Understanding Anti-Money Laundering (AML) and Know Your Customer (KYC) compliance

AML (Anti-Money Laundering) and KYC (Know Your Customer) compliance aim to prevent financial crimes for organizations in various ways, including verifying customer identities. AML specifically focuses on preventing, detecting, and reporting financial crimes, especially money laundering and financing terrorism. KYC compliance focuses on verifying the identity of clients with exhaustive identity due diligence and strict transaction monitoring. 

Both compliance standards are internationally recognized and often commonly confused as the same thing, although they’re different. AML is the entire compliance program, whereas KYC is a critical component of how regulated institutions can achieve greater compliance with anti-money laundering initiatives in their businesses. 

Smarty assists financial institutions and fintechs aiming to comply with AML and KYC by improving the accuracy, completeness, and reliability of addresses and physical location data—critical components in identity verification, risk decisioning, and fraud detection.

In this article, we’ll cover:

• Understanding KYC and AML compliance
  • Key differences between AML and KYC compliance
  • The symbiotic relationship in financial security
• Essential steps in KYC and AML onboarding
  • Customer Identification Programs (CIP)
  • Risk assessment procedures
• The role of technology in KYC and AML
  • KYC & AML with address data
• Conclusion

Understanding KYC and AML compliance

Anti-Money Laundering (AML) compliance is a set of overarching regulatory standards that must be upheld by banks, fintech and payment providers, lending and mortgage companies, real estate professionals, casinos and gaming businesses, insurance companies, accounting and legal firms, and others. 

Although KYC is highly related to and a part of AML compliance, understanding the difference between Know Your Customer requirements and its umbrella Anti-Money Laundering compliance is important. Recognizing the difference can help you see how you can become more compliant with both.

Key differences between AML and KYC compliance

AML is a framework of standards that work together to prevent financial crime. Many sub-standards that fall under the AML compliance umbrella are Enhanced Due Diligence (EDD), transaction monitoring, Suspicious Activity Reporting (SAR), recordkeeping and auditability, Risk-Based Approach (RBA), sanctions screening, internal controls and governance, beneficial ownership transparency, geographic risk management, and Know Your Customer (KYC). 

KYC is a small part of the much bigger picture of AML and is actually a substandard of Customer Due Diligence (CDD). KYC’s focus is on collecting and verifying identity documents, confirming address validity, and matching against watchlists and sanctions, such as OFAC Sanctions Lists.

Some of these lists include Specially Designated Nationals and Blocked Persons (SDN), consolidated sanctions lists such as Foreign Sanctions Evaders (FSE), Non-SDN Iran Sanctions Act (NS-ISA), Sectoral Sanctions Identifications (SS), UN sanctions lists, FATF High-Risk and Non-Cooperative Jurisdictions, and many more. 

These acronymed lists that the KYC checks against help to keep you from doing business with:

• Sanctions - Individuals, companies, and organizations tied to terrorism, drug/sex trafficking, weapons proliferation, sanctioned regimes, nuclear proliferation, conflict zones, blacklisted countries, etc.
• Wanted persons - Interpol Red Notice subjects, FBI’s Most Wanted list, tax evaders and financial fugitives, local/regional most-wanted individuals, Politically Exposed Persons (PEPs) under active investigation, etc.
• Blacklisted organizations - Al-Qaeda, ISIS, Hezbollah, Hamas, Boko Haram, cybercrime networks (Evil Corp, Lazarus Group, etc.), front companies used for money laundering or terrorist financing (phony import/export companies used for smuggling or laundering), international embargo violators and companies, etc.
• High-risk individuals - Politically exposed persons (PEPs), individuals with suspicious or inconsistent behavior (using multiple aliases, incomplete or unverifiable address information, etc.), people involved in high-risk professions (lawyers, accountants, notaries, art dealers, unregulated crypto traders, casino operators, etc.)

The symbiotic relationship in financial security

Like Batman and Robin, KYC and AML work together to fight financial crime. KYC can be considered one of the first lines of defense against suspicious behavior, because to combat it, you first need to know 1) Who your customers are, 2) Where they live or operate, 3) What kind of activity or transactions should be expected of them, and 4) What they do.

Building a customer risk profile empowered with data from sanctions and watchlists is essential to help you monitor anomalies. This further empowers organizations to catch illicit activity before it spreads and avoid massive regulatory penalties for non-compliance.

Basically, KYC tells you who’s on the other side of the transaction, and AML uses that insight to spot and stop suspicious activity.

Although the government had KYC and AML checks in place back in 1970 to protect the American people, after 9/11, when terrorists exploited the financial system with anonymous accounts, shell companies, and international transfers, the USA PATRIOT ACT introduced more aggressive due diligence, mandatory Customer Identification Programs (CIP), and expanded penalties for non-compliance. You can read an overview of the USA PATRIOT Act here. 

Essential steps in KYC and AML onboarding

The steps of KYC and AML onboarding are as follows:

1. Collect identity data (Customer ID Programs): A federally mandated process under Section 326 of the USA PATRIOT Act. Your CIP must be approved by your board of directors or governing body and reviewed regularly.
2. Customer ID verification: Using multi-layered verification methods that balance compliance, usability, and, most importantly, risk, institutions prove that the individuals or entities they are working with are actually who they claim to be. Government-issued photo ID, proof of address, Social Security Number (SSN) or foreign TIN, articles of incorporation, business license, Employer Identification Number (EIN), beneficial ownership details, and proof of registered address (for businesses) are all examples of documentary verification. 
   
