Financial institutions and banks, no matter how small, have the potential to be used and abused by customers for the purpose of facilitating money laundering activities. Money laundering, which is the act of hiding the existence of money or the source of the money so that the source appears legitimate, is often used to facilitate criminal activities, corruption, tax evasion, and terrorist financing. Use of financial institutions to conduct these sorts of activities is all too frequent in the domestic and international banking system and financial industry, which is why many countries have developed rules and regulations concerning verifying the identity of customers, and have implemented other anti-money laundering policies.
What Are Know Your Customer Regulations and Anti-Money Laundering Programs?
Financial institutions that handle transactions are largely disconnected from the customers that use their services. The financial institution is effectively blind to what its customers might be doing when transferring funds or making a transaction, and could inadvertently and unknowingly be enabling customers to engage in criminal activity, terrorist financing, or money laundering. To help put a stop to money laundering activities in the financial and banking system, various countries have implemented Know Your Customer (KYC) regulations and other anti-money laundering policies.
Know Your Customer regulations are business processes designed to help financial institutions determine and establish the identity of a customer and to determine that the source of the funds are legitimate and not from criminal activities. These regulations allow financial institutions to manage risk better by identifying potentially problematic customers, or suspicious transactions. Financial institutions are required to comply with Know Your Customer regulations and the anti-money laundering policies for the various countries that they do business in. Compliance can get complicated since the laws can be slightly different in each country.
Anti-Money Laundering Initiatives of the USA PATRIOT Act
In the United States, the main anti-money laundering laws are embodied in the USA PATRIOT Act, which amended the Bank Secrecy Act. Under Section 352 of the USA PATRIOT Act, “financial institutions,” which include banks, credit card issuers and operators, credit unions, securities or commodities brokers and dealers, currency exchangers, insurance companies, investment banks, loan and finance companies, and several other types of individuals, establishments and institutions, such as pawnbrokers and precious stones and metal dealers, are required to establish anti-money laundering programs for the purposes of preventing the inadvertent support of terrorist financing and other criminal activities. These regulations also help authorities to detect instances of money laundering and to prosecute the perpetrators.
Some of the requirements that are placed on U.S. financial institutions by Section 35 of the USA PATRIOT Act include:
- Implementing internal programs and written policies to identify bank customers and to verify their identities;
- Implementing controls that detect and report suspected bank customers that are engaged in money laundering and other illegal activities;
- Designating a compliance officer to manage the bank’s compliance program;
- Instituting ongoing employee training for compliance issues; and
- Conduct audits of the institution’s compliance programs.
These regulations are meant to help financial institutions and banks assess customer risk, and to help these institutions in taking steps to manage that risk.
Consequences of Non-Compliance
Failure to implement effective compliance programs has serious consequences. If regulators determine that a financial institution is noncompliant, the financial institution can be fined civilly or criminally. Individuals could face jail time for criminal noncompliance. Additionally, the institution will be placed under scrutiny by regulators as the institution develops and implements a compliance program.
Tips For Know Your Customer and Anti-Money Laundering Compliance
It is important that banks and financial institutions comply with the regulations set forth by the USA PATRIOT Act. A few tips for banks regarding Know Your Customer and anti-money laundering compliance include:
- Work with an experienced compliance lawyer. A lawyer can help the bank develop a compliance program that satisfies compliance under the law.
- Designate a compliance officer who is specifically tasked with developing, implementing and enforcing the bank’s compliance program. The compliance officer should be well trained, and should have the authority and resources necessary to effectively implement and support the compliance program.
- Educate bank employees about compliance requirements and how the bank’s compliance program meets those requirements. Well-trained employees will better understand the importance of compliance and their role in the overall compliance program.
- Regularly test the compliance program. Testing, with a corresponding in-depth analysis of the results, will ensure employees are adhering to the bank procedures and protocol concerning Know Your Customer and anti-money laundering compliance.
Developing and implementing a Know Your Customer and anti-money laundering compliance program can be challenging, but compliance is absolutely critical. Non-compliance will result in strict regulatory supervision over the bank’s compliance efforts in the future.