Why does anti- money laundering exist, and is it the same as know your customer?
You see the alphabet soup “AML/KYC” a lot when it comes to financial institutions, de-fi and Web 3.0 projects. They are not the same thing, though. Know Your Customer, or KYC, is just a part of the broader anti-money laundering effort around the world. KYC information needs updating on occasion, but anti-money laundering, or AML, is a constant process with every transaction under some degree of scrutiny.
The full breadth of AML is much larger than what we are showing here – even KYC is just a part of it. There’s KYCC! That’s Know Your Customer’s Customer. Intricate cross-border transactions are another part of AML. Here, we will stick to the basics.
Reports
Part of the essential framework of AML is Reporting. Some transactions require reporting immediately and without exception. Others only require it when an issue is raised. Reports fall under five basic groups:
Currency transaction report (CTR)
If you are conducting transactions with more than $10,000 in cash in the course of one business day, you will need to file a CTR. This is the same whether you are an individual or a business. If you go to your bank, it can be filled out there, or you can file it electronically with the Financial Crimes Enforcement Network (FinCEN). If you file one on occasion (when selling a car, for example) it will not raise flags. However, repeated CTRs, especially from private individuals, may lead to a closer examination. Trying to avoid filing by spreading out the transactions over the course of a day or two can also attract attention. That’s when a Suspicious Activity Report gets filed.
Suspicious activity report (SAR)
An SAR must be filed when the financial institution notices something strange – there does not need to be proof. I a client appears to be avoiding the filing of a CTR or a Monetary Instrument Log, it needs to be noted and sent to FinCEN. Any hint that wire or check fraud is being committed should trigger an SAR filing.
Another case that requires an SAR filing is ‘mysterious disappearances’. If someone seems to be covering a departure – either their own or someone else’s, the authorities need to be notified.
One other important aspect of SARs is that the filer cannot discuss the filing, even with the person or business that it is filed about. SARs are even exempt from the Freedom of Information Act.
Foreign Bank Account Report (FBAR)
U.S. citizens and residents connected to foreign bank accounts or "foreign financial accounts" altogether totaling over $10,000 need to file a yearly Foreign Bank Account Report (FBAR) with the U.S. Treasury by October 15. The accounts must also be reflected on the Form 1040 tax form Schedule B.
Currency and Monetary Instrument Report (CMIR)
If you are physically sending or causes someone to physically send currency, traveler’s checks, or other monetary instruments in an aggregate amount exceeding $10,000 into or out of the United States, a CMIR is required.
