The fundamental principles of AML, KYC and KYB requirements help financial institutions. These rules assist in knowing about their businesses, client organizations, accounts, etc. Moreover, they help in the avoidance of risks affiliated with money remittance. Today, many expatriates live and work in foreign countries that send money back home from abroad. The financial institutions have to regulate and control safe and secure international money transfers for these expatriates. For instance, 32 million Indians live outside countries across the UK, Europe, Australia, Canada, Africa, Asia, etc. When such extensive diasporas send money to India from abroad, criminals can easily attempt money laundering.

Before getting into details about the requirements of AML, KYC and KYB across Europe, let’s understand the terminologies.

Anti-Money Laundering (AML)

Anti-Money Laundering (AML) refers to laws, regulations, procedures and standards to prevent criminal activities from illegal funds. The European Union has the regulatory framework to avoid ML. The Financial Action Task Force shapes it. 

The commission presented the latest directive on 20th July 2021 that showed the sixth directive on Money Laundering. It replaced directive 2015/849. It is known as Directive 2019/1153.

KYC- Know your customer

To know your customer or know your client (KYC) is a process of identification and verification of the client’s identity. In simple words, it is to ensure that the client is genuine and involved in the legal business while opening an account. KYC assists in the analysis of risk involving ML and terror financing.

KYB- Know your Business

Likewise, KYB, Know Your Business identifies firms, suppliers and companies. It uncovers the ultimate beneficial owner. Also, it figures out if they pose a money laundering threat or terrorism financing risk.
 

Note: AML is a concept of fighting money laundering; meanwhile, KYC and KYB are tools to achieve that objective. 
 

European Union and Money Laundering Directives

Numerous papers brought awareness to the extensive practices of money laundering in the world. Similarly, terror attacks and tragic criminal activities led to extensive strategies by European Union.

To deal with terror financing, European Union introduced particular regulations in eleven years, precisely:

Money Laundering Directives 4, 5 & 6

• 4 directive was adopted on 20th May 2015. It reflects on 40 recommendations. Directive 4AMLD ambition to combat money laundering’’ and financing of terrorism ‘’.
• 5 AML focuses on transparency. It anticipates member states to recognise trusts and entities under legal responsibility.
• 6 AML Directive came into effect on 3 December 2020 and aimed to strengthen AML rules in the European Union. For financial crime, it places a higher responsibility on regulated entities.

FATF Global Watchdog

The Financial Action Task Force (FATF) is a global intergovernmental organization. FATF brings forth the international standards for anti-money laundering compliance. It monitors customers under AML guidance. FATF has 36 member states.

The organization has made it mandatory for member states to follow the standards. It is compulsory to perform ‘’ know your customer procedures, risk assessment, due diligence and screening against global sanctions. After these measures, it has become safer to transfer money to India and other countries worldwide.

FATF provides recommendations for EU’s AML and KYC requirements. These guidelines help in the maintenance of transparency in the financial market.

Payments Service Directive (PSD2)

Payments Service Directive assists financial institutions in adopting new technologies and making electronic payments secure all over Europe. It follows two-factor verification before payments as part of the AML program.

General Data Protection Regulation (GDPR)

GDPR protects data for Institutions with an AML program. It allows the collection and processing of personal data. Though MLA legislation overrides this, institutions can hold financial transactions for five years.

KYC rules in the European Union

The Key points of 6 AMLD in the European Union include;

• Almost 22 established offenses have been described in the directive
• European Union states transaction threshold reduction
• Aggression has been discussed considering three key points
• Economic endorsements up to 5 million
• It focuses on the Registered Tech companies

KYC Requirements

Few steps are followed for ‘’know your customer’’ following Anti-Money Laundering procedures. These requirements include:

Customer Identification requirements 

Customer identification includes Name, Date of Birth, Address, and Identification Number. It must be the client’s legal name along with the customer’s digital photo, Identity document, and scanned ID documents.

Customer’s Due Diligence 

Customer’s Due Diligence required for risk assessment includes screening customers based on their profession, occupation, transaction patterns and financial history.  

Enhanced Due Diligence 

EDD is designed to handle high-risk customers and large transactions. Risky customers and transactions pose a greater risk to the financial sector and cannot be detected by CDD procedures.

Takeaway

KYC is an essential part of AML, and it’s mandatory for financial institutions. KYC and KYB should be given priority to avoid ML and terrorism financing. Knowing your customer and their business can save you from the consequences of ML. Besides time consumption and significant resources, it can also save the reputation.