#FractalAcademy, Episode III: What is KYC? What is AML?
The abbreviated terms KYC and AML come up a lot in our posts. But what do they mean? And what are they good for?
Hello, and welcome back to #FractalAcademy. In the last episode, we had given a list of answers to some of your most frequent questions (right here, if you missed it), where we talked a lot about the different steps of the KYC (Know Your Customer) process. But what is KYC? What is Anti Money Laundering (AML)? Today, we will go into these two important terms, explain what they stand for, and what they are designed to protect.
What is Know Your Customer?
Know Your Customer (or Know Your Client) is the process of verifying a customer’s identity, carried out by companies in compliance with legal requirements and regulations. KYC is a mandatory process for intuitions that open and maintain financial accounts. Its importance in onboarding clients is one of the biggest challenges many companies face daily.
Because of the increasing complexity of regulations related to identity and data, institutions have become subject to higher standards for the safety and privacy of individuals. Essentially, the KYC guidelines are set in place to prevent financial institutions from being used in criminal activities. These preventative methods help cut down on the possibility of identity theft and attempts to defraud others users.
To successfully pass a KYC verification, the user must present several forms of reliable identity documentation. These could be a driver’s license, passport, or a utility bill with your legal name and address on it. In a nutshell, these documents are verified to make sure you are who you say you are. The ever-evolving space of technology and cryptocurrency makes it necessary to define such standards to protect users and prevent online fraud.
What is Anti Money Laundering?
Developed as a response to money-laundering activities and the covert financing of terrorism, AML is a system of policies, laws, and regulations to prevent and detect criminal behavior. The AML process is designed to prevent criminals from disguising illegally obtained funds as legitimate income.
AML regulations require financial institutions to monitor customers’ transactions and report suspicious activity. AML laws and regulations target criminal acts such as market manipulation, trading of illegal goods, abuse of public funding, and tax evasion. Navigating the AML requirements can be challenging, but it is vital in helping governments worldwide maintain financial law and order.
AML initiatives, rose to global prominence in 1989 after FATF, or the Groupe d’action Financière, was formed. The rise of the global economy and international trade has opened the door to international financial crimes. The FATF was established as a global watchdog to create standards and policies that combat money laundering (mixing illegally acquired money with legitimate earns to hide criminal gains) and terrorism financing at national and international levels.
Why are they important?
KYC regulations have far-reaching implications for consumers and financial institutions alike. Money laundering relies on anonymity; this has ramped up KYC regulations to report suspicious transactions to combat illegal funding. Financial institutions are required by law to use KYC to establish the legitimacy of a consumer’s identity.
Essentially, KYC procedures are tailored to specifications and suited to the needs and function of the company in question. AML regulations, as the legislative framework that financial institutes must follow, take a broader approach towards addressing concerns with illegal financial activities. Overall, both verify the customer’s identity and prevent illegal financial activities.
With KYC and customer due diligence, AML regulations can be used to spot suspicious activity quickly and efficiently. In conclusion, a risk-aware approach with KYC procedures can help eliminate the risk of fraudulent activities and ensure a better customer experience. The AML procedure, on the other hand, exists primarily to ensure that financial institutions fight terrorism financing and laundering. Stopping criminals from obscuring the origins of their illegal transactions will only mean a safer world.
At Fractal, we offer two solutions that make the painstaking KYC and AML processes more privacy-preserving and straightforward for both businesses and customers: Fractal Wallet, and Fractal ID. Using these solutions, users can have a secure, decentralized wallet to keep their credentials (already verified through the KYC process via Fractal) and share them with whomever they choose — saving them time and alleviating a difficult process for the businesses they interact with. On the next episode of #FractalAcademy, we will dive deeper into the details of Fractal ID, so stay tuned!
About the Fractal Protocol
Built on Polkadot, Fractal Protocol is an open-source, zero-margin protocol that defines a basic standard to exchange user information in a fair and open way, ensuring a high-quality version of the free internet. In its first version, it is designed to replace the ad cookie and give users back control over their data.
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