   However, non-documentary verification is also a requirement of the PATRIOT Act. Examples of non-documentary verification might include cross-referencing customer information with public records, credit bureaus, third-party identity verification services, out-of-wallet questions (asking, “Which of the following cars have you owned?”), IP address matching, velocity checks (Are they submitting applications too quickly?), etc.
3. Screen it against sanctions and watchlists: We discussed this earlier. Just look out for the bad guys wanting bad things. Behavioral analysis, screening against ID databases, and machine learning can assist you with this process.
4. Understand risk: Build that risk profile, baby!
5. Identify ultimate owners: Document checks, biometrics, selfie ID, etc., can all help you accomplish this.
6. Ongoing monitoring, record-keeping, and audit trail: It’s not a one-and-done process. You need to keep a digital (and sometimes paper) trail documenting your processes for adhering to AML and KYC compliance guidelines in case the big guys ever come knocking, asking for proof.
7. Escalation and reporting (if necessary): This is the final (hopefully unnecessary) phase of AML onboarding and monitoring, where suspicious findings or red flags are reviewed, documented, and escalated. The escalation teams can be internal compliance officers, external regulators (like FinCEN in the U.S.), and even law enforcement agencies in more serious cases. 

If you can smooth this process out, your customers can move through it efficiently, and you can more accurately stop the bad guys in their tracks. Let’s dive a little deeper into a few of these segments and understand the part that address data plays.

Customer Identification Programs (CIP)

Customer identification programs (CIPs) are used by banks and credit unions, insurance companies, lenders and mortgage companies, and more to identify individual customers or business entities they may do business with. 

The information CIPs collect on people typically includes:

1. Their full, legal name (no nicknames or aliases)
2. Date of birth
3. Residential address (validated)
4. Government-issued identification (passport, national ID, driver’s license)
5. Contact info (email, phone number)

The information that CIPs collect on business entities typically includes:

1. Legal business name
2. Registered address (not a PO Box unless the jurisdiction allows it)
3. Type of entity (LLC, Corporation, Partnership, etc.)
4. Tax ID or registration number
5. Names and details associated with owners and controllers (which are then also treated like the individuals' collected info)
6. Country of incorporation
7. What the business does

Because this is the first step in a lengthy process, it’s important to understand that the rest of the risk assessment profile depends on the accuracy of how it starts. Addresses linked to these individuals have the potential to be the first red flag for a business or person.

Typoed, non-existent, and utterly fake addresses don’t belong in a database used to verify identity. There are several address verification and validation tools that CIPs use to check that an address is real, but we’re partial to ours. You can try US Address Verification or International Address Verification completely free, live, and without giving us any of your personal information if you’d like to see how it works. 

Risk assessment procedures

The procedures for financial risk assessments also touch address data. The typical process for building a risk assessment profile looks like this:

1. Define the risk categories (these can relate to customer risk, product or service risk, geographic risk, channel risk, transactional risk, etc.).
2. Assign inherent risk scores (low risk vs high risk, numerical scales, colored flags, etc.)
3. Evaluate existing controls (assess the strength of your mitigating controls)
4. Calculate residual risk (Inherent risk - mitigating controls effectiveness)
5. Apply risk-based controls (each profile having a score means you can tailor your compliance efforts)
6. Ongoing monitoring processes (pay attention to triggers and perform routine re-screenings after major data or regulatory changes)
7. Document everything (keep track of how you assess risk to have the best auditable backbone)

The role of technology in KYC and AML

Scalable data tools help businesses keep up with changing AML regulations—and can cut down on future compliance costs and penalties. Data solutions, like Smarty, also make it easier to work with data from different sources by combining everything into a single, easy-to-use interface without risking duplicate or alias addresses.

KYC & AML with address data

When companies use advanced data analytics such as address verification and rooftop geocoding to detect fraud, they can catch suspicious activity faster and reduce the time it takes to complete AML and KYC compliance reviews. Similarly, bolstering their internal and external forms with address autocomplete streamlines manual entry.

Modern data platforms support key AML tasks like Know Your Customer (KYC), Customer Due Diligence (CDD), and filing Suspicious Activity Reports (SARs). By making it easier to spot unusual patterns and speed up reporting, these tools help businesses stay compliant and ahead of financial crime while building trust as being a compliant organization with your customers. 

Conclusion

AML and KYC compliance are no longer  checkboxes—they’re essential strategies for protecting financial institutions, their customers, and the integrity of the global financial system. As regulations evolve and financial crime grows more sophisticated, it's time to redefine what strong KYC and AML compliance really look like.

That starts with recognizing that address data is a foundational identity signal. Verifying, enriching, and geocoding addresses helps institutions spot anomalies, reduce false positives, and build more accurate customer risk profiles from day one. From onboarding to ongoing monitoring, address intelligence supports every phase of AML and KYC workflows.

Modern compliance requires precision, speed, and adaptability. With advanced address solutions like validation, autocomplete, and rooftop geocoding, financial institutions can meet regulatory demands more efficiently, while making it harder for fraudsters to slip through the cracks.

And, this protection goes beyond being compliant. Compliance ultimately equates to protections for you and your organization in terms of STEEP legal fees, reputational damage, and time-consuming litigation.

Want to make your compliance smarter, faster, and future-ready? Start with the data point every customer provides: their address. 

And make sure it’s right.