When you set up a new bank account you're often asked to hand in lots of identifying information, such as a proof of address, utilities bills, or a passport. Why is this?
They're all part of an important banking process called KYC – Know Your Customer, which is one of the first lines of defence against money laundering.
Money laundering is when an individual or entity attempts to cover up the (often criminal) origins of money they want to use. And it's a big deal. It's estimated that around $2 trillion1 is laundered every year – that's around 2% of Global GDP. Even in countries with robust anti-money laundering regulations in place, cunning criminals are often able to find ways to hide their money – as much as £90 billion2 is believed to be laundered through the UK alone each year.
How does it happen?
Money laundering is a deliberately complicated and opaque process – because if it were easy to spot, it would be easy to trace. However, in simplified terms it can be broken down into three key steps:
- Placement: Dirty money is moved into a shell account – often multiple accounts. This stage is the riskiest and is where launderers can be most easily caught out through KYC checks.
- Layering: That money is then made untraceable through changing the nature of the hidden money. This involves passing it through third parties, such as multiple transfers to different accounts at different financial institutions, through industries such as gambling or property purchases, or through cash-intensive "front" businesses, like a bar.
- Integration: The money is reclaimed as legitimate income. For example, an entity could use property bought with laundered money as collateral on loans.
At the end of the process, the criminal actor has access to clean, untraceable money that can be spent at their discretion.
Money laundering also has a number of directly harmful ripple effects. It can go to finance criminal or terrorist groups and enable bribery and other forms of political and institutional corruption.
What's being done?
Businesses and banks can help prevent money laundering by having those KYC controls. By verifying the identity and legitimacy of their customers and those customers' transactions, they can both prevent the creation of shell bank accounts by those who use them for laundering and narrow the pool of potentially suspect accounts that can be used.
These kinds of checks are why banks need to ask for so many different types of verification from their customers. These checks may seem annoying, but we need to be certain you are who you say you are not just to protect your money, but to help protect the entire financial system from criminals.
However, money laundering also needs to be tackled at government level as well. As it often involves criminals and assets moving across international boundaries, responses need to be global – organizations like the Financial Action Task Force3 which encompasses 37 member states, exist to facilitate this.
With governments around the world keen to prevent money laundering to stop criminals and terrorists from funding their activities, Know Your Customer checks are essential. We'll try to make them as straightforward as possible – but to stop money laundering, we need your help to identify legitimate banking customers and transactions so we can spot the illegitimate ones.