Identity Resolution Daily

Banks have a tough job to do. To stem the flow of dirty money to drug dealers and terrorists, U.S. banking regulators currently hold financial institutions responsible for customers that attempt to turn ill-gotten gain into clean cash. And soon, if a new bill makes its way through Congress, banks will also have to account for “reverse money laundering” — i.e., when clean cash ultimately funds dirty deeds.

In July, Congressman Geoff Davis of Kentucky introduced the Combating Terrorism Financing Act of 2007 (H.R. 3146), which according to his web site, “will help close loopholes in the current law to more effectively combat terrorist finance activities.”

We’ve covered at length here, here and here the problems with the BSA and its recent update, requiring an “institution to form a reasonable belief that it knows the true identity of its customers.” Congressman Davis’ H.R. 3146 does nothing to clarify what is the legal, enforceable definition of a bank’s responsibility to “form a reasonable belief.”

The new law will however

1. “Amend current law to prohibit domestic ‘reverse’ money laundering which is the transportation of large quantities of cash for the intended promotion of terrorism or other crimes;
2. “Prohibit money laundering through informal value transfer systems, such as hawalas and the Black Market Peso Exchange, using money from an unlawful activity whether it is part of single transaction or an arranged series of transactions;
3. “Allow law enforcement officials to temporarily freeze the bank accounts of those arrested in the U.S. in connection with moving funds in or out of the U.S.;
4. “Deem that checks without a dollar amount, a tactic used increasingly in money laundering to circumvent U.S. Customs reporting requirements, will have a value equal to the value of the funds in the bank account on which the check is drawn;
5. “Make it illegal to transport more than $10,000 in criminal proceeds by courier across State lines if the currency was either known to have been derived from an unlawful activity, such as drug trade, or knowing that the currency will be intended to promote an unlawful activity; and
6. “Permit the adding together of separate transactions, provided that the transactions are closely related in terms of time, the identities of the parties involved, and the manner conducted, to reach the $10,000 threshold thus making it illegal to be transported across State lines by courier.”

The problem with this new law to fight reverse money laundering is the same problem with current Anti-Money Laundering (AML) statutes. At present, the AML provisions of the USA PATRIOT Act and the Bank Secrecy Act (BSA), require banks to Know Your Customer (KYC) and Know Your Customer’s Customer (KYCC). But what the heck constitutes “reasonable belief” in your customer’s identity?

In No One Knows What Know Your Customer Really Means, we pondered a hypothetical bank customer who checks out with standard due diligence:

“…let’s assume that this hypothetical developer/exotic car aficionado/gambler happens to also be a terrorist financier, though that can’t be found on his resume. Now what would happen if a catastrophic terrorist attack succeeds due to funding from this gentleman and the subsequent forensic investigation ties him to the crime? Would the bank be fined for not knowing this customer well enough?”

Unfortunately, banks are still caught between knowing their customers and knowing what banking regulators want them to know about their customers. And now with reverse money laundering possibly becoming a compliance issue, the problem will get worse.

Here’s a hypothetical from The Terror Finance Blog:

“A major bank in the United States is ‘acquiring’ currency from major banks in Paraguay, shipping the money to the U.S.via a cash courier, and then wiring it to designated foreign locations. […] Unknown to the cash courier, the ultimate controller of the funds is a Hezbollah bomb maker, who indirectly owns a travel agency from which the currency originates, as well as ensures that the ultimate destination of the money is Hezbollah in Lebanon. Thus, the cash begins clean, and ends up dirty.”

If your bank performed due diligence on the source of the clean money (the travel agency), would you detect the indirect ownership from the Hezbollah bomb maker? If the ownership didn’t turn up, would federal regulators be satisfied that you had done everything in your power to form a reasonable belief in the owners’ identities?

Banks clearly need to go beyond what federal regulators require.

Until the BSA is redrafted to clearly outline what is and is not required of AML officers, identity resolution software is the best way to protect banks from this ambiguous law. With an identity resolution solution that uses sophisticated similarity search techniques to resolve multiple identities into one unified view, your bank can go beyond subjective “reasonable” certainty to really know who is who and who knows who.

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This entry was posted on Tuesday, September 4th, 2007 at 4:23 pm and is filed under AML, Anti-Money Laundering, Banking, Identity Resolution, Federal Government. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.