The Myths of Compliance

First Published: 2001-07-26

I just received from my bank the questionnaire required by the new “know your customer” legislation and put aside work for a few hours to “comply” with it. Let me give you a “how-to-do-it” manual.

The world of bureaucrats 

First, although the account (open for some 5 years) is actually in the name of a Bahamian incorporated company, the bank sent me their "Personal Account Information" form. On querying the bank’s Money Laundering Prevention Officer (“MLP”), I was told that I got the personal form because I was the authorized signing officer. OK, but still leaving many nit-picky questions to resolve. Should I answer with my own data or the company’s?

Under "name of customer", I thought for a bit and filled in my personal name, with explanatory note as “sole signatory” for my company. Asked to supply “certified” copies of my passport, I learned from the MLP Officer that I could simply scrawl my own certification on the photocopied pages. This was good news: I had no need to call on the services of a notary or a passport official.

"P. O. Box". Again, I needed more thought. I decided to fill in the company’s box (not my personal one), since that’s where the bank sends mail. 

"Permanent address". A certified copy of driver’s license, utility bill, RPT assessment bill or other documentation must evidence this. Well, the new licenses do not include address, nor do Batelco bills, and my company does not get a BEC bill, nor is it assessed a real property tax. I responded by enclosing the tax assessment for my personal residence.

"Nationality". Both the company’s and mine are Bahamian, so that was easy.

"Date of birth". I chose my own, not the company’s.

"National Insurance No". I considered strange the instruction “retain certified copy”. Does the bank really expect me to send them the original? I resolved it by sending a photocopy (certified by me again) of my own NIB card. But why on earth is this needed for a customer who provides a passport?

"Telephone No. – home and work". The directive “verify in telephone directory and retain certified copy of listing” puzzled me. Was I supposed to photocopy pages from the 2001 Directory and certify them? I compromised by sending originals of Batelco bills for both numbers. The long-suffering MLP Officer told me she would verify them in Directory.

"Place of Work". I simply named the company and its street address.

"Occupation". Whose? Mine or the company’s? I fudged by writing in “financial consultant”. The MLP Officer told me I should just back this up by providing a copy of company’s business license.

"Purpose of Account". I filled in simply “pay company’s operating expenses”. Hope this will pass muster with MLP Officer.

"Source of Income", with instruction to attach copy of letter from employer or certified copy of pay slip. How could this be applicable to a company, with income from many clients? MLP Officer (by now tired of me) told me business license itself would answer this point

"Expected monthly account activity — number & $ value of deposits". By now tired myself, I answered brusquely: “same as past history.” 

Does it work?

All very entertaining, and for someone who handles complex paperwork every day, it was no big deal. But think of the thousands of Bahamians who sadly will have a real struggle with this procedure. And think of working Bahamians who have been considering opening a bank account and who will now be deterred by these complexities. A modern economy needs deposits in banks, not cash under mattresses: is this the way to achieve it? 

Like many hasty legislative actions, the new “know your customer” rules will have unforeseen and unfortunate consequences of the highest order. Banks’ MLP Officers, either taken away from more productive work or newly hired at considerable expense, will devote hours and days of their time answering picayune queries like mine or reviewing the submitted forms and wrangling with customers over the tiniest details. At the end of the day on December 31, 2001, we can be sure that many questionnaires will not have been completed in full compliance with every pinprick of the regulations. Banks will then have two options: they can simply sweep the deficiencies under the rug and accept the risk of keeping the accounts, or take the Draconian remedy of turning the accounts over to the Central Bank. Is the Bank really prepared for this? 

Another objection to the regulations is more serious. Far from being an effective net to catch money-launderers, they will in fact do the opposite: they will lull bankers into a false sense of security and distract them from detecting the few real crooks. By accumulating and reviewing vast files of irrelevant paperwork, our banks will have little time or incentive to investigate the serious cases deeply. No professional drug-dealer is going to be spotted by having on file his NIB number and his “source of income” as provided by himself. 

In fact, probably 90% of our B$ bank accounts are held by decent wage-earning citizens who the slightest scrutiny will reveal cannot possibly be laundering money. The banks themselves can observe that the modest in-flow of funds to these accounts comes from payroll deposits or savings account interest. Unlike the clients of international private banks with diversified investment portfolios booked in complex trusts and holding companies, these retail customers should be exempt from the cumbersome “know your customer” apparatus: a proven signature, address and phone number should be all that’s required. 

Our local life insurance companies face similar absurdities. Sales agents, instead of selling, are spending most of their days now collecting detailed information from thousands of long-time customers with ordinary life policies. The only movements of funds are the periodic fixed premiums and the eventual death benefit — surely a far-fetched path for laundering money. 

The alternative

By radically reducing the redundant paperwork, well-trained bank compliance officers would be better able to focus on the truly suspicious events, which are rare but time-consuming. Their characteristics are not hard to learn: 

1. An exceptionally large deposit on opening an account can be questioned by an officer before acceptance; 
2. Subsequent large deposits from unknown sources (particularly if followed by immediate large withdrawals or transfers) can be investigated and, if necessary, the customer can be reported and the account blocked. 

The real way to identify money launderers is through the use of computer programs (they do exist) that immediately detect unusual movements in an account and flag them to management, plus training front-line tellers how to spot questionable walk-in customers.

This is the efficient approach to money laundering — using a rifle instead of scattershot firing without aim.

Our country would be well served if the banks and insurance companies themselves stage a quiet but forceful revolt against these new and useless burdens that have been placed upon them. They should demand that our lawmakers return to a world of reality, rather than the mythical world of bureaucrats where all problems are solved by keeping archives of paper on file.

“The Americans’ frustration with government regulation was caused not mainly by what is regulated – everyone wants a safe workplace and clean air – but by how regulation works. Government regulates us like central planning, using ironclad legal dictates that effectively banish human judgment and good sense.”
(Philip K. Howard, The Death of Common Sense)

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