What is AML/KYC and PEPs? And why every fintech startup should be aware of those regulations?

These days things are changing extremely fast.

Only yesterday we were able to buy and sell things freely and in the online mode. But today almost any online business requires KYC and other policy requirements. If you want to stay tuned and earn profit by using those policies, then you have to definitely check the following blog post!

Know Your Client (KYC)

The Know Your Client is common to the financial sphere and ensures investment advisors know detailed information about their clients’ risk tolerance, investment knowledge, and financial position.

By using KYC every part of the business process stays secure: customers are protected by having their financial advisors know what investments best suit their personal situations. Financial advisors are protected by knowing what they can and cannot include in their client’s portfolios. KYC compliance typically involves requirements and policies such as risk management, customer acceptance policies, and transaction monitoring.

KYC method typically includes:
– Identity verification, confirmation of citizenship/country of a person’s origin
– Examining a person for any links to illicit activity
– Asking about the source/destination of funds that are being moved
– Examining suspicious transactions or assessing abnormally large transaction volumes

There are several laws that were implemented in July 2012 that cover this topic together: Financial Industry Regulatory Authority (FINRA) Rule 2090 (Know Your Customer) and FINRA Rule 2111 (Suitability). These laws are in place to protect both the broker-dealer and the client and so that brokers and firms deal fairly with clients.

Anti-Money Laundering (AML)

Anti-money laundering applies to a set of rules, regulations, and systems designed to prevent crooks from disguising illegally obtained money as legitimate profit. AML rules incorporate a relatively limited range of transactions and criminal behaviors, their implications are far-reaching. For example, AML regulations require that banks and other financial institutions that issue a credit or allow clients to open deposit accounts follow laws to make sure they are not aiding in funds-laundering.

AML is related to KYC, but centered on money laundering — that is, converting illegally-derived profits into “clean” or “legitimate” assets.

There are a few actions, that as usual applies with AML laws:
– Monitoring for regular transactions in excess of $10,000, or near this threshold
– Requiring banks and credit card companies to report certain types of transactions to the US Department of the Treasury
– Control the movement of foreign or domestic cash both abroad and domestically
– Obtain proper KYC information to confirm a person’s identity, and see if they have been involved in illicit activity

Politically Exposed Persons (PEP)

Politically Exposed Persons are anyone from a foreign land, committed with a leading public role, such as a foreign minister, ambassador, or another high-ranking executive. PEP monitoring is used to help assure that these people are not misusing their power to rob or otherwise steal and abuse funds. Their close family members may also be monitored.

In general, this policy is realizing by using a combination of KYC and AML procedures — the person’s assets are closely monitored, unusual activity is reported, and they are examined regularly to assure that they are not engaging in any illegal activity.

For monetary regulators, KYC, AML, and PEP are all extremely important for preventing unlawful use of banks, money laundering, fraud, and other criminal movements.

Who needs to perform Anti-Money Laundering checks?

Commercial banks as well as the financial sector and lawyers, notaries, accountants, real estate agents, casinos, and company service providers. Sometimes AML also applies to dealers in goods (precious metals), when payments are made in cash in excess of €10,000.

The following measures were also applied to the whole “bitcoin” sphere, which  means that firms can only forego client due diligence standards in circumstances where:
– the maximum amount which can be stored electronically is €150
– the payment instrument used in connection with the electronic money is not reloadable or is subject to a maximum limit on monthly payment transactions of €150, which can only be used in the UK
– the relevant payment instrument is used exclusively to purchase goods or services
anonymous electronic money cannot be used to fund the relevant payment instrument.

When AML, KYC, and PEP regulation become a must-have for European fintech startups?

As everything in our world, that depends on the company’s pattern.

If the fintech start-up offers core banking products and services such as insurance, payment providers, B2B services, asset management, peer-to-peer lending, checking accounts, business finance, etc, then KYC is critical to ensure the start-up follow the compliance and regulatory protocols for all transactions, based on the country to which the fintech belongs.

Of course, the following topic can’t be fully disclosed in just one article. That’s why we’re going to post two more articles about KYC, AML, and PEP policies. But for now, that’s all, folks!

Please, tell us in the comments below which part of the article was the most relevant to your business.