Banking and Blockchain: Why We Need an AML/KYC Safe Harbor


In 1970, legislators supporting the Bank Secrecy Act (BSA) emphasized that the new law would not be a burden to financial institutions because they already kept most of the records required and the Secretary of the Treasury would have broad latitude to provide exemptions in cases where regulatory costs exceeded benefits.

Since then, each of the 11 additional laws has added more requirements for banks and money transmitters. Today, this compendium of regulation is generally referred to as the anti-money laundering (AML) and know-your-customer (KYC) rules.

In addition to reporting transactions above certain levels, banks are now required to know who their customers are, and to report any ‘suspicious activity’. Ask any financial institution today what its largest burden is, the answer is invariably “compliance”.

Uncertainty and de-risking

Regulatory burdens on financial institutions are expensive, and growing bank fees and service charges have reflected this. However, after the financial crisis of 2008, regulators added uncertainty to the mix.

They began to use the broad authority granted them by Congress to impose large fines, levying $321bn in penalties on banks between 2009 and 2016. The perceived randomness of who might be fined next and how much, added enormous uncertainty to the world of banking.

In addition to the financial impact of nine- and 10-figure fines, being singled out as a supporter of terrorism and organized crime carries an enormous reputational risk for any company.

Banks got the message. Their response was to sever ties with virtually any foreign correspondent bank with customers that regulators might deem ‘suspicious’ using 20/20 hindsight.

They are also careful not do business with customers or industries that might later turn out to be ‘suspicious’. It’s a rational course of action with devastating results.

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