Know Your Customer or KYC is a building block of our financial structure that allows banks and non-bank financial institutions to prevent future illicit activity while also giving regulators their peace of mind. The Bank Secrecy Act, or, BSA is legislation created in 1970 to prevent institutions from being used by criminals to hide or launder their ill-gotten gains. The Act requires the entity to provide documentation regarding suspicious activity and currency transaction reports to regulators; these also help with future risk-based reviews of the compliance policy and the information regarding the basis of how the activity was structured to form a known characteristic pattern. The BSA also requires those institutions perform Anti-Money Laundering (AML) checks and keep specific records of events that could signal the occurrence of money laundering.
The process of performing KYC is what businesses carry out to verify the identity of their customers either before or during the time that they start doing business. The term KYC can also reference the regulated bank practices that are similarly used to verify clients’ identities. Banks and companies of all sizes have become big supporters of KYC. It is increasingly common for banking institutions, credit companies and MSB’s to require that their customers provide them with detailed information in order to ensure that they are not involved with corruption, bribery, or money laundering.
When operating a Bitcoin ATM, you are operating in all senses as a Money Transmitter. Aside from the federal laws you may be subject to state licensure and must comply with those regulations separately so please consult an attorney to be sure that you are in full compliance with the regulations. For now, federal regulations for BTM operators fall under the FinCEN Money Services Business rules and regulatory expectations. One of those being to register with FinCEN within 90 days of establishing your business. In that registration, you will have the ability to choose what type of MSB you are; that could be “dealer in foreign exchange, seller of prepaid access, seller of money orders, issuer of travelers checks, Money transmitter” and so on. When preventing your business from being used to facilitate money laundering or any other illicit activity, it is essential to form a functional relationship between your business, the compliance person your business has appointed and a compliance program that has been structured for overall usability. Making sure that you are not only complying with the state and federal regulations but also with the internal controls; this will bring optimal results in detecting and reporting these suspicious activities to the regulators and proving the businesses consistency and transparency.
I look at KYC like this, if Joe Blue comes to my machine, let’s say for argument sake he is fully aware of the reporting laws because he, allegedly, launders money and virtual assets as his side project. Not a lot, he knows the rules so he does it so that he can consistently stay under the radar. However, when he comes to the machine, any transaction over $500, the machine prompts him to use an authentication application so that the machine operator can see exactly who is making that transaction. So, if he decides to buy $30,000 in bitcoin, but breaks it up into 7 transactions, well, that’s going to throw up a red flag for compliance; adding the KYC factor, we know who we are transacting with, making it easier to perform the necessary due diligence and foster the security of the business. There are many circumstances in which a person may try to evade reporting limits but let’s say that he DOESN’T go over the $500 limit, at that point he would, at the very least perform SMS verification. When the transaction was initiated the customer was prompted to verify a SMS number in order to proceed, this is with any transaction, no matter the amount. The customer could possibly have a logical explanation for his activity, but coming from a compliance perspective, they are “out of the scope of ordinary” transactions. Without the verification; how would you proceed? When the customer first arrived at the machine, it captured a photo of him and is stored with the transaction in the machine’s dashboard. Along with that, his SMS number was provided and verified; with the tools available we can cross check that phone number to any connections it may have made along the way, such as; social media, phone companies, application services etc.
So, what KYC does for companies is existential to the underlying risks that all money transmission services pose, illicit criminal activity, regardless of its measure. Being able to identify the individual(s) is essential to Money Services Business and what they can provide in a Suspicious Activity Report. These individuals are only taking away from the people, our own country, and primarily the small businesses that are building a foundation for the future. I micromanage everything but I really feel that isn’t farfetched, I mean it must start somewhere, and later in, that $30,000 that Joe wanted to launder could turn into $100,000, and in the wrong hands, could be contributing to an even larger crime. If it could affect your life personally, would you prevent it? That is the Ethics side of compliance, its true to its meaning, “Ethically, is this something that I would do?” Hopefully the answer is something close to, “Probably not…..” The current regulations that MSB’s must follow relating to their KYC are not excessive or able to be compared to those that the centralized banks follow in the BSA; very minimal in fact, comparatively. So to keep your business secure and aid in bringing illicit activity to a halt, preventatively, this becomes key and hence my first reference as one of the building blocks; in fact, it carries many of the others on its back as it contains most of the viable information that the regulating bodies are going to make their determinations on in the end. The end being, when the regulation comes, when the SEC and CFTC get done fighting over whether cryptocurrency is a security or commodity, they will look at everything we’ve done thus far and when they impose their final rulings, every step our fellow MSB’s dealing in virtual currency have taken, will be under scrutiny and essentially will determine our fate in the eyes of the regulators.
I say, don’t fight it; not because I write and enforce the policies, not because I agree entirely that the notions align with the future of the blockchain, but because I understand what makes those illegal activities what they are and what they represent. Without thinking about the regulations or the virtual aspects, from a first-person perspective, think about what the US Dollar, the only currency used all over the world, has been used for across the board and why we’ve imposed these regulations in the first place. This isn’t something that we can avoid and it’s never going away, so buckle up and enjoy the ride, it’s a bumpy one but, you’ll make it from A to B.