KYC and AML Requirements for Cross-Border Payments

Cross-border payments move trillions of dollars annually, creating both opportunity and risk. In 2024, global regulators issued $4.6 billion in AML fines to financial institutions that failed to meet Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements. TD Bank alone faced $3.09 billion in penalties, the largest fine ever imposed under the Bank Secrecy Act, after compliance failures enabled over $670 million in money laundering.

The stakes extend beyond regulatory fines. 25% of financial companies surveyed lost over $1 million to fraud in 2023, according to research from Alloy. Money laundering itself accounts for an estimated 2 to 5% of global GDP, or $800 billion to $2 trillion annually, per the United Nations Office on Drugs and Crime (UNODC).

For financial institutions processing cross-border payments, robust KYC and AML programs are no longer optional. They are fundamental to risk management, regulatory compliance, and maintaining access to the global financial system.

What is KYC (Know Your Customer)?

Know Your Customer (KYC) is the process financial institutions use to verify the identity of their customers before establishing a business relationship. For cross-border payments, KYC procedures ensure the person or entity sending or receiving funds is who they claim to be.

KYC verification typically requires:

• Government-issued identification (passport, driver's license, or national ID card)
• Proof of residential address (utility bill, bank statement, or lease agreement)
• Date of birth confirmation
• Full legal name verification
• For businesses: beneficial ownership information (individuals owning 25%+ of the entity)

The KYC process happens at onboarding and must be updated when customer circumstances change significantly. Financial institutions cannot process payments for customers they haven't properly verified. This is a fundamental requirement across all major jurisdictions.

In H1 2024, KYC-related fines increased 102%, reaching $51 million, according to Fenergo's analysis of global enforcement actions. The data shows regulators are intensifying scrutiny of identity verification failures.

What is AML (Anti-Money Laundering)?

Anti-Money Laundering (AML) refers to the laws, regulations, and procedures designed to prevent financial crimes including money laundering, terrorist financing, and fraud. While KYC focuses on identity verification, AML encompasses the ongoing monitoring and detection systems that prevent illicit financial flows.

AML programs include:

• Customer due diligence (CDD) and risk assessment
• Transaction monitoring for suspicious patterns
• Sanction lists screening (OFAC, UN, EU designations)
• Politically exposed persons (PEPs) identification
• Suspicious activity reporting to regulators
• Record-keeping and audit trails
• Employee training on financial crime detection

The Financial Action Task Force (FATF), the global standard-setter for AML/CFT compliance, works with international bodies to combat money laundering. Money laundering accounts for an estimated 2 to 5% of global GDP, approximately $800 billion to $2 trillion annually, per UNODC data.

Transaction monitoring penalties increased 100% year-over-year to $3.3 billion in 2024, demonstrating that regulators are focusing enforcement on institutions that fail to detect suspicious activity.

KYC procedures for cross-border payments

Identity verification forms the first line of defense in KYC procedures. Financial institutions must collect and verify specific data points before onboarding customers for cross-border payment services.

At minimum, KYC regulations require verification of full legal name, date of birth, residential address, and nationality. For individuals, this typically means submitting government-issued documents such as passports, driver's licenses, or national ID cards.

FinCEN's Customer Due Diligence Requirements (CDD Final Rule) establish four core elements:

1. Customer identification and verification
2. Beneficial ownership identification and verification
3. Understanding the nature and purpose of customer relationships
4. Ongoing monitoring

The verification process varies by jurisdiction and risk level. In the US, the Bank Secrecy Act (BSA) requires financial institutions to verify identity using documentary methods (examining government-issued ID) or non-documentary methods (checking databases and records). 

The EU's 6th Anti-Money Laundering Directive (6AMLD), adopted in May 2024, strengthens requirements by expanding the list of predicate offenses to 22 categories, increasing minimum prison sentences to four years, and extending criminal liability to legal entities.

For businesses sending or receiving cross-border payments, beneficial ownership verification identifies individuals who ultimately own or control 25% or more of the entity. This prevents criminals from hiding behind shell companies. FinCEN's CDD Rule requires financial institutions to collect beneficial ownership information at account opening and verify the identity of each beneficial owner.

Customer due diligence (CDD) levels

Not all customers present the same level of risk. Financial institutions apply different levels of scrutiny based on the customer profile, transaction types, and geographic factors. The three levels of customer due diligence are standard, enhanced, and simplified.

Standard CDD applies to most customers and includes basic identity verification, address confirmation, and purpose of the business relationship. Standard procedures satisfy regulatory minimums for low-risk customers.

Enhanced due diligence (EDD) applies to higher-risk scenarios:

• Politically exposed persons (PEPs) and their family members
• Customers from high-risk jurisdictions identified by FATF
• Correspondent banking relationships
• Private banking for high-net-worth individuals
• Cash-intensive businesses
• Complex corporate structures with unclear beneficial ownership

Enhanced procedures include additional documentation, senior management approval, source of funds verification, and more frequent monitoring. Global financial crime compliance costs reached $274 billion in 2022, per LexisNexis data, with enhanced due diligence representing a significant portion of these expenses.

