Money laundering is a global issue, with the United Nations estimating that between $800 billion and $2 Trillion are laundered each year, with 90% of this estimation remaining undetected. Money laundering is the act of taking money obtained through illegal activities and then introducing it into the system to legitimize or clean it and then make use of it. Originally, and most often, this was applied to the actions of organized crime but has expanded to included tax evasion or false accounting.
The United States has multiple laws to prevent this type of activity and reclaim the illegitimate assets from criminals aiming to circumvent the system. Many of these laws directly affect the financial institutions of the nation. American banking and investment businesses need to follow compliance regulations that help in the effort to combat money laundering, including FINRA’s (Financial Industry Regulatory Authority) Rule 2090 (KYC or Know Your Client). The Know Your Client rule was introduced by FINRA to require broker-dealers to use reasonable effort to verify the identity of customers (or any other account owners) and assess their risk level. Part of this goal is to add transparency to the financial institutions in America, especially following the 2007-2008 financial crisis, and incorporate Anti-Money Laundering (or AML) compliance into the structure of our institutions.
AML and KYC are extensions of the Bank Secrecy Act and the CDD (Customer Due Diligence) Rule. The act, created in 1970, aims, as the Financial Crimes Enforcement Network states, “to improve financial transparency and prevent criminals and terrorists from misusing companies to disguise their illicit activities and launder their ill-gotten gains.” So, through the Know Your Client rule, broker-dealers must evaluate the information provided by a potential customer and verify their identity against government documents and assess the risk level they pose towards financial crime.
This activity is a check for any indication of money laundering or terrorism financing. Part of this is a background check or a customer screening, checks beyond their identity. Using the customer’s identity, financial institutes check against various lists, like sanction lists, watch lists, and PEP lists to evaluate if the customer may be engaging in illegal activities.
Background checks get followed by continuous monitoring, allowing broker-dealers to better spot irregularities in the transactions. For instance, in the event of large cash transactions, those typically over $10,000. Amount exceeding this amount must be reported and monitored. All to say that many governments and non-government institutions require compliance to defend against this issue that gets taken very seriously. Throughout 2020, there were several institutions fined for violating AML related compliance. Kyckr compiled these together and found that:
- Twenty-eight financial institutions were issued fines for AML-related violations.
- Regulators from 14 countries issued AML-related fines.
- Fines totaled roughly $3.2 billion USD.
Failing to follow the laws and maintain compliance can have serious consequences for financial institutions. Ensuring that you do the proper level of due diligence, follow the Know Your Client rule, and perform a background check can protect your business.