The Hidden Cost Of Strict KYC and AML In The Banking Sector

Last Updated on June 11, 2021 by Oddmund Groette

This article is off-topic, but in my opinion quite important:

International regulators, led by the EU and the USA, are increasingly taking steps to clamp down on money laundering and pushing banks to better KYC (know your customer). According to regulators, money laundering is widespread and very common. Personally, I believe money laundering is grossly overestimated and is more about politics and influence. However, what is starting to become a problem is to get a proper banking service for small businesses. The regulators, in their eagerness to implement more laws and red tape, are killing all incentives for banks to take on small clients. Let me give you a personal example:

I have a Latvian LLC (called SIA) which is mainly my investment vehicle (I’m a resident of Latvia but a citizen of Norway). I do about 40 bank transactions per year, mostly in USD to my account at Interactive Brokers, and some transfers to pay the inevitable taxes. In other words, I’m a very small client. I have applied for a bank account in the three biggest banks here in Latvia (for my LLC), but they all rejected me. The reason is obvious: it takes more or less the same amount of time to handle a big client as a small one: the workload is fixed per client because of all the papers needed to be filled out. Add to this the risk inherently in all international transfers. The penalties for any bank getting involved in money laundering are very hefty. Hence, there is no point in taking on such a client like me even though transactions are between reputable Interactive Brokers and my company’s bank account. Every transaction of any size needs to be verified, and this takes a lot of time both for the bank and the client. (Last week I spent three hours gathering documentation for some transfers I did to my personal account. If I can’t document it, they simply freeze the account. For all bank transactions you are guilty until you prove yourself innocent.)

To me it does not make any sense: I would assume at least 99.5% of transactions are completely legal and honest. Regulators want to clamp down and stop a small percentage of the 0.5% suspicious transactions, but at the same time, they create a lot of problems for the 99.5% honest transactions. How many tens of billions do this cost in wasted manpower and less productivity? We can only guess.

As we all know, big business wants regulations to keep small business and competition away.

This article describes why Estonian banks close bank accounts to foreigners.