Understanding AML and KYC – Explained Simply

This blog post is based on what I’ve learned and understood about AML (Anti-Money Laundering) and KYC (Know Your Customer).

I’ve done some research and tried to explain it in simple words. If anything needs more clarity or if I’ve missed something important, please feel free to let me know—I’m always open to learning more!

What is AML?

AML stands for Anti-Money Laundering. It refers to the rules and processes that help stop people from turning illegal money into legal money.

What is Money Laundering?

Money laundering means taking money earned through illegal activities and making it look like it came from a legal source. For example, money earned through:

• Gambling or betting,

• Drug trafficking,

• Havala (illegal money transfer),

• Tax evasion, and more.

  
  

Stages of Money Laundering:

1. Placement – This is when illegal money is first put into the financial system.

   • Structuring: Depositing money in small amounts to stay under the reporting limit.

   • Smurfing: Using different accounts or people to deposit the money.

2. Layering – Creating complicated transactions to hide where the money came from.

3. Integration – Once the money looks clean, it’s used for investments or business as if it were legal.

   
   

Who Monitors This?

Several important organizations help stop money laundering:

• FATF (Financial Action Task Force): A global body that creates guidelines for fighting money laundering and terrorism financing.

• FIU (Financial Intelligence Unit): A unit in each country that looks into suspicious financial activities.

• MLRO (Money Laundering Reporting Officer): The person in a company who reports suspicious transactions.

• Compliance Assistant Manager: If they find anything suspicious, they create a SAR (Suspicious Activity Report) which is sent for review and further investigation.

  
  

What is KYC?

KYC means “Know Your Customer.” It is the process used by financial institutions to verify who their customers are and understand their financial behavior.

There are three main steps:

1. Customer Identification Process (CIP) – Collecting ID documents like PAN, Aadhaar, passport, etc.

2. Customer Acceptance Process (CAP) – Making sure the customer’s details and documents are valid.

3. Customer Due Diligence (CDD) – Checking the customer’s financial background and risk level.

   
   

Risk Categories in KYC:

Based on the customer’s background, banks or forex companies divide them into risk categories:

• High Risk – Politically Exposed Persons (PEPs), High Net-Worth Individuals (HNIs).

• Medium Risk – Professionals like doctors, lawyers, and chartered accountants.

• Low Risk – Salaried employees, students, or retired individuals.

If someone crosses their usual transaction limit, a Transaction Monitoring System may raise a red flag to check for suspicious activity.

At that point, the same bodies we mentioned earlier—FATF, FIU, MLRO, and the Compliance Manager—may get involved.

Conclusion

This is what I have understood and researched about AML and KYC. I’ve tried to explain it in the most simple way possible. If you feel anything needs more explanation or if I’ve missed something important, please feel free to guide me—I’m always happy to learn and grow.

Disclaimer

This information is shared only for knowledge and educational purposes. It is based on my personal understanding and research. Please consult a certified professional or your organization’s compliance team for official guidance.