Inside Payment Compliance: Navigating KYC and AML Requirements

The growth of digital payments has prompted lawmakers to introduce regulations that safeguard payments from fraud and hacks. Fraudsters often target unwary customers, creating a vicious cycle that harms businesses, customers, and market reputations. Payment regulations address these risks. These laws and standards govern the entire payment processing system, and you must adhere to them to conduct business successfully.

Payment processing is vital for any business, especially those that accept online transactions. As digital payments become standard, keeping up with compliance has never been more important. Following rules helps protect your business from fraud, security breaches, and regulatory penalties.

In this article, we will explore what KYC and AML are, the differences between AML and KYC, and how they work in conjunction with each other. We will also discuss who regulates payment compliance and outline best practices for effective AML and KYC compliance in 2025.

What is KYC?

Know Your Customer (KYC) is the process of verifying a customer’s identity when they open or use a financial service. It’s the first line of defence in understanding who you’re doing business with.

KYC requires you to collect and verify essential customer information, including full legal names, addresses, dates of birth, and government-issued identification. For businesses, it is essential to understand ownership structures, beneficial owners, and the nature of their operations.

KYC Checks Typically Involve:

Verifying identity documents
Assessing proof of address
Conducting background screening (PEP/sanctions)
Performing ongoing customer due diligence (CDD)

These measures help prevent fraud, mitigate financial risk, and confirm that clients genuinely are who they claim to be — all before any transactions take place.

At the same time, the KYC process itself consists of 3 stages:

Customer Identification Programs (CIP) – to verify basic identity information
Customer Due Diligence (CDD) – to assess risk levels and transaction patterns
Enhanced Due Diligence (EDD) – to apply additional security to high-risk customers.

What is AML?

Anti-Money Laundering (AML) is a set of laws, rules, and procedures designed to prevent criminals from integrating illicit funds into legitimate financial systems. These rules were created because financial crimes have become more advanced. AML helps identify, track, and report suspicious financial activities, such as money laundering, terrorist funding, or other forms of fraud.

AML measures primarily identify and mitigate the risks associated with money laundering, ensure compliance with relevant legislation, and maintain the integrity of the financial system. Financial institutions must establish robust AML frameworks, implement effective monitoring systems, conduct due diligence, and report suspicious activities to the appropriate authorities.

AML compliance within the payments industry helps identify irregular activity, prevent suspicious transactions, and safeguard the integrity of the financial ecosystem. By establishing effective AML measures, payments professionals not only fulfill regulatory requirements but also take responsibility for promoting transparency and security across all financial operations.

What is the difference between AML and KYC, and how do they work together?

Understanding the difference between KYC and AML is vital for building a well-integrated compliance strategy.

KYC focuses on customer identification, while AML monitors ongoing activities throughout the customer lifecycle. Together, they form a complete compliance approach.
KYC occurs mainly during onboarding and periodic reviews. AML continuously analyzes all transactions in real time.
KYC creates the foundation for effective AML monitoring. Without proper customer identification and risk assessment, AML systems cannot accurately detect suspicious activities or generate meaningful alerts.

Talking about the way AML and KYC work together:

The process starts when you identify the customer through KYC procedures. This preliminary evaluation defines the customer’s identity, risk level, and anticipated transaction behavior, and it creates the reference framework that supports ongoing AML monitoring.
AML transaction monitoring systems rely on KYC data to understand each customer’s typical behavior and transaction patterns. When activity differs from these patterns, automated alerts prompt review. This integrated process customizes monitoring to each client’s risk profile, ensuring that suspicious behaviors are detected based on clear, established baselines.
Risk assessment is the ongoing link between KYC and AML, updating each customer’s profile dynamically as new activity is detected. When AML systems flag shifts in behavior or transaction patterns, these updates are reflected in the KYC profile. This ensures that risk assessments are always informed by the latest information from both processes, reinforcing continuous and integrated compliance.
Integration is also important for official reporting. KYC data provides suspicious activity reports with more detailed information about the customer. This helps regulators see what happened and why the behavior may be suspicious.

Who regulates payment compliance?

1. Global Regulatory Bodies

Payment Card Industry Security Standards Council (PCI SSC)

The Payment Card Industry Security Standards Council (PCI SSC) is a global regulatory body for payments. It was created to protect payments, payment information, and processes worldwide. Any business, of any size, must follow PCI rules if it accepts payment cards from Visa, MasterCard, American Express, Discover, or JCB. You must meet PCI Data Security Standards if your company stores, processes, or handles card data, even if it is encrypted. PCI-compliant companies utilize PKI to safeguard internet transactions.

This long-standing industry association establishes global security standards for card payments. Its flagship framework, the PCI Data Security Standard (PCI DSS), defines mandatory data protection requirements. Most payment processors and merchants handling card transactions must adhere to this standard.

Financial Action Task Force (FATF)

FATF is an independent intergovernmental body responsible for establishing global standards to combat money laundering and terrorist financing.

Started by the G7, the FATF creates AML and KYC guidelines worldwide, including in Europe. The FATF has 40 members, including all EU states, and collaborates with numerous partner countries to assist them in establishing robust AML/KYC regulations.

The FATF maintains “black” and “grey” lists to indicate which countries have weak AML policies that could pose a risk to the financial system. Countries on these lists must fix their AML and KYC issues to be removed.

The FATF’s advice influences AML and KYC regulations in each country. These guidelines help nations build their own compliance systems and IT support.

2. Regional Regulatory Bodies

Europe:

The European Commission leads the launch of directives, including the one on payments, the Revised Payment Services Directive (PSD2), which coordinates payment laws within the EU. Each EU member state has appointed its National Competent Authority (NCA) to implement these directives in its region and territories.

