Know Your Customer - Deep Dive
Hello. This is ARGOS. This is the second installment of our series on how the FATF's recommendations evolve into regulations in different countries, and we're going to take a look at why and how they evolve into regulations.
If you missed the last installment, please click the link below Know Your Customer - Deep Dive - Series 1: G7 & FATF
Relationship between the FATF and its members
The FATF's list of members is a collection of countries that represent a very large portion of the world's economy and finance.
Failure to comply with the recommendations of the FATF can result in the following situations
Sanctions in international financial markets
The FATF may designate a country as "non-cooperative" or "high-risk" if it does not comply with its recommendations. These designations may require additional controls and reviews for financial institutions doing business with the country. This could delay transactions or increase the cost of international financial transactions in the country due to additional verification.
This can make it more difficult for companies based in the country to export, import, etc. and companies with global operations are particularly hard hit and their international competitiveness continues to decline.
Decreased foreign direct investment
Countries that do not comply with the recommendations will lose credibility in the international investment community. This may result in foreign investment capital hesitating or avoiding investing in the country.
Instability in domestic financial markets
FATF-designated high-risk countries face an increased risk of actual illicit flows, which can undermine the stability of domestic financial markets.
This is very important because it can directly threaten the safety and security of the country.
Considering these various situations, it is clear that non-compliance with the FATF's recommendations is not just a loss of credibility, but also has important economic, financial, and security implications, which is why member countries base their legislation, management, and supervision on the FATF's recommendations.
As a result, the FATF's recommendations become the centerpiece of each country's money laundering legislation, and the FATF can be seen as the foundation of the global financial transaction environment as a 'trusted counterparty'.
U.S. Regulations on Financial Security
The United States accepted the FATF's recommendations and implemented them through laws and regulations.
Bank Secrecy Act (BSA)
Born in 1970, the BSA is our superhero against money laundering! It tells banks to:
Keep track of transactions
Report big cash moves
Flag suspicious activities
USA PATRIOT Act
Born after the tragic 9/11 attacks, this law gave more muscles to the BSA. Especially Title III, the "International Money Laundering Abatement and Financial Anti-Terrorism Act" is all about stopping global money laundering and terror funding. It tells banks to:
Really get to know their customers (KYC)
Be super careful and check their customers well (CDD)
Office of Foreign Assets Control (OFAC)
A special team from the U.S. Treasury . They have a list of countries, people, and groups that the U.S. shouldn't do business with. Banks need to always check this list before making moves.
Financial Crimes Enforcement Network (FinCEN)
Another cool team from the U.S. Treasury . They're like the detectives of the financial world, always on the lookout for money-related crimes.
US Regulation and eKYC.
Among other things, the USA PATRIOT Act's Title III, the "International Money Laundering Abatement and Financial Anti-Terrorism Act," embodies this concept.
The following provisions can be considered as the predecessors of eKYC.
‘‘(1) RECORDKEEPING AND REPORTING OF CERTAIN FINANCIAL TRANSACTIONS.
‘‘(B) FORM OF RECORDS AND REPORTS.—Such records and reports shall be made and retained at such time, in such manner, and for such period of time, as the Secretary shall determine, and shall include such information as the Secretary may determine, including— ‘ ‘
(i) the identity and address of the participants in a transaction or relationship, including the identity of the originator of any funds transfer;
(ii) the legal capacity in which a participant in any transaction is acting;
(iii) the identity of the beneficial owner of the funds involved in any transaction, in accordance with such procedures as the Secretary determines to be reasonable and practicable to obtain and retain the information; and
(iv) a description of any transaction.
More specific guidance is being issued by the U.S. Treasury Department's OFAC and FINCEN agencies.
FINCEN's Customer Identification Regulations require all financial institutions in the United States to verify the identity of new customers and accounts when they are opened.
https://www.fincen.gov/sites/default/files/guidance/finalciprule.pdf
Customer identification program requirements All customer identification programs must meet six general requirements outlined in the CIP Final Rule as established in the USA PATRIOT Act.
This includes: Establishing a documented CIP program 🆔 Collecting four specific pieces of identifying information: the customer’s name, address, date of birth, and government-issued identification number Establishing identity verification procedures Meeting recordkeeping requirements established by the law Comparing the individual against official government lists Establishing a process for providing customers with notice that you are requesting information to verify their identity.
CIP and KYC are sometimes used interchangeably, but they are not exactly the same.
CIP can be implemented as part of broader KYC and can build on additional strategies including CDD, On going Monitoring.
This includes obvious financial institutions such as banks and lenders, but also applies to less obvious businesses where 'money flows', such as fintech, payments, and cryptocurrency exchanges.
eKYC solutions with ARGOS
In this article, we have seen how FATF has evolved into national regulations and what the specific regulations are.
Next time, we will be able to show you how ARGOS supports these regulations.
ARGOS will continue to strive to make your authentication journey more convenient and secure. Join us in making your online world safer and more convenient!