions verify the identity of their customers before initiating a financial relationship. It is a fundamental component of AML programs, designed to assess customer risk and detect potential involvement in illicit activities.

KYC involves collecting and validating customer data such as name, date of birth, address, and identification documents. Institutions may also evaluate customer behavior to detect inconsistencies or high-risk patterns.

AML vs. KYC: Key Differences

While AML and KYC are interconnected, it is important to distinguish their scopes:

• KYC is a subset of AML. KYC forms the initial step in a broader AML compliance strategy.

• KYC focuses on identity verification, while AML encompasses ongoing processes like transaction monitoring, risk assessments, and reporting suspicious activities.

• AML is proactive and reactive, involving not only preventative measures but also continuous monitoring and reporting.

Understanding this relationship helps institutions structure a compliance program that is both comprehensive and aligned with regulatory expectations.

The AML/KYC Compliance Framework: Core Components

Compliance with AML and KYC requirements involves a multi-layered approach, including:

• Customer Identification Program (CIP): Verification of customer identity using official documents, biometrics, and facial recognition.

• Customer Due Diligence (CDD): Initial risk assessment based on publicly available data and customer information.

• Enhanced Due Diligence (EDD): Applied to high-risk clients; includes media searches, financial history, and deeper profiling.

• Transaction Monitoring: Continuous review of financial transactions to detect suspicious patterns.

• Suspicious Activity Reporting (SAR): Filing reports to authorities when illegal activity is suspected.

• Ongoing Risk Assessment: Periodic reviews to update customer profiles and risk status.

• AML Training & Awareness: Educating staff to recognize and respond to red flags.

AML & KYC Compliance: Regulatory Expectations

AML Compliance refers to adherence to national and international AML regulations. This includes obligations such as suspicious transaction reporting, record-keeping, and internal controls.

KYC Compliance, on the other hand, specifically relates to procedures around customer identity verification, risk profiling, and periodic reviews.

Both are mandatory for regulated entities, including:

• Banks and credit institutions

• Insurance and investment firms

• Virtual asset providers

• High-value goods dealers

• Payment processors and e-money institutions

8 Best Practices to Enhance AML/KYC Compliance

1. Understand Applicable Regulations: Institutions must stay informed on jurisdiction-specific regulations and international guidelines like FATF.

2. Establish Comprehensive Policies: Internal policies should outline onboarding, risk categorization, monitoring, and reporting mechanisms.

3. Deploy a Robust CIP: Implement biometric checks, document verification, and tiered risk categories.

4. Tiered Due Diligence: Apply CDD to all clients and EDD where elevated risk is identified.

5. Automate Transaction Monitoring: Utilize machine learning-based systems to flag anomalies in real time.

6. Regular Staff Training: Continuous education ensures all employees understand their role in compliance.

7. Conduct Internal Audits: Routine audits help identify gaps and adapt processes to emerging risks.

8. Stay Current with Industry Trends: Monitor updates from regulators, attend industry conferences, and benchmark practices.

Automation: The Future of AML and KYC Compliance

Manual KYC processes are prone to delays, inconsistencies, and human error. By contrast, automated solutions can perform identity checks, document verification, and transaction analysis at scale with greater speed and accuracy.

One-Constellation offers an API-first, SaaS-based KYC/AML platform that streamlines compliance processes across the client lifecycle. Our risk-based approach allows institutions to prioritize high-risk clients, automate due diligence tasks, and maintain a consistent compliance posture.

Benefits include:

• Faster client onboarding

• Reduced operational costs

• Improved compliance accuracy

• Real-time monitoring and alerts

Do You Need AML or KYC?

Regulated institutions are legally required to implement AML programs, which by definition include KYC. If your business operates in any of the following sectors, AML/KYC compliance is mandatory:

• Financial institutions (banks, insurers)

• Virtual asset and fintech service providers

• Real estate agencies and high-value asset vendors

• Online gambling platforms

Failure to implement effective compliance programs can lead to financial loss and irreversible reputational harm.