Welcome back to our course on FinTech Security and Regulation.
In today's session, we're going to talk about two concepts in
FinTech regulation which are AML and KYC.
Now, these two terms I have heard some students who are learning about FinTech for
the first time describe as these technical terms were a little confusing to me.
We're used to in IT people throwing out
three letter or four letter in
acronyms that means something or another and you're wondering,
I wonder what that means.
Well, these two terms are so common in finance that
if you work in the finance industry or familiar with finance,
you would say, why are we talking about this?
Everybody knows about this.
Well, not everybody does and not everybody who's excited about FinTech knows about this.
So if you know all about AML and KYC,
stop the video and go onto the next one because you know everything about this.
So you really don't need to learn more.
But for many people,
these are important concepts.
Now, let me define them.
AML, this means Anti Money Laundering.
KYC, this means Know Your Customer.
These are pretty simple things, but what does this mean?
Well, Anti Money Laundering means the government has
an interest in preventing crime, blackmail,
fraud, illegal gains being laundered so that they're harder to track,
and so they want to stop drug dealers from laundering their money.
They want to stop criminals from transferring
funds that are ill-gotten gains in one way or another.
They want to stop blackmail or ransom from being paid or find it or trace it.
So they don't want you to be able to launder money and hide it.
They also have a vested interest,
an important government interest that they would like
you to pay taxes when you owe taxes.
So they consider tax evasion to be money laundering.
It's you're trying to hide something or trying to evade taxes.
So AML not only stops illegal activities or laundering
illegal money into money that's harder to
trace and looks like it might have come from illegal source,
maybe that involves paying taxes on
it that you might have been able to avoid if you'd kept it hidden.
So they don't like that,
but they also want you to pay taxes on money that you rightly do owe taxes on,
and so trying to avoid taxes is a type of laundering of money in a different way.
KYC, Know Your Customer,
is different term which doesn't refer to
the way a marketing person will talk about knowing your customer.
In marketing, we'd really like to understand
our customers so that we can better meet their needs,
better provide the products that they want and need,
charge a premium for our services because you know
our customers better and we can better serve their needs,
this is not that.
Now, there may be some side benefits of knowing
your customer better of being able to do marketing better,
being able to do product design better, et cetera,
but the KYC that financial institutes normally are talking
about is a government requirement to comply with the law,
and the law is there to prevent bad actors or fraud from taking place.
They want you to know who it is that's putting money into your institution.
If it's a corporation,
who owns the corporation?
Who's behind it?
Where did the money come from?
Are you committing money laundering in some ways?
Are you committing a crime in some ways?
Is this company being setup to avoid tax regulations or to
avoid campaign finance laws or to commit some other kind of illegal activity?
So you want to know your customer to know that they are
not in some way a bad actor that might harm society in some way.
So by identifying the customer,
then you can also report on what that
customer's doing so that the tax authorities can say,
you know your customer,
you know their social security number or you know
their passport number or their national identity number and therefore you can
report on transactions that took place like
stock sales or other things and therefore we can come back and say,
oh by the way, we think you owe taxes on them.
So these activities, AML and KYC,
are there to help the government protect society against crime and criminals,
and also to help the government collect the taxes they feel that they are due.
Now most of us would prefer to pay less taxes
instead of more taxes so we'd like to minimize our tax burden.
If we do that legally, that's great.
If we do that illegally, that's a crime,
and that's something that government cares deeply about and they will
use financial institutions and records and
evidence to find ways to go
after individuals that are hard to arrest or convict on other things,
Al Capone getting taken down as the notorious mobster not because of killing
people or selling illegal products
but because he didn't pay taxes on the money that he made.
Tax evasion took down Al Capone with the testimony of his accountant,
not all the criminal things he did to make the money.
Theodore Henry King CLARKAssociate Professor