The most important organisations tasked with managing KYC and AML compliance in the EU include:

European Banking Authority (EBA)

The EBA, established in 2011 in France, is an EU authority responsible for banks. It aims to maintain a safe, transparent, and stable sector. It also promotes fair business among EU banks and can overrule national regulators.

The EBA made AML and KYC rules in the EU more uniform. Now, banks in all member states must follow the same standards. This means banks from weakly regulated countries no longer have an advantage.

European Commission

For AML and KYC, the European Commission suggests new laws and policies. Supervisory groups, such as the European Banking Authority, help put these rules in place. The European Commission also proposed the original General Data Protection Regulation (GDPR), which was later accepted by the European Parliament and the Council of the EU.

Europol & Eurojust

Europol and Eurojust are EU agencies that fight serious cross-border crime. They help with investigating and prosecuting money laundering and other financial crimes in Europe. Since the EU has many legal systems, strong teamwork is needed. These agencies help make this possible.

North America

The regulatory landscape in North America is relatively more complex. Federal agencies, such as the Federal Trade Commission and the Consumer Financial Protection Bureau, regulate payment compliance in the United States, and two tiers of state laws also cover this area. It is essential to note that Canada has few specific rules and regulations governing credit companies, which are managed by the Financial Consumer Agency of Canada (FCAC).

Asia/Pacific Region

AML regulations vary considerably across the Asia-Pacific (APAC) region. In Singapore, the Corruption, Drug Trafficking, and Other Serious Crimes Act 1992 (CDSA) and the Financial Services and Markets Act 2022 are the primary regulations governing AML, supplemented by additional legislation, such as the Payment Services Act 2019. Obligations for regulated entities under these rules include:

Identifying and knowing their customers (KYC)
Identifying beneficial owners of assets
Conducting regular account reviews to identify signs of financial crime
Monitoring and reporting any suspicious transactions.

For Hong Kong, the key AML legislation is the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO), supported by the Banking Ordinance (BO). Requirements of these regulations include:

Implementing and maintaining a risk-based compliance program
Carrying out CDD and KYC procedures
Maintaining ongoing customer monitoring
Reporting suspicious transactions to authorities
Keeping detailed records
Arranging regular independent audits.

The four core AML regulatory bodies in the APAC region are the Monetary Authority of Singapore (MAS), the Hong Kong Monetary Authority (HKMA), the Australian Transaction Reports and Analysis Centre (AUSTRAC), and the Australian Treasury. They adopt a proactive stance, working closely with financial institutions and stakeholders.

This hands-on approach ensures compliance and enhances the security of the payments sector. MAS and HKMA emphasize collaboration and real-time supervision, while AUSTRAC focuses on emerging payment methods. The Australian Treasury continually reforms regulations to address new risks. This collaboration is crucial for maintaining a secure payments ecosystem amid the evolving financial crime landscape.

The regulatory requirements for Know Your Customer (KYC) compliance in the APAC region vary across different sectors, including banking, insurance, and securities, to address their unique operational risks. In the banking sector, regulators mandate comprehensive customer due diligence (CDD) and enhanced due diligence (EDD) for high-risk customers, requiring banks to verify identities, understand business relationships, and monitor transactions for suspicious activities. Advanced technologies such as biometric verification and electronic KYC (e-KYC) are also encouraged to streamline processes and enhance accuracy.

3. Payment Networks

The same principle applies to customer-level regulation overseen by major payment networks such as Visa and Mastercard, which actively develop their own compliance frameworks. These global networks establish specific operational and security rules that member banks and financial institutions must follow when processing transactions through their systems.

In many instances, these internal requirements go beyond the PCI DSS standards, encompassing broader elements of security, risk management, and transaction integrity.

Best practices for effective AML and KYC compliance in 2025

Lowering legal and reputational risks. By adhering to AML regulations, businesses can protect their reputation while avoiding substantial regulatory fines and penalties.
Detecting fraudsters. In the financial services industry, fraudsters not only use fake IDs but also employ a range of sophisticated schemes, including money muling. By ensuring that only verified users can become customers, businesses can effectively curb even the most sophisticated and innovative fraud attacks.
Improving user experience. When businesses optimize their KYC/AML flows according to applicant risk profiles, users don’t have to pass extra checks. This reduces drop-offs and improves the user experience.
Effective case management tools. These help to ensure compliance requirements are met, cases are handled consistently, resources are allocated efficiently, reports can be generated quickly, and all information is recorded in one place.
Keeping comprehensive records. Most AML regimes require records to be kept for a certain time period (five years is common).
Independent audits. The Company’s AML compliance program should be regularly reviewed by independent experts to verify its effectiveness and identify any areas that require improvement.

In the modern payments ecosystem, compliance with KYC and AML standards is not a regulatory formality but a cornerstone of financial integrity and trust. Effective compliance programs strike a balance between risk management, operational efficiency, and customer experience, ensuring institutions remain competitive while maintaining transparency.

KYC establishes the foundation of customer trust through identity verification and risk assessment, while AML provides continuous oversight of financial behavior to detect anomalies and prevent illicit activity. Their synergy forms a dynamic, self-correcting system—one that evolves in tandem with global trends in financial crime.

Regulatory expectations from organizations such as FATF, PCI SSC, and regional authorities continue to expand, demanding that payment providers embed compliance into every layer of their operations. Businesses that adopt risk-based, technology-driven frameworks and conduct regular audits will not only mitigate legal exposure but also enhance credibility and customer loyalty.

Ultimately, achieving compliance excellence lies in striking a balance between regulation and innovation. Companies that invest in robust verification systems, risk-based due diligence, and continuous improvement through independent audits position themselves as trustworthy players in an industry where credibility is paramount.

The content of this article is intended to provide a general guide to the subject matter, not to be considered as a legal consultation.