Financial institutions and other businesses may be subject to Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements. The Bank Secrecy Act, as amended by the USA Patriot Act, sets forth procedures by which such institutions are required to vet their customers and know where their funds are coming from. These procedures are designed to limit the ability of criminals and terrorists to launder money through the financial system.
Anti-money laundering is important to understand and prevent because it causes economic distortions and disruptions in every economy it touches. If, for example, there is an individual who is flush with funds from a criminal enterprise, his or her primary concern is “legitimizing” (called “integrating”) the funds through businesses, real estate, collectibles, or other methods. Whether he or she gets a return on capital is secondary, since there is so much money coming in that actually running a legitimate and profitable business is of secondary concern. So what happens? This person will open up, say, a bicycle shop and load it up with inventory that can be sold at some price to unknowing buyers who are paying “clean” cash for the bikes. The money launderer is happy to discount the bikes well below competitors’ prices since, as noted, actual profitability is of secondary importance. This puts extreme pressure on competing, legitimate bike sellers who cannot offer the same discounts, forcing them out of business. Once the money launderer has captured significant market share through this predatory pricing, he or she is free also to raise prices, further enriching him or her, all of which has come at the expense of legitimate business people.
The Know Your Customer (KYC) process is one in which a business or individual provides proof of his or her identity to a financial institution, escrow agent or other services provider. The goal of the Know Your Customer laws is to assign to the person being reviewed a risk score based on whether that person is on any one of numerous lists of people known to be involved in criminal activity. There are software packages that support this type of investigation, which pull together background information about individuals in a comprehensive format.
This discovery process often comes under the header of “Customer Due Diligence”. In short, covered institutions must take steps that are reasonably designed to prevent that institution from being used by terrorists, narco traffickers and others seeking to hide or integrate criminal funds. The process is often cumbersome from the customer’s standpoint, however, these processes are often necessary to maintain the integrity of the global financial system.
Part of complying with these laws requires ongoing reviews of internal policies and procedures, and the appointment in some cases of a Compliance Officer charged with overseeing these types of reviews and ongoing compliance matters.
Contact us for more information about how the Anti-Money Laundering and Know Your Customer laws apply to your business, and steps you must take to come into compliance.