Anyone working in the financial services industry knows about all the new “Know Your Customer” or “Know Your Client” regulations that have popped up in recent years. KYC is essentially the main tool regulators are using to enforce Anti Money Laundering legislation. The term essentially consists of two items:

• You need to be able to prove who your customers are, so this information can be used in investigations later on.
• You need to be able to identify “unusual” patterns in a customer account. For example a customer might have a steady income of $1000 a month for 3 years. All of a sudden he starts receiving weekly payments of $9,999. This may be legitimate but according to most legislation around the world it is the responsibility of the financial institution to discover the “source” of the income.

The first point is important not only for the obvious reasons, but also to help enforce the second point. If the first item did not exist, you could have someone opening 100 different accounts with false names and move the money that way.

As this is primarily a “tech blog”, geeks might rightfully ask what has this got to do with us? Short answer if you dont work in the financial services industry nothing. If you do, you might be involved in the technological solution to a policy generated by management and you must understand the issues involved.

Panama has had a bad reputation as a centre for money laundering in the past. While this used to be true due to the traditionally very liberal banking regulations of past, we now have some of the most stringent anti money laundering rules around. This was started 5 years ago by the introduction of the new Banking Superintendent.
They have introduced very strong regulations on such things as anti money laundering while letting the market take care of most of the other banking infrastructure. In addition to them there is also a special Financial Analysis Unit (UAF) which supervises the Anti Money laundering regulations for all institutions financial or otherwise. UAF have very strong powers and reports directly to the president. This approach has been very successful, know all the international organisations fighting money laundering have given Panama very high ratings.

Now Panama has got a strong tradition for international commerce and communications. We have the canal after all and probably some of the best fiber connectivity in the world. This coupled with our large Banking Center should be a great oportunity to international financial services on the internet. However the main thing stopping this is the implementations of the current anti money laundering regulations. There is not a problem with the regulation it self or with the policy for large and non internet based accounts. However the problem is that there hasn’t been put enough thought by the financial institutions them selves in creating different rules for small internet based accounts.

Most of the rules are setup be relatively unintrusive for traditional non electronic clients. In particular larger businesses doing business through attorneys dont normally have a problem. However how other types of applications, such as payment systems, micro investing, rechargable debit cards etc. They have been made close to impossible due to the interpretations of the laws. The main reason is that they take away the benefits of doing it on the internet. You can’t open account instantly, because you have to provide physical evidence of various items.

However there are many other interesting approaches that can be done using technology, that are fully allowed within the guidelines of the Banking Superintendent.

One approach that I favor is what I call the KYC Ladder. Variations of this are already in place in many internet based financial services today. This takes the graduated approach. An institution defines different levels of access based on different levels of information. This allows smaller accounts/transactions to be done without requiring masses of paperwork. An example could be a rechargable or single use debit card. This could be created with a max balance limit of $200 with no more documentation than customer provided name/address information as well as email verification and a credit card charge. If you want to increase your balance limit you would have to provide further information. This whole thing could be done in such a way that it would be very inobtrusive and quick to open an account and certify oneselves up to higher levels.