AML & KYC Interview Notes - Detailed Guide
1. Introduction to AML & KYC:
- **Anti-Money Laundering (AML)** refers to a set of regulations, laws, and procedures designed
to prevent criminals from disguising illegally obtained funds as legitimate income. It ensures that
financial institutions detect and report suspicious activities.
- **Know Your Customer (KYC)** is a process used by banks and financial institutions to verify the
identity of clients, assess their risk level, and ensure compliance with AML laws.
- KYC and AML are essential for preventing crimes like money laundering, terrorist financing, tax
evasion, and fraud.
2. Key AML Regulations & Frameworks:
- **Financial Action Task Force (FATF):** An intergovernmental body that sets global AML
standards and issues recommendations to combat money laundering and terrorist financing.
- **USA PATRIOT Act (U.S.):** Requires financial institutions to establish robust AML programs,
conduct due diligence, and report suspicious transactions.
- **EU Anti-Money Laundering Directives (AMLD):** A series of regulations adopted by the
European Union to strengthen AML and counter-terrorism financing (CTF) measures.
- **Bank Secrecy Act (BSA) (U.S.):** Mandates financial institutions to report transactions
exceeding $10,000 and maintain records to detect money laundering.
- **Prevention of Money Laundering Act (PMLA) (India):** Focuses on preventing and controlling
money laundering while confiscating illegally acquired property.
3. KYC Process & Importance:
- The KYC process includes identity verification, financial activity assessment, and ongoing
monitoring.
- **Steps in the KYC process:**
1. **Customer Identification Program (CIP):** Collects key information such as full name, date of
birth, address, and government-issued ID.
2. **Customer Due Diligence (CDD):** Assesses the risk associated with a customer based on
their financial activity.
3. **Ongoing Monitoring:** Regularly reviews transactions to detect suspicious behavior.
- **Why is KYC important?**
- Prevents fraud, financial crimes, and identity theft.
- Helps in regulatory compliance and avoids hefty fines.
- Protects financial institutions from reputational damage.
4. Customer Due Diligence (CDD) & Enhanced Due Diligence (EDD):
- **CDD:** Basic KYC measures applied to all customers.
- Verifies customer identity.
- Determines the nature of transactions and risk level.
- **EDD:** Additional verification for high-risk customers, such as politically exposed persons
(PEPs) or those from high-risk countries.
- Involves collecting extra documentation.
- Requires a deeper analysis of financial transactions.
- Ensures increased monitoring and reporting.
5. Red Flags & Suspicious Activity Reporting (SARs):
- **Red Flags Indicating Money Laundering:**
- Frequent large cash deposits and withdrawals.
- Sudden and unexplained changes in transaction patterns.
- Use of multiple accounts to move money.
- Transactions with high-risk countries or tax havens.
- **Suspicious Activity Reporting (SAR):**
- Financial institutions are required to report suspicious transactions to regulators such as the
Financial Crimes Enforcement Network (FinCEN) in the U.S.
- SARs must be filed within 30 days of detecting suspicious activity.
- Helps law enforcement agencies investigate and prevent financial crimes.
6. Role of Financial Institutions in AML Compliance:
- Implement risk-based AML programs to monitor customer activities.
- Maintain records of transactions and submit required reports.
- Conduct employee training programs on AML compliance.
- Use advanced technologies like AI and machine learning to detect fraudulent activities.
7. Common Interview Questions & Detailed Answers:
**Q1: What is AML, and why is it important?**
- AML is a regulatory framework designed to prevent financial crimes by monitoring and reporting
suspicious transactions.
- It is crucial to prevent illicit activities such as drug trafficking, fraud, and terrorism financing.
**Q2: What are the different types of KYC?**
- **Simplified Due Diligence (SDD):** Applied to low-risk customers with minimal documentation.
- **Customer Due Diligence (CDD):** Standard verification for most customers.
- **Enhanced Due Diligence (EDD):** Applied to high-risk individuals like politically exposed
persons (PEPs).
**Q3: How do you handle a high-risk customer?**
- Conduct EDD by gathering additional information, such as the source of funds.
- Increase transaction monitoring to detect suspicious activities.
- Report any red flags to regulatory authorities.
**Q4: What are some key red flags in AML compliance?**
- Structuring transactions to avoid reporting thresholds.
- Use of shell companies or complex corporate structures.
- Unexplained cash deposits or withdrawals.
**Q5: Explain the difference between CDD and EDD.**
- CDD is a basic identity verification process, while EDD involves additional scrutiny for high-risk
customers.
- EDD includes gathering more documentation, continuous monitoring, and higher reporting
obligations.
Conclusion:
AML and KYC are essential frameworks for ensuring financial transparency, preventing illegal
activities, and maintaining regulatory compliance. Financial institutions play a key role in
implementing robust AML policies and monitoring customer activities to mitigate risks.
