It can sometimes feel like financial companies need quite a lot of information from you before they are able to provide you with any services. This need for your information can sometimes feel odd for you as a consumer – from intrusive questions such as how much you earn and where you work to the downright strange ones such as how you spend your money or even what kind of personality you might have! And these are in addition to other equally strange questions such as what ties you might have with a specific country and whether there are politicians or heads of state in your family or close relatives.
All this might make you feel like you’re being investigated by the authorities for committing some sort of crime or at least being a suspect, and this could leave you wondering why.
Why is there such an extensive need for documents? Why am I being interviewed? Why do you want all this information when a lot of it doesn’t seem like it’s even relevant?!
The answer lies in a program called Anti-Money Laundering, or “AML” – while you are most likely just a normal, honest, hard-working member of society – history is riddled with bad actors who have manipulated the financial system in order to fund their own criminal operations. AML programs exists in order to make it harder for those bad actors to move money around anonymously, with the aim of stamping out criminal activity by limiting their access to the financial system. As there have been many cases of money laundering in the past, these programs receive a lot of focus from regulators and are now quite stringent.
One key part of an AML program requires all financial institutions to know a lot about their customers – through a blandly named process called Know Your Customer or “KYC”, which verifies an individual or organization’s identity (i.e. makes sure you’re legit and actually exist!). This is primarily why you have to deal with all those weird questions when signing up to use various financial services.
Why is Anti-Money Laundering so important?
Let’s start by looking at what money laundering actually involves. This is a process which converts “dirty” money into “clean” money, and here’s the lowdown on how it’s done:
Placement: You take “dirty” money which has been obtained via illegal sources and put it into the financial system by using financial institutions. Metaphorically, this is similar to taking your dirty clothes and loading up the washing machine.
Layering: Once the money is in the financial system, you move it around by making a series of fake transactions to various different part of the financial system and combine this with some fancy accounting tricks. Metaphorically, this is similar to turning the washing machine on and watching all the dirty clothes inside get jumbled up.
Integration: In the final step, the money should now look like it has come from legitimate sources and be almost impossible to trace back to its dirty origins. You take this money out from a legitimate bank account and nobody ever knows it’s true, illegal origins. Metaphorically, this is similar to taking your freshly washed clothes out of the washing machine!
Clearly, this can have horrific outcomes if the “dirty” money that comes from illegal activites such as trafficking of humans or illegal weapons and substances is then accessed by criminals. This would mean the criminals who undertake these activities are successfully able to profit from it all and likely go on to grow the power and influence of their illicit operations. Anti-Money Laundering programs exist to prevent these kinds of money laundering activities from taking place.
We recommend watching “The Laundromat” on Netflix for a dark but entertaining take on all the crazy things money laundering can lead to!
What about KYC?
Take a customer who wants to open an account. Financial institutions have to check if customer’s identity is legitimate. Financial institutions also have to verify the legality of the customer’s transactions in order to ensure there are no illegal transactions behind their customer’s money. The best time to stop money laundering would be to check at the time of opening an account, so any bad actors do not enter into the financial system but are instead cut off from being able to profit from their illicit activities. This is why financial institutions must understand the background of the customer before opening an account – both the customer’s identity as well as where their money is coming from.
Zooming out
As various security threats in the world materialize, international money laundering and terrorist activity prevention measures have become ever more stringent. Therefore, financial institutions are now legally required to ensure their systems are not used by people who pose a threat to the public and that no proceeds from crime have been stored or transferred. Institutions that fail to comply with these requirements may face formal sanctions and substantial penalties imposed by legal authorities. This means that financial institutions need to know who the customer is and what their usual business is, in order to ensure that the customer's operations are in line with the type and scope of the financial institution’s business.
On the other hand, there have also been cases of companies collecting excessive customer data and using it without their permission as well as other privacy threats from suspicious internet sources. All of this comes from the underlying fact that information can be a valuable asset these days, and regulations such as GDPR have been introduced in response to this.
However, not all companies want to use your data without permission for their own gains! Financial institutions collect all this data from you in order to comply with legal obligations and (hopefully) keep the world a safer, happier place in doing so. 🙏
Evarvest complies with all Lithuanian and international legal requirements regulating the prevention of money laundering and terrorist financing, as well as implementing key "Know Your Customer" processes.
So when you are asked for this kind of information from financial institutions that you trust and want to engage with, just remember to Keep Calm and get through the KYC! 🤩
Please know, the value of investments can go up as well as down and you may receive back less than your original investment, meaning, when investing your capital is at risk.
Disclaimer: At Evarvest we believe in making investing and investment education more accessible, but we don’t provide investment advice and individual investors should make their own decisions. While we try our best, we cannot ensure the accuracy of the information we provide.
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