This article is a Steem exclusive focusing on how the way we are fighting financial crimes (KYC, BSA, AML) makes no sense, stifles innovation, violates rights, and doesn't actually fight crime effectively. I also make one small suggestion for change that will ease the regulatory stranglehold on innovation.
There is a war on cash
It has been the unofficial policy of both the United States and many other countries to reduce the use of cash. Already, the $100 bill is on the chopping block. The rationale is to combat tax evasion, money laundering, and terrorist financing.
The war on cash is causing real harm
The most obvious casualty in this war is privacy. Some people care an awful lot about privacy and some people don't care all that much. If you care about privacy, there's nothing else I need to say. If you don't care about privacy, consider that our finances are one of the few things that people still do try to keep private. And arguing that privacy doesn't matter just because there's nothing you need to keep private is like arguing that freedom of speech doesn't matter just because you have nothing to say.
But privacy is not the only casualty. Innovation is too. The complex tangle of regulations has made it extremely difficult for crypto-currency companies to connect to the existing banking system. The barriers to entry are simply enormous.
And, of course, it's not just the direct compliance that's a problem. Indirect compliance is crushing too. There are hundreds of completely legal businesses that have stopped operating because they have been unable to keep or maintain banking relationships.
Like most businesses, banks don't want to turn away customers. But for a variety of reasons, they have no choice.
For example, suppose the government of a middle eastern country decides to identify someone as a suspected terrorist because they oppose that regime. "We oppose terrorism, they oppose us, therefore they might be a terorrist", they reason. Suddenly, you can't open a bank account anywhere because you're on a list, a list that has no appeals process and which prohibits banks from even disclosing that they are using it.
You might think that small, local banks would be free to take on local businesses as customers, free from such pressure. But you would be wrong. Small banks are totally dependent on their interbank relationships. All it takes is a call from one of their correspondent banks and that's it, you can't move money any more.
You might think that even if you're on one of these lists, a bank that knows you might decide the list is bogus and accept you as a customer. Again, you'd be mostly wrong. Avoiding the risk of liability is worth more to the bank than one customer.
The war on cash is violating rights
The entire KYC/AML scheme is a massive due process violation. While the scheme manifests as private decisions, some private bank decides not to do business with some private business, the scheme exists because of laws, regulations, and court precedents. The bank is reducing regulatory and legal risk.
Imagine almost any legal issue you want where a law would violate due process. For example, say we wanted to make it illegal for people merely suspected of being terrorists to buy food. Certainly that would violate rights. But we can achieve that same affect by making grocery stores and restaurants legally responsible for ensuring that they take every precaution to ensure that someone they served food to doesn't commit a terrorism offense.
This would have all the same due process problems -- no appropriate standards for deciding who the rule applies to, no appeals if you are denied food based on incorrect information, and no judicial oversight. This is the effect our KYC/AML scheme has had.
And make no mistake, access to the financial system is getting to be as important as food. More and more places don't take cash. There are coffee shops where you can't get a latte unless some FI can make a profit on it.
The war on cash does not fight crime
If people are trying to launder money or finance terrorists, let's put them in jail for money laundering and providing material support to terrorists. Otherwise, they'll just keep looking for cracks in the system, forcing the system to become more and more oppressive.
Shutting people out of the system based on mere suspicion, with no opportunity for them to counter the suspicion with additional information leads to low quality information. All we have are the accusations. And when the accounts are closed, we have no visibility into the actions that could lead to criminal prosecutions. We want terrorists in jail, not edged out of the financial system.
Just as the NSA keeps asking for more and more spying because they are addicted to having lots of data, financial regulators keep thinking that if they can just see more and more of what's going on, somehow they can stop the bad guys. But cutting off a customer is blinding yourself. And not hearing the customer's side is deafening yourself. We are fighting deaf and blind.
There is something we can do to make it better
While I firmly believe that massive structural changes are the right solution to this problem, I do have a suggestion for a simple change that would make the situation much better. Unfortunately, it is a recommendation for an additional regulation. Much as I hate the idea of adding yet one more rule to a broken system, on net I think this will improve things a lot.
It's a simple and fair rule -- if financial institutions are critical infrastructure, like utilities are, prohibit them from denying services to people or businesses arbitrarily. If they have a reason not to let someone open an account or close an existing account, require them to disclose the reason. And if the customer has a response, require them to evaluate it.
Paradoxically, financial institutions might be happy with this rule. Sometimes tying someone's hands helps them. For example, there cannot be liability for taking someone on as a customer when doing so is required by law. And one can more easily resist pressure to do something if it is illegal.
For example, If a correspondent bank says that some middle eastern nation said they would prefer that a small bank close the account of a customer whose transactions they felt were suspicious for some undefinable reason, the bank can now reply that they cannot close accounts based on mere inarticulable suspicion. And now that bank is relieved of pressure to terminate a customer that they don't want to terminate.
This would not be a substitute for real reform. But it is simple to explain, immediately makes sense, and would reduce the strangling effect inability to maintain banking relationships has had on innovation.
I am not naive
I recognize that this sounds simple and naive. And that's probably because the system is so insane and so broken that it's very easy to point out how crazy it is. If there's some equally simple reason why this all really makes sense, I have not heard it.
I work for a company with a BSA compliance department. I am a member of its Board of Directors and have had the legally required KYC/BSA/AML training. I am by no means an expert in KYC/AML regulation. But it seems to me to be a massive exercise in crossing t's and dotting i's to produce a massive storehouse of extremely low-quality information on which the only action taken is to deny people access to vital services on the basis of secret suspicions or punish people for failing to dot a lower case j (everyone forgets to do those).
An ad for lawyers
I strongly urge those in the space to engage with regulators actively and early. There is a tendency to try to do the minimum necessary to comply with the law and hope that you can fly low under the radar. This is a huge mistake. Having your first contact with the government to be a hostile one can be a business ending (and even freedom ending) experience.
I know it costs a lot of money and it's probably something you look forward to about as much as a root canal. But trust me, being able to sleep at night is worth it.
I am speaking only for myself. This article does not necessarily reflect the views of my employer or anyone else.
I recognize, and urge others to also recognize, that disagreeing with a law or legal requirement is not a justification for violating that law or failing to comply with that legal requirement. I am advocating that changes in laws and regulations be considered and adopted, not for civil disobediance or lawbreaking.