Simplified CDD may apply to low-risk customers in certain jurisdictions, such as government entities or publicly listed companies subject to regulatory disclosure requirements. However, simplified procedures are rare in cross-border payment contexts due to the inherently higher risk of international transactions.

AML program components

Effective AML programs combine multiple layers of controls to detect and prevent financial crime. The core components work together to identify suspicious activity before it results in material harm.

Sanctions screening checks customers and transactions against government-maintained lists of designated individuals and entities. In the US, the Office of Foreign Assets Control (OFAC) maintains sanctions programs. The EU and UN publish their own designation lists. Financial institutions must screen at onboarding and continuously monitor for list updates. Starling Bank's $28.9 million fine from the UK FCA in 2024 stemmed largely from sanctions screening failures.

Politically exposed persons (PEPs) screening identifies individuals who hold or have held prominent public positions. PEPs present heightened corruption risk due to their position and influence. Family members and close associates of PEPs also require enhanced scrutiny. Financial institutions must determine if customers are PEPs, apply enhanced due diligence, and obtain senior management approval before establishing the business relationship.

Ongoing monitoring doesn't end after onboarding. Financial institutions must review customer transactions for patterns inconsistent with the expected business activity. Monitoring systems flag unusual transaction amounts, frequencies, or destinations for investigation.

Transaction monitoring systems use rule-based and machine learning approaches to detect suspicious patterns. Common red flags include:

• Rapid movement of funds immediately after receipt
• Transactions just below reporting thresholds (structuring)
• Payments to or from high-risk jurisdictions
• Business activity inconsistent with stated purpose
• Round-dollar amounts unusual for the business type

When monitoring systems identify potential issues, compliance teams investigate and determine whether to file a Suspicious Activity Report (SAR) with regulators.

Regulatory requirements by region

KYC and AML requirements vary significantly across jurisdictions, creating compliance complexity for financial institutions operating globally. Understanding regional differences is essential for cross-border payment providers.

United States

The Bank Secrecy Act (BSA) and subsequent regulations form the foundation of US AML requirements. The Financial Crimes Enforcement Network (FinCEN) enforces BSA compliance.

Key US requirements include:

• Customer Identification Program (CIP) to verify identity at account opening
• Beneficial ownership identification for legal entities
• Suspicious Activity Report (SAR) filing for transactions above $5,000 suspected of money laundering
• Currency Transaction Reports (CTR) for cash transactions exceeding $10,000
• OFAC sanctions screening
• Independent AML program testing

North America accounted for 95% of the $4.6 billion in global financial penalties in 2024, with US regulators issuing over $4.3 billion in fines. This enforcement intensity makes US compliance especially critical for cross-border payment providers.

European Union

The EU's 6th Anti-Money Laundering Directive (6AMLD), adopted in May 2024, harmonizes AML enforcement across member states. The directive expands predicate offenses to 22 categories, increases minimum sentences to four years, and extends liability to legal entities.

EU member states maintain their own supervisory authorities, but all must comply with:

• Customer due diligence requirements
• Beneficial ownership registers
• PEPs identification and enhanced due diligence
• Transaction monitoring
• Suspicious transaction reporting
• Record retention for at least five years

United Kingdom

Post-Brexit, the UK maintains its own AML framework separate from EU directives. The Financial Conduct Authority (FCA) supervises most financial institutions.

UK requirements mirror EU standards in many areas but with some differences:

• Money Laundering Regulations 2017 (MLRs) set baseline requirements
• Proceeds of Crime Act 2002 (POCA) criminalizes money laundering
• Senior management accountability regime holds executives personally liable
• Enhanced reporting requirements for high-risk customers

Latin America

LATAM jurisdictions have strengthened AML frameworks in recent years, driven by FATF recommendations. Requirements vary by country but generally include customer identification, beneficial ownership verification, transaction monitoring, and suspicious activity reporting.

Brazil, Mexico, Colombia, and Argentina have particularly robust frameworks aligned with international standards. These markets require local regulatory registrations and compliance with domestic AML rules, not just home-country regulations.

Asia-Pacific

APAC AML requirements range from highly developed (Singapore, Hong Kong, Australia) to emerging frameworks in Southeast Asian markets. Singapore's Monetary Authority and Hong Kong's Financial Services and Treasury Bureau enforce strict standards comparable to US and EU requirements.

Financial institutions operating across APAC must navigate country-specific requirements while maintaining consistent risk management standards. The region's rapid fintech growth has intensified regulatory focus on digital payment providers.

How financial institutions implement KYC and AML compliance

Building an effective compliance program requires combining technology, processes, and trained personnel. The implementation approach depends on the institution's size, customer base, and risk profile.

