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What is KYC? and AML?


KYC and AML are the acronyms for Know Your Customer and Anti-money Laundering, and refer to the set of activities that both financial institutions and regulated businesses must perform to verify the identity of their customers and obtain sensitive information from them, as well as prevent money laundering from illegal activities.

The terms KYC/AML are also used to define the different regulations that govern these activities. With KYC, it is no longer enough to verify the identity of the client at the document level; the financial entity must also verify the real identity of the client and share the information with the Administration.

A deeper knowledge of the techniques used by the money laundering networks has motivated a series of changes in international standards and legislation in recent years, with the consequent harm caused to honest people who want to protect their privacy.

However, if the KYC in the financial system was the origin at a regulatory level affecting banks, insurance companies or export credit agencies, other sectors have echoed the need to verify the identity of customers

Examples of new sectors that have been introducing KYC/AML policies are the online gaming sector, crypto-currency, betting, telecommunications… so we could also talk about KYC in online gaming or KYC in cryptocurrency.

KYC / AML regulations

Know Your Customer regulations are local and differ from country to country

Among the different regulations, in Europe we have the (EU) Directive 2018/843 of the European Parliament and the Council on the prevention of the use of money laundering or terrorist financing.

The companies affected by this regulation are:

  • Banks
  • Mutual insurance companies
  • Credit companies
  • Insurance Companies
  • Financial Advisors
  • Brokerage houses and stock companies
  • Pension fund managers
  • Collective investment schemes
  • Postal Services
  • Currency exchange posts
  • Individuals and unofficial financial institutions that exchange or transmit money
  • Real Estate Agents
  • Dealers in precious metals, precious stones, antiques and art
  • Legal advisors and lawyers
  • Accountants
  • Auditors
  • Notaries
  • Casinos and betting shops

The Norwegian anti-money laundering legislation

With the new AML Act and Regulation Norway has implemented most of the EU 4th AML Directive. 

The Regulation sets out that the Norwegian AML legislation applies to agents of foreign payment institutions, and introduces an obligation for at national point of contact for such agents in some situations. The AML regime is also extended to additional service providers – electronic wallet providers and virtual currency exchange service providers, in line with the EU 5th Anti Money Laundering Directive. 

Key elements for assessing the low and high risk of money laundering and terrorist financing is included in the Regulation, and reporting entities will have to implement enhanced due diligence measures to monitor suspicious transactions involving certain high-risk countries. 

Documents for the identity verification process (KYC)

It is usually in the first phase of the business relationship with the client, known as Digital Onboarding, that the client is registered in the system, when the KYC measures for the verification of their identity are implemented and reinforced.

In some sectors, such as Online Gaming, the obligation to perform a document verification by the gaming operators was done at a later stage when the player wanted to withdraw his prizes. Currently, the regulations have become more restrictive, obliging new players to verify their identity during the onboarding process.

Therefore, depending on the sector and the regulations that apply, it is usually one or the other that is required during the registration process. KYC controls typically include the following:

  • Collection and analysis of basic identity information, such as identity documents. Generally, the Passport, Driver’s License, National Identity Card, or Certificate of Citizenship are valid.
  • Verify the client’s physical address. This is usually verified by handing in some utility bills such as gas, electricity or telephone, tax receipts, bank statements, etc.
  • Checking against third party lists (delinquent lists, police databases to check for pending crimes, gambling problems, etc.)
  • Determination of the client’s risk in terms of propensity to commit money laundering, financing of terrorism or identity theft
  • Creating an expectation of a client’s transactional behavior.
  • Tracking of a customer’s transactions.
  • Verification of the origin of payments

Digital Onboarding

Digital Onboarding is the process that allows a customer to register for the first time completely online from any device (smartphone, computer) by collecting their personal data, an identity document that identifies them and verifying that they are who they say they are.

Within the financial sector, until a couple of years ago, to open a bank account it was necessary to travel to a branch office so that an agent could verify the customer’s identity, so the onboarding model was face-to-face.

Little by little, the onboarding process has been digitized, allowing the downloading of forms and contracts from the bank’s website, until the current model, in which banks have the permission of the regulatory bodies and the necessary technology to allow that first contact of the customer with the bank is 100% digital.

The German bank N26 was one of the pioneers in the implementation of Digital Onboarding, and since then, many companies from multiple sectors have been using document scanning technology to extract information from the ID document and biometric recognition to verify the identity of the holder of the document, integrating into their own systems (ERP, CRM) all the customer information generated during the process.

KYC regulations in the cryptocurrency sector

With the expansion of the cryptocurrency sector, the use of this type of asset has become a concern for governments and authorities, who have been looking for mechanisms to establish standards and regulate companies, mainly exchange houses.

The fears stem from one of the characteristics that differentiate cryptocurrencies from fiat money, such as the privacy of their transactions and their decentralized operation. Something that on the one hand is taken as an advance in terms of people empowering themselves and taking control of their finances, but on the other hand, is seen as an open space for the commission of illegal activities.

That is why, recently, the “know your customer” rules have begun to be part of the requirements that exchange offices request from their users in order to carry out operations. This is a trend that has become more common, especially among centralized exchange houses, as a result of the regulatory pressures being exerted in many countries.

These pressures are getting stronger, so now even decentralized platforms are incorporating the KYC.

Lack of rigor

Despite the fact that it is increasingly common to find exchange platforms that ask for documentation in order to comply with customer knowledge, it is still considered that companies linked to crypto currencies are not being rigorous with KYC protocols, as pointed out by the cyber security company Hacken, in a recent study.

