KYC and AML Regulations: The Regulatory Framework Explained

The Relationship Between KYC and AML

KYC is the primary compliance tool within the AML (Anti-Money Laundering) framework. While AML is the regulatory regime that defines obligations, KYC is the practical process that businesses implement to fulfil them.

Without KYC, AML compliance is impossible. Without AML, KYC would have no reason to exist.

Evolution of AML Regulation in Europe

First AML Directive (1991)

Established the foundations of the European prevention system: the obligation to identify customers and report suspicious transactions. It applied primarily to financial institutions.

Second AML Directive (2001)

Extended scope to non-financial professionals (lawyers, accountants, notaries) and improved international cooperation mechanisms following the 9/11 attacks.

Third AML Directive (2005)

Introduced the concept of the risk-based approach: businesses must adapt the intensity of their controls to the risk level of each customer and transaction.

AMLD4 — Fourth Directive (2015)

Significant changes:

• Obligation to identify the beneficial owner of transactions.
• Creation of central beneficial ownership registers.
• Strengthened sanctions.
• Application to online gambling platforms.

AMLD5 — Fifth Directive (2018)

Adaptation to the digital economy:

• Extension to cryptocurrency exchanges and virtual wallet providers.
• Public access to beneficial ownership registers.
• Mandatory enhanced due diligence for transactions with high-risk countries.
• Greater controls on prepaid cards and anonymous electronic money.

AMLD6 — Sixth Directive (2020)

Criminal enforcement strengthened:

• Harmonised definition of money laundering offences across the EU.
• Corporate criminal liability (not just individuals).
• Minimum prison sentences of 4 years for money laundering offences.
• Expanded predicate offences (tax crimes, cybercrime).

AML Package 2024-2025

The most ambitious reform to date:

• Creation of AMLA (Anti-Money Laundering Authority), a new European authority headquartered in Frankfurt.
• AML Regulation directly applicable in all member states (no transposition required).
• EUR 10,000 limit on cash payments across the EU.
• Extension of obligations to new sectors: luxury goods dealers, football clubs, crypto-asset agents.

UK Regulatory Framework

The UK's AML regime operates independently post-Brexit, but remains closely aligned with international standards:

• Money Laundering Regulations 2017 (as amended in 2019 and 2022) — the core statutory instrument.
• Proceeds of Crime Act 2002 (POCA) — establishes money laundering as a criminal offence and creates the Suspicious Activity Report (SAR) regime.
• FCA Handbook — sets out detailed KYC and AML requirements for financial services firms.
• HM Treasury sanctions lists — must be screened in every KYC process.
• Office for Professional Body Anti-Money Laundering Supervision (OPBAS) — oversees professional body supervisors.

The National Crime Agency (NCA) receives and analyses Suspicious Activity Reports (SARs) from regulated firms.

US Regulatory Framework

The United States has a layered AML regime:

• Bank Secrecy Act (BSA, 1970) — the foundational AML law requiring financial institutions to maintain records and file reports.
• USA PATRIOT Act (2001) — expanded KYC requirements, introduced Customer Identification Programs (CIPs).
• FinCEN CDD Rule (2016) — requires covered financial institutions to identify and verify beneficial owners.
• Corporate Transparency Act (2021) — mandates beneficial ownership reporting to FinCEN.
• OFAC sanctions — administered by the Treasury Department, screening is mandatory.

MiCA Regulation and Crypto-Assets

The Markets in Crypto-Assets (MiCA) Regulation, in force since 2024, has unified obligations for the crypto sector across the EU:

• All crypto-asset service providers need authorisation.
• Full KYC required for all transactions (no minimum thresholds).
• Traceability of crypto-asset transfers (Travel Rule).
• Capital and governance requirements for exchanges.

This directly affects exchanges, custodians, DeFi platforms with centralised components, and stablecoin issuers. In the UK, the FCA's registration regime applies similar requirements. In the US, FinCEN treats crypto exchanges as MSBs under the BSA. See crypto solution.

How Regulations Affect Your Business

If you are a fintech

You need:

• Full KYC at onboarding for every user.
• Ongoing transaction monitoring.
• A documented compliance programme.
• A designated compliance officer (MLRO in the UK).

See fintech solution.

If you sell high-value goods

You need:

• Identity verification on cash transactions above GBP/EUR 10,000.
• Source of funds checks when the risk profile requires it.
• Retention of compliance records.

See luxury solution.

If you operate a marketplace

You need:

• Seller verification to prevent fraud.
• Transaction monitoring for suspicious activity.
• A procedure for reporting unusual transactions.

See marketplace solution.

Frequently Asked Questions

When does AMLA become operational?

AMLA will be fully operational in 2026. The new AML Regulation will be directly applicable without requiring national transposition in EU member states.

Does MiCA apply to DeFi?

MiCA applies to centralised crypto-asset service providers. Truly decentralised protocols (with no intermediary) currently fall outside its scope, although this is under review.

Does the UK have stricter requirements than the EU?

In some respects. The UK's SAR regime requires reporting even when suspicion is below the threshold of certainty. The FCA has also taken an aggressive enforcement posture, particularly with crypto firms, where a large number of registration applications have been rejected.

Can I use a KYC provider based in another country?

Yes, provided the provider complies with the regulations applicable in your jurisdiction and you can demonstrate that the controls are equivalent to those required locally. For a full list of who must comply, see our guide on regulated entities.

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Need to align your compliance with the latest regulations? The experts at Joinble help you implement KYC that meets all current and upcoming regulatory requirements.