FAQ – AML/CFT, KYC and Compliance

AML stands for Anti-Money Laundering. It refers to a set of laws, regulations, and procedures designed to prevent criminals from disguising illegally obtained funds as legitimate income. AML encompasses policies, controls, and systems that financial institutions and other obliged entities must implement to detect, prevent, and report money laundering activities and terrorist financing.

AML checks are procedures conducted by financial institutions and other obliged entities to verify the identity of their customers, assess risk levels, and monitor transactions for suspicious activities. These checks include customer due diligence (CDD), enhanced due diligence (EDD) for high-risk customers, ongoing monitoring of business relationships, and screening against sanctions lists and databases of politically exposed persons.

KYC stands for "Know Your Customer." It is a process used by businesses to verify the identity of their clients and assess potential risks of illegal intentions in the business relationship. KYC procedures require organizations to identify and verify customer identity using reliable, independent documents, data, or information sources.

Know Your Customer (KYC) is a regulatory and legal requirement that obligates financial institutions and other regulated entities to verify and identify their customers before establishing business relationships. The KYC process helps institutions understand their customers' risk profiles, ensure compliance with regulations, and prevent their services from being used for money laundering or terrorist financing activities.

KYC verification is the process of confirming a customer's identity through document verification, biometric checks, or other authentication methods. This typically involves collecting and verifying official identification documents (such as passports or driving licenses), proof of address, and sometimes additional documentation depending on the risk assessment and regulatory requirements in specific jurisdictions.

Money laundering is the process of making illegally obtained money appear legal by disguising its true source. It typically involves three stages: placement (introducing dirty money into the financial system), layering (creating complex layers of transactions to obscure the money trail), and integration (making the cleaned money available to criminals with its origin obscured).

In the EU, Article 2 of Directive (EU) 2015/849 defines the entities covered. These are mainly companies active in the legal or financial sectors, such as banks, insurance companies, but also lawyers, real estate agents, accountants, and consultants of all kinds.

With the gradual establishment of the AMLA (Anti-Money Laundering Authority), better and more uniform enforcement is being put in place, along with the systematization of preventive controls.

Money laundering is legally defined as the process of concealing the origins of money obtained from illegal activities by passing it through complex transfers and transactions, ultimately making it appear as legitimate income. It involves converting "dirty money" from criminal activities into "clean money" that appears to have been acquired legally, thereby allowing criminals to use their proceeds without detection.

A Politically Exposed Person (PEP) is an individual who has been entrusted with a prominent public function, such as heads of state, senior politicians, senior government officials, judicial officials, military officials, senior executives of state-owned corporations, or important political party officials. PEPs are considered higher risk for money laundering due to their position and influence, requiring enhanced due diligence measures.

To check if someone is a PEP, organizations typically use specialized databases and screening tools that maintain updated lists of politically exposed persons worldwide. These databases include current and former government officials, their family members, and close associates. Regular screening against these databases should be conducted during customer onboarding and throughout the business relationship as part of ongoing due diligence.

A beneficial owner is the natural person who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction or activity is being conducted. This includes persons who ultimately own or control more than 25% of the shares or voting rights in a company, or who otherwise exercise control over the management of an entity through other means.

To identify beneficial owners, organizations must collect information about the ownership and control structure of corporate customers. This includes reviewing corporate documents, shareholder registers, trust deeds, and other relevant documentation. Many jurisdictions now maintain beneficial ownership registers that can be accessed for verification. The process involves tracing ownership through corporate layers until the ultimate natural persons who own or control the entity are identified.

AMLA (Authority for Anti-Money Laundering and Countering the Financing of Terrorism) is a decentralized EU agency that coordinates national authorities to ensure correct and consistent application of EU AML/CFT rules. AMLA will directly supervise high-risk cross-border financial entities, support Financial Intelligence Units (FIUs), and establish common supervisory standards across the EU.

The agency is based in Frankfurt, Germany, and will be fully operational by 2028, with the mission to transform anti-money laundering supervision in the EU and enhance cooperation among member states.