According to this research by Hacken, the exchange houses that are most demanding only ask their clients for a passport, a written legal certificate and a self-photo (selfie) with the certificate and passport. Three requirements that are part of a longer list of documents and a more complex procedure.

In general terms, the information collected must include identity documents, address, payroll, income or corporate tax returns, list of partners or persons with whom business transactions are conducted (including persons with public offices).

All this data determines the risk that the client represents in relation to money laundering, financing of terrorism or identity theft, as it allows the drawing up of a profile that establishes the expectations of his behavior in the operations he carries out. These transactions must be monitored, analyzing the behavior of the people or organizations with whom the user operates.

With all this information, banks, public administrations, notaries and lawyers involved in financial operations create a database. In this way, these financial entities have a record of their clients, which can also be useful for the authorities.

Death sentence for the sector?

Beyond the possible advantages, many users and members of the ecosystem see this procedure as an invasion of privacy and a way to re-centralize finances. Something that goes against the philosophy that inspired the development of cryptomoney. Some even believe that KYC represents “a death sentence for crypto-currencies”.

This position is based on the fact that, since their origin, crypto-currencies were created under the premises of security, transparency, anonymity, and the exclusion of intermediaries that could hinder the activities of people in their use. This fact could explain why many exchange houses do not fully adhere to the KYC policy. It is precisely the promise of privacy that forms part of their promotional campaigns. That is why many users protested when decentralized platforms implemented KYC.

However, members of the ecosystem, differ from the idea that regulations and data requirements, lead to the disappearance of crypto actives. This is the opinion of Chris Housser, co-founder of Polymath Network.

How do you manage in an increasingly regulated world if you are a lover of freedom?

Very few financial services can still be used anonymously. Until recently, you could anonymously use prepaid cards with a limit of $1,000 per transaction if you reloaded them with Bitcoin, but this is no longer possible.

Now you need to at least verify your passport to be granted certain limits.

The official version is that the purpose is to fight terrorism and crime.

That may be true and that’s the intention (at least for the voters), but the reality is that terrorists and criminals will always find ways to organize their financial flows despite such regulations. Just as they have always been able to access weapons despite strict prohibitions in many countries.

In the end, such anti-terrorism laws are really just a pretext for achieving total transparency for the individual. Financial matters are closely monitored, especially for citizens of countries with high tax burdens.

To this end, the automatic information exchange standard was implemented several years ago, which results in the exchange of account data from all over the world with local tax authorities.

Although almost all of the world’s most attractive financial centers have already signed up to this initiative, also known as the Common Reporting Standard (CRS), it has more holes than a Swiss cheese.

Among the many gaps is the fact that the exchange is with the country from which the management has been verified. At the moment other factors such as nationality, registration certificate or similar are not taken into account.

Therefore, if you have a consumer invoice for a property abroad you can easily register with all the financial service providers you want. Thus, the exchange of information occurs, but not necessarily with the country where you have your tax residence.

You can avoid the exchange of information completely if the property is located in a country that does not participate in the CRS. Although there is almost no attractive jurisdiction that has not signed the agreement, there are still many countries outside the CRS where it is worthwhile to acquire a property in the form of an investment.

For example, most of the world’s developing countries are outside of the information exchange because such a system would be too much for their banking infrastructure and the costs would be disproportionately high. In addition, these countries have a low risk of tax evasion.

The fact that a country does not participate in the exchange means not only that it does not send information, but also that it does not receive it. In this sense, interesting consumption bills are those of such attractive places as Thailand, Peru, Paraguay, Ukraine or the Dominican Republic, since they do not involve an exchange of information by themselves.

Even if in the not too distant future virtually all countries have joined the CRS and your property is in a country with CRS, this need not be a problem.

As long as you meet your local tax obligations with respect to the property and its possible rent, you should not have any problems.

If you use, or have used, an address in your home country and go through the bank identification process with that address or use your old tax ID number, this could lead to an investigation of the case.

The verification could be considered an indication that your usual residence is still in your home country and could lead to a tax inspector or private investigator monitoring the property to see who really lives there and if it turns out that you actually still reside there.

Generally, the actual circumstances are decisive in deciding your tax residency, which do not include your mailing address, accounts, credit cards, or pre-departure verification of your address.

In other words, if you have a bank account in your home country, you can usually use the bank statements in the identification process (KYC) as long as the provider accepts them.

However, this procedure has its risks, especially if you continue to spend relatively long periods in your home country (even staying under 183 days).

For that reason, it is only recommended for those who, after giving up their usual residence, will not really spend much time in their home country and can also plausibly prove that they have been abroad.

But, unfortunately, it doesn’t stop there.

More and more banks and financial service providers are demanding consumer invoices after the account has been opened, once a year, or in extreme cases even on a quarterly basis. And, if you don’t want to put your account at risk, you must be able to meet this requirement.

Unfortunately, consumer bills are expiring. In general, an electricity bill can be up to 3 months old.

Cell phone bills are generally not accepted. This is because it is considered that with an Internet or cable TV flat rate you need a residence, where the corresponding connection is installed, while this is not necessary in the case of the cell phone.

Depending on the regulatory country and the provider’s criteria, account statements, credit card bills, bank references, insurance certificates or similar documents may also be valid, as long as the residence address is visible.

The best way to get an invoice is to buy or rent a home. If you don’t want to have any problems, you should always proceed according to the current law.

We will expand on this topic in future posts in which we will talk about the status of permanent traveler and how you can benefit from it