U.S. financial institutions are part of the first line of defense against illegal money laundering and terrorist financing. They play a key role in global efforts to prevent terrorist and other criminal organizations from earning, moving and storing illicit funds.
Criminal organizations can be involved in a wide range of illicit activities such as cybercrimes, arms trafficking, kidnapping, extortion, drug trafficking, human trafficking and smuggling, domestic terrorism, and international terrorism. All banks have a responsibility to know their customers and understand how transactions from illegal activities might flow through their institution.
Since the terrorist attacks of Sept. 11, 2001, and as early as the 1980’s, banks and regulators have focused on limiting terrorist funding and money laundering related activities through the U.S. financial system. It’s hard to move funds around the globe and within a country without using a financial institution, therefore banks have continually been asked to increase their efforts to prevent, detect and report potentially suspicious financial transactions indicative of money laundering and terrorist financing. Know Your Customer (KYC) regulations are a critical component to anti-money laundering efforts.
In 2016, the U.S. government issued a rule requiring banks to verify the identities of beneficial owners of legal entity clients such as corporations, LLCs, partnerships, unincorporated non-profits and statutory trusts. Beneficial owner information is required for an individual with an ownership stake of 25 percent or more equity interest, and for an individual who exercises significant authority to control the affairs of the legal entity.
If you’re a beneficial owner of a legal entity, you’re asked to provide personal information that includes:
• Full legal name
• Date of birth
• Current residential address
• Social security number or other government issued identification number
Banks and other financial institutions must collect this information because it’s a regulatory requirement. But more importantly, it helps assist in efforts to prevent, detect and report money laundering, and terrorist financing activity.
For example, while opening a new account and asking key KYC information, a bank may discover through open source record checks that an individual or business has previously defrauded innocent investors, or was previously connected to a global criminal network. This information may indicate that this potential customer could pose an elevated money laundering risk.
Gathering KYC information and discovering potential money laundering risk can help limit exposure to financial risk for banks and their business clients. This helps protect from potential damage to reputation, which can be just as important as safeguarding financial assets.
Today, we live in a global economy with transcontinental trade and travel spanning the world. We have an expansive and sophisticated global banking network and there’s an increased ease to global communications.
From the internet to intercontinental air travel, local crime has become transnational crime that crosses our borders and poses an even greater risk to our nation. This makes KYC even more critical than it ever was before.
The more financial institutions understand about their customers the more proactively they can identify activity that’s unusual for a customer type, a customer in a particular location or region, etc. Having the information to recognize expected patterns is fundamental in identifying potential money laundering and/or terrorist financing.
We hope this helps explain why banks ask for your personal information, even if you’re handling the accounts of your organization.