Our primary goal is to help you to understand RegTech and to become more confident and persuasive in your ability to analyze and make recommendations to executives within the finance industry regarding how to react to these changes, e.g. Regulations to crypto-currencies like BitCoin & ICO. This MOOC on RegTech offered by HKUST presents the views of several professors from the top business school in Asia as well as perspectives from industry professionals. HKUST has been ranked for many years as the number one EMBA program in the world, as the number one Finance program in Asia, and as the top MBA program in Asia by multiple independent rating and review journals and surveys. This course offers the combined strengths of HKUST in Business, Finance, and Technology as one the world's leading academic institutions on an important area of technology and business innovations. For students from outside Asia, this also gives an insight into changes happening in the most advanced FinTech markets of the world, since Asia leads worldwide in FinTech adoption and creative innovations. This course "FinTech Security & Regulation(RegTech)" is part of the HKUST-Coursera FinTech specialization. There are 3 other courses in the specialization including FinTech Foundations and Overview, FinTech Risk Management, and FinTech Innovative Disruption: Implications for Society. The FinTech specialization will be launched in Fall 2018, stay tuned!
2.2 AML & KYC in FinTech
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Do curso por The Hong Kong University of Science and Technology
FinTech Security and Regulation (RegTech)
2 classificações
The Hong Kong University of Science and Technology
2 classificações
Na lição
Risk Management & Government Control
In this module, we explore some of the tools government use to regulate financial markets and discuss potential challenges for FinTech innovators in complying with these regulations. Some basic terms commonly used in finance such as AML & KYC are defined and described. We examine the role of different government agencies as well as alternative social objectives that influence the development of regulations over time.
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Theodore Henry King CLARKAssociate Professor
Information Systems, Business Statistics and Operations Management Department
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.
So this is a government interest in protecting the government's revenue stream.
The government also don't like
citizens moving money to other countries or other ways that's outside their control.
So they don't like cryptocurrencies because they can't control them as
well and you may say as a cryptocurrency exchange,
hey, I'm outside the US,
I'm outside US controls.
Maybe, but if you have an office in the US,
if you have some presence in the US,
if you have customers in the US and the government
can anyway attach anything of yours in the US,
they may be able to exercise control and they may make
money laundering laws force you to pay big fines,
or force you out of business.
More and more governments are saying we'd like to regulate in some way this economy,
this currency or whatever you want to call cryptocurrencies.
We want to regulate this area so that we can collect taxes when people
make capital gains or so that we know where money is flowing,
and we force people to know who their customers are and identify their customers.
These regulations are inconsistent with the anonymity
and privacy that is inherent to many cryptocurrencies.
Bitcoin has some of this,
some others have even more.
You can have a large degree of anonymity in these markets which
is annoying to some government regulators who don't like that.
Now, you may like it a great deal as a citizen.
The US government, for example,
has issued a statement that they believe most cryptocurrency investors,
bitcoin and other cryptocurrencies are not paying
the capital gains taxes that are due on their gains, on their benefits.
You may say, well, I don't want to pay taxes if I don't have to.
You may be able to get away with that,
but you are breaking the law and if you get caught,
that can have serious consequences including jail term as well as large fines.
US government, for example,
feel strongly enough about this that as a US citizen,
I have to file paperwork every year because I have a foreign account.
I have overseas checking accounts and savings accounts because I live overseas.
So it's not surprising to deposit my paycheck overseas.
But as a US citizen,
I have to comply with these regulations and if I don't do that,
if I'm even one day late on a form,
the US government automatic fine is $10,000 and it goes up from there.
That's a lot of money for being a day late and there's no good excuse for that.
You can ask for forgiveness,
you can ask for mercy,
but the government doesn't have to give it to you.
So this is a risk as we really have to pay attention to that.
If you're a financial services firm in a FinTech space,
you may think that AML or KYC don't apply to you.
What's risky is that a government can go back in time,
back before they talk to you about this or before new regulations were passed and say,
you were responsible for AML and KYC even if you didn't know what they were.
This regulation can apply to US ex post facto,
meaning even if you're ignorant, that's no excuse.
Even if you thought it didn't apply, that's irrelevant.
The government says it does.
They can get a court order against you and shut your company down or fine you
hundreds of millions of dollars and effectively kill your business.
So you need to be careful about this because all of your gains and
success may vanish overnight if you're not in compliance with regulations.
In our next session,
we'll talk with a large banker,
the Chief Operating Officer of HSBC,
one of the largest financial services firms in the world and
a leading financial services institution in Hong Kong and throughout Asia.
He'll talk a little bit about AML,
KYC as well as RegTech and other aspects of regulation in
the financial services industry and how that affects his firm
as well as FinTech companies and startups. Thank you.
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