Anti-Money Laundering: The Challenges of Know Your Customer Legislation for Private Bankers and the Hidden Benefits for Relationship Management ('The Bright Side of Knowing Your Customer')

The Banking Law Journal, Vol. 128, No. 6, p. 548, June 2011

19 Pages Posted: 28 May 2011 Last revised: 25 Jun 2011

See all articles by Philip J. Ruce

Philip J. Ruce

Thomas Jefferson School of Law

Date Written: June 1, 2011

Abstract

The past decade has seen an overwhelming array of new anti-money laundering rules, regulation and legislation. These rules are designed to protect financial institutions from liability and to prevent laundered money from entering the legitimate economy, thereby encouraging further criminal activity. Key among these rules are the Know Your Customer ("KYC") requirements intended to assist financial institutions with identifying the true beneficiaries of account funds.

Many of the KYC requirements, however, have been viewed negatively by those working in the financial services industry. These initiatives can be expensive and cumbersome; at best, they might be viewed simply as a necessary evil. The very language of the requirements can have negative connotations; compliance literature often speaks of "requirements" and "obligations." Profiling clients and reporting transactions that are suspicious are obviously a very important part of what bankers do, but it has not been greeted enthusiastically. Intrusive questions and cumbersome due diligence procedures can be off-putting to current and, particularly, prospective customers. In some cases, they have prompted entire compliance departments to be nicknamed the "Business Prevention Unit."

Knowing customers, however, is an integral part of doing business, and an even bigger part of private banking. This article will first discuss what private banking entails, as well as its unique vulnerabilities to money laundering. The article will then consider some of the primary rules, regulations, and recommendations for the KYC aspect of some of the key anti-money laundering initiatives, and will discuss the problems private bankers have with these initiatives. The article will then analyze how and why these programs should be viewed differently by private bankers: as an opportunity to better serve the client, to better understand their needs, and to better generate revenue.

Keywords: Private banking, KYC, Know Your Customer, anti-money laundering, AML, compliance, wealth management, banking, money laundering

JEL Classification: K00, K19, K22, K23

Suggested Citation

Ruce, Philip J., Anti-Money Laundering: The Challenges of Know Your Customer Legislation for Private Bankers and the Hidden Benefits for Relationship Management ('The Bright Side of Knowing Your Customer') (June 1, 2011). The Banking Law Journal, Vol. 128, No. 6, p. 548, June 2011, Available at SSRN: https://ssrn.com/abstract=1852743

Philip J. Ruce (Contact Author)

Thomas Jefferson School of Law ( email )

701 B Street
Suite 110
San Diego, CA 92101
United States

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