No One Knows What Know Your Customer Really Means
Remember Riggs Bank, the Washington, DC-based bank that was fined $25 million dollars in May of 2004 for helping former General Pinochet launder his money? With tighter Anti-Money Laundering (AML) regulations enforced by the Bank Secrecy Act and the USA Patriot Act, a scandal like this one could never happen again, right?
Think again.
To fight money laundering activities, U.S. banks have increased spending on AML programs by 71 percent over the last three years, according to recent KPMG press release. Despite the increased spend, it’s still not enough. KPMG’s Teresa A. Pesce, is quoted in the July 9th release as saying:
“‘Many AML executives may have a view that they have invested so heavily in IT systems and hiring experienced professionals that they do not need to focus on tactical and relevant strategic compliance and monitoring issues.’ […] She cautioned, however, that AML remains a very critical issue, particularly since 7 percent of North American bank executives reported their institutions were not in compliance with U.S. Patriot Act testing requirements.”
Note that 7 percent “reported” their non-compliance. Odds are high that many more banks are not in compliance — they just didn’t tell KPMG about it for fear of doing anything that might trigger an investigation.
To truly root out money laundering, identity theft, fraud and terrorist financing, banks must go beyond the Know Your Customer (KYC) edict, as mandated by the Banking Secrecy Act of 1970. Before 9/11, banks were encouraged to file Suspicious Activity Reports (SAR) with the federal government and to establish procedures to identify money laundering schemes. Post 9/11, all of this is now required but exactly what a bank can be held accountable for has never been spelled out. Know Your Customer requirements, as they stand now, are loosely interpreted and rarely enforced.
Here’s a scenario put forth by Alvin D. Lodish in FinanceTech:
“‘Know Your Customer’” does not mean the bank is responsible for evaluating how an account holder, corporate or otherwise, chooses to spend its money. However, what a jury or even a Judge may believe a bank’s duty is, particularly in light of broad based ‘Know Your Customer’ policies, is not clear. For example, let’s assume a corporate account holder is in the business of developing property and raises money from investors for that purpose and the investor’s funds are deposited in the corporate operating account. Let’s assume some of the money is used to buy dozens of exotic cars or is sent to casino/hotels, does the bank have an obligation under the ‘Know Your Customer’ policy to question those transactions? (Given that whatever payments were made were done by an authorized signatory and there were sufficient funds in the account.)”
Now 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?
Congress needs to revisit AML legislation because no one really knows what Know Your Customer really means.
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