After many complaints from my wife, I’m going to separate this aspect of banking into multiple parts, so that these posts can be much shorter than the previous ones. The time has come to discuss the most annoying part of banking, from a client’s point of view: some banks call it ‘compliance’, some call it ‘financial security’, others just ‘AML’, but now it has become so much broader, and regulators have no problems just expanding the scope of legal obligations placed on banks with regards to fighting crime. This is just a general post about why this is necessary, with subsequent posts focused on specific themes.
If you think about this, it may seem very weird, because this aspect of banking (actively fighting crime) is relatively new. A couple of decades ago, banks did not use to have massive teams of people working in ‘compliance’. Obviously, the obligation on banks to respect criminal codes was always there, but there were no dedicated teams. Now, it is so important, my colleague who leads the department responsible for this is constantly teased about his ‘workforce’. His team is at least five times bigger than mine. His function definitely has the biggest number of internal policies and procedures published, and it complicates the Bank’s relationship with clients and business opportunities in unimaginable ways. Those complications, while they may not be unreasonable when the whole context is considered, when those requests are made to clients, they may seem absurd. I.e. a bank asking a client for the purpose of withdrawing a sum of money or telling a client that the number of money transfers to a certain country is limited, can be confusing and irrational from a client’s point of view. Yet, it’s something that regularly happens, all in the name of fighting crime, and respecting the law.
So, what type of crime are banks fighting and how do they fight it? The main and most famous ones are Money Laundering and Terrorist Financing. Obviously, everyone1except individuals that like using cash for their activities, and terrorists agrees that those activities are not good for our society. In addition to that, banks also have the obligation to not transact with sanctioned persons or countries, as well as to ensure that export controls are respected. More recently, there’s significant pressure on banks to fight corruption as well. In terms of how banks are ensuring such relevant laws are respected is by: knowing their clients, understanding their business and what type of transactions they make, knowing who they usually transact with, and continuously monitoring their activities (in automated and manual ways). The amount of data a bank has on their clients is massive, and that data is very intimate. If banks were allowed to analyse that data to create more holistic profiles about their clients, they would definitely know their clients better than their spouses; but that’s a totally different topic for another day. For now, there are very specific checks and controls that are done on keeping updated client information and monitoring their transactions.
In the next couple of posts, I will explain how and why banks have to do these things. The key phrase in that previous sentence is ‘have to’, because I can guarantee you that no bank employee wants to do those things. Ultimately, from the banks’ point of view, that’s the why of it. Conceptually, the bare minimum for a bank to function is to have a specific account identified, and to know who that account belongs to. In fact, that’s how it was in the past. A bank had an account with a specific number, and they knew who that account belonged to. That’s it. But that was a time when the internet didn’t exist, and you had to go in person to make all your bank transactions. So, the next time a bank employee asks you for a copy of your updated ID card, or a proof of residence, or something else, remember that they don’t want to ask for those things, but they have to. Banks are legally obligated to do this.
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