Technology infrastructure

Identity verification platforms automate document collection, validate government-issued IDs using optical character recognition (OCR), perform biometric verification through liveness detection, and check customers against sanctions and PEPs lists in real time.

Transaction monitoring systems analyze payment patterns to flag unusual activity. Machine learning models improve detection accuracy by learning normal behavior patterns for different customer segments.

Compliance teams and risk-based approach

Compliance teams review flagged transactions, conduct investigations, and determine whether activity warrants filing a SAR. Experienced analysts distinguish legitimate business activity from suspicious behavior.

Resources get allocated based on customer risk profiles:

• Low-risk customers receive automated verification and routine monitoring
• High-risk customers trigger enhanced due diligence, additional documentation requirements, and senior management review

Training and testing requirements

Regular training ensures staff understand their obligations and recognize red flags. Financial institutions must train employees on AML policies, sanctions requirements, suspicious activity indicators, and reporting procedures.

Independent testing validates program effectiveness. Most jurisdictions require independent AML program audits at least annually to assess whether controls operate as designed.

Common KYC and AML compliance challenges for cross-border payments

Financial institutions processing international payments face practical difficulties implementing compliance requirements across multiple jurisdictions.

False positives and data quality

Monitoring systems flag legitimate transactions as suspicious, overwhelming compliance teams with investigations. When 90%+ of alerts are false positives, resources get wasted on non-issues rather than genuine threats. Data quality issues compound the problem. Customers submit incomplete documents, third-party data sources contain errors, and inconsistent name formats make matching difficult.

Regulatory complexity across markets

Requirements differ by jurisdiction. Some markets mandate specific technology approaches or require local data storage. Staying current across multiple regulatory regimes requires significant resources.

Customer friction and resource constraints

Cumbersome verification processes cause customers to abandon onboarding. Financial institutions must balance security requirements with user experience. Smaller institutions struggle with the cost of AML technology, skilled personnel, and ongoing training. Some partner with larger institutions or compliance service providers rather than building in-house capabilities.

Best practices for KYC and AML compliance

Financial institutions can improve compliance effectiveness by following proven approaches that balance regulatory requirements with operational realities.

Risk-based segmentation

Not every customer requires the same level of scrutiny. Effective compliance programs develop clear risk criteria based on customer type and business model, transaction patterns and volumes, and geographic factors including high-risk jurisdictions. This approach allows institutions to apply standard procedures to low-risk customers while reserving enhanced due diligence for situations that warrant it.

Automation and integration

Modern compliance programs automate routine verification tasks, freeing compliance teams to focus on complex investigations. Technology handles document verification, database checks, and sanctions screening faster and more consistently than manual processes.

The most effective programs integrate compliance into the customer experience rather than treating it as a separate hurdle. This means embedding verification steps into the onboarding flow and providing clear instructions throughout.

Documentation and monitoring

Detailed documentation of every compliance decision is essential. Regulators expect financial institutions to demonstrate their reasoning when they onboard high-risk customers or file SARs. Records must be maintained for the required retention period, typically 5 to 7 years.

Staying current with regulatory developments across all markets where you operate requires ongoing attention. This includes subscribing to regulator publications, participating in industry associations, and engaging compliance consultants for complex jurisdictions.

Training, testing, and partnerships

Regular training extends beyond compliance staff to all employees. Front-line personnel often encounter suspicious activity first but may not recognize red flags without proper training.

Regular testing through independent audits and self-assessments helps identify deficiencies before regulators do. Many institutions also partner with specialized providers when building in-house capabilities isn't feasible. Compliance technology vendors and managed service providers offer solutions that smaller institutions cannot develop independently.

Due handles KYC and AML compliance so you can focus on growth

KYC and AML compliance shouldn't slow down your cross-border payment operations. Traditional compliance programs require months to build, dedicated teams to manage, and constant updates to keep pace with regulatory changes across multiple jurisdictions.

Due's payment infrastructure embeds enterprise-grade compliance directly into cross-border payment flows, enabling fintech companies to launch compliant products without building KYC and AML programs from scratch.

• Multi-currency accounts: Open non-custodial accounts with built-in KYC verification in under 2 minutes. Hold and convert funds across 80+ currencies with automated identity verification and ongoing sanction screening.
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• Cross-border payouts: Send compliant payments to 80+ countries with automatic OFAC, UN, and EU sanction list screening. Transparent pricing with wholesale FX rates and instant settlement through local rails or stablecoin networks.
• Developer API: Integrate SOC2 Type II certified payment infrastructure with full programmatic control. Non-custodial wallet architecture means you control the keys while Due handles compliance, verification, and ongoing monitoring.

Book a demo to learn how Due's compliance infrastructure can accelerate your launch timeline.

Disclaimer: This article is provided for informational and educational purposes only and does not constitute legal, compliance, or professional advice. Regulatory requirements vary by jurisdiction and are subject to change. Organizations should consult with qualified legal and compliance professionals regarding their specific obligations.