KYC and AML – What Are They and How Do They Differ?

Example:

A company begins working with a new corporate client. As part of the KYC process, it verifies the company’s information, checks its authorized representatives, and identifies its beneficial owner. It then assesses the risks associated with the client, including its industry, ownership structure, and the countries in which it operates. If transactions that are unusual for the client’s profile occur during the relationship, they may be subject to further review as part of the AML process.

KYC vs. AML – What’s the Difference?

KYC and AML are closely connected, but they have different scopes.

	KYC	AML
Meaning	Know Your Customer	Anti-Money Laundering
Purpose	Determine who the customer is and assess the risk associated with the relationship	Reduce the risk of money laundering and terrorist financing
Scope	Customer information, identity, beneficial ownership, customer profile	KYC, risk assessment, relationship and transaction monitoring, suspicious activity analysis, and other AML controls
When	When establishing a relationship and during subsequent updates	Throughout the entire customer relationship
How they relate	One component of AML	A broader framework that includes KYC and other AML processes

Simply verifying an identity document does not mean the entire AML process has been completed. The information obtained through KYC serves as the starting point for further risk assessment and helps determine how the customer should be managed.

What Does the KYC/AML Process Look Like in Practice?

The scope of the process depends on the type of customer, the nature of the business, and the identified level of risk. In practice, however, several key stages can be distinguished.

1. Customer Identification and Verification

The first step is to collect the customer’s information and verify their identity. For an individual, this may include information from an identity document. When the customer is a company, information about the legal entity itself must also be verified.

2. Identifying the Beneficial Owner and Understanding the Nature of the Relationship

For legal entities, it is important to determine who ultimately owns or controls the entity. Information about shareholders listed in a registry may not always be sufficient, particularly in the case of more complex ownership structures. The organization should also understand the purpose and intended nature of the business relationship. This makes it possible to assess later whether the customer’s actual activity is consistent with what could reasonably have been expected at the beginning of the relationship.

3. Risk Assessment

The information collected is used to determine the money laundering and terrorist financing risk associated with the customer. Relevant factors may include the type of business activity, ownership structure, products used, geographic exposure, and the nature of expected transactions. In practice, this stage may also include screening the customer and related parties, for example for PEP status or against applicable sanctions lists.

Not every customer requires the same level of scrutiny. The Polish AML framework follows a risk-based approach, meaning that the scope and intensity of the measures applied should reflect the identified level of risk.

4. Ongoing Monitoring and Information Updates

The process does not end once the customer has been accepted. Throughout the relationship, the organization should assess whether the customer’s activity remains consistent with what it knows about the customer, the nature of the customer’s business, and the established risk profile. Relevant changes may include, for example, a sudden increase in transaction volume, expansion into new jurisdictions, changes in ownership, or other new circumstances that may affect the customer’s risk assessment.

Customer data and documentation should also be kept up to date. Ongoing monitoring and maintaining current information are expressly included among the customer due diligence measures set out in the Polish AML Act.

KYC/AML Under Polish Law

Under the Polish AML Act, the concept commonly referred to in the industry as KYC should primarily be understood in the context of customer due diligence measures (środki bezpieczeństwa finansowego) applied by obliged institutions.

Under Article 34 of the Act, these measures include:

• identifying the customer and verifying the customer’s identity,
• identifying the beneficial owner and, where appropriate, determining the ownership and control structure,
• assessing the business relationship and, where appropriate, obtaining information about its purpose and intended nature,
• conducting ongoing monitoring of the business relationship, including transaction analysis and ensuring that the information held is kept up to date.

These measures are primarily applied when establishing a business relationship, but the Act also provides for other situations in which they are required. These include certain occasional transactions, suspected money laundering or terrorist financing, and situations in which doubts arise about previously obtained customer information.

This means that KYC should not be treated simply as a form completed during onboarding. Its purpose is to build a sufficient understanding of the customer so that risk can also be properly managed later in the relationship.

Why Does KYC Quality Matter to the Entire AML Process?

An AML framework relies heavily on the information collected about the customer. If that information is incomplete, outdated, or incorrectly assessed, problems can arise at later stages of the process as well. For example, it is difficult to properly assess an unusual transaction if the organization does not know what normal activity looks like for that particular customer. Similarly, failure to correctly identify the beneficial owner may mean that the company does not know who ultimately stands behind the entity with which it has a business relationship.

An effective process should therefore go beyond collecting a predefined set of documents. The information must be analyzed, an appropriate risk level assigned, and the findings used in the customer’s ongoing monitoring.

This approach is also reflected in supervisory practice. GIIF, Poland’s General Inspector of Financial Information, emphasizes the need to assess information obtained about customers, while supervisory authorities focus, among other things, on the proper identification of beneficial owners, ongoing monitoring, and keeping customer information up to date.

KYC gives an organization knowledge about its customer. AML determines how that knowledge should be used to identify and mitigate risk throughout the business relationship. In practice, the two areas must therefore function as one integrated process – from onboarding and risk assessment through ongoing monitoring of the relationship.

Explore more AML articles

• What is AML (Anti-Money Laundering)
• KYC – What Is It and How Does It Work?
• What Is an AML Officer and What Do They Do?

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