From KYC to AML: The essential compliance protocols your payment provider must follow

For any company operating in payments — whether a fintech startup, a global bank, or a payroll provider — two key disciplines drive security, compliance, and efficiency efforts: know your customer (KYC) and anti-money laundering (AML).

KYC is at the center of fraud prevention and financial crime compliance, making sure businesses accurately verify and assess customer risk. 

AML frameworks complement KYC by enforcing policies that detect and prevent money laundering, terrorist financing, and other illicit financial activities. As technology evolves, businesses must be even more meticulous with these two areas to avoid costly compliance failures that put customers at risk.

It’s important for customers of payment providers — or those searching for one — to be aware of KYC and AML best practice too, so they know what to look for in a secure provider.

KYC: protective verification and risk assessment

KYC practices are fundamental to preventing fraud, managing reputational risk, and fortifying the integrity of payment systems. As financial crime tactics evolved, KYC best practice did too in response.

Risk-based KYC

Not every customer carries the same level of risk. Instead of applying the same verification process to every user, payments companies implement risk-based KYC.

• Low-risk customers (e.g. individuals making small transactions) may go through a streamlined process.

• High-risk customers (e.g. businesses in regulated industries or individuals making large cross-border payments) undergo enhanced due diligence (EDD).

This type of approach is driven by global AML frameworks that emphasize flexibility over rigidity in compliance strategies.

KYC can’t be a one-time process, it has to be continuous

It's natural for customer details to change over time, and this can happen since they were last subject to a KYC check.. Truly knowing your customer is not a one-and-done exercise. The details you hold on them need to be as current as possible. That’s why leading payments providers use continuous KYC monitoring, rather than relying solely on one-time verification at onboarding.

This aligns with global AML directives that require businesses to update customer information regularly, and flag changes in behavior that might indicate risk.

AML: strengthening compliance to combat financial crime

AML regulations must evolve quickly to address the increasing complexity of financial crime. In tandem, payments companies must stay ahead of these changes to remain compliant and protect their operations. This means implementing updates swiftly.

Regulatory enforcement is aggressive, with good reason

Regulators worldwide maintain strict AML oversight, particularly for cross-border payments and digital financial services.

• In Europe, the EU’s Sixth AML Directive (6AMLD) and the New AML Package establish expanded liability for financial crime, ensuring that even negligence in AML compliance results in criminal penalties.

• In the U.S., the Corporate Transparency Act enforces stringent reporting requirements for business transactions.

For payments companies, proactive compliance is key — reacting to regulations after they take effect is not a viable option.

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Data privacy laws add a new dimension to compliance 

When first implemented, the General Data Protection Regulation (GDPR) forced companies to rethink how they handle customer data, but it was just the beginning.

Now, companies navigate a growing web of privacy laws as the norm, from the California Consumer Privacy Act (CCPA), to India’s 2023 Digital Personal Data Protection Act (DPDP), and Brazil’s Lei Geral de Proteção de Dados (LGPD), and beyond. For payments providers, the business risk of non-compliance in relation to data handling is significant, on a global scale.

AI in compliance: powerful but under regulatory scrutiny

AI and machine learning are automating and expanding the scope of KYC, fraud detection, and transaction monitoring. But regulators are starting to scrutinize how AI-driven compliance tools are used, particularly to avoid bias in decision-making.

Brought into play in August 2024, the EU AI Act is one of the first laws specifically regulating AI in financial services, but it won’t be the last. Those in the payments space using AI for KYC and fraud detection must put transparency (to do with how these systems make decisions) at the top of their agendas.

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Key developments in AML compliance

AML regulations aren’t static, they shift in response to new technology and advances in financial crime. Your payment provider’s grasp of long-term industry standards for compliance should be robust. They should have also responded to the below, at speed, with fine-tuned updates to their compliance strategy:

• Expansion of beneficial ownership rules: The U.S. the Corporate Transparency Act (CTA) came into force at the beginning of 2024. It mandates broader disclosure requirements for ultimate beneficial owners (UBOs), increasing transparency in business structures to combat financial crime.

• EU AML Authority (AMLA) implementation: The European Union has established the AMLA half way through 2024, to oversee and enforce AML regulations across member states, centralizing audits and compliance oversight.

• FATF’s updated recommendations on virtual assets: The Financial Action Task Force (FATF) introduced stricter KYC requirements for virtual asset service providers (VASPs), — towards the end of 2024 — particularly for cryptocurrency transactions and cross-border payments.

• Enhanced due diligence for high-risk transactions: Many jurisdictions have increased due diligence (EDD) requirements in recent years — for politically exposed persons (PEPs), and businesses operating in high-risk industries or sanctioned regions. This includes Australia, with their Anti-Money Laundering and Counter-Terrorism Financing Act (AML/CTF), that was updated at the end of last year.

• AI-driven AML compliance under scrutiny: Regulators want more transparency in AI-driven AML tools. Machine learning models used to detect financial crime must be fair, accurate, and easy to explain.

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In summary: What you need to know about your payment provider

For those using providers of payment services, check in on their latest KYC and AML practices, to make sure they’re up to date and fully compliant. This is essential for long-term stability, security, and trust in a partnership like this — beyond just avoiding fines. Remember: 

• In KYC, risk-based approaches, continuous monitoring, and multi-factor verification are now industry standards. 

• In AML, proactive compliance strategies, enhanced due diligence, and AI-driven fraud detection are vital for mitigating financial crime risks.

• On the regulatory front, compliance strategies must adapt quickly, especially when it comes to more rigorous AML enforcement, data privacy, and AI governance. Payment providers should react to updates swiftly, don’t accept lengthy time lags on this.

The fintech space is ever expanding, at speed — but fast payments at your fingertips, from anywhere, aren’t a novelty anymore. There’s growing concern about the privacy and security of the keenly interconnected way we make payments now. 

Only companies that have deployed the most secure KYC and AML methods have established a level of safety you can trust.