Avoiding the Material Risks Associated With Withholding or Providing Incomplete or False Know Your Client (KYC) or Know Your Business (KYB) Information

Financial institutions have the ability to ask for KYC and KYB information from clients at any time as part of the financial institution’s Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) obligations and policies.

A common misunderstanding is that financial institutions need to ask the client’s permission or seek the agreement of the client to request the information, and that the financial institution is required to justify its ongoing and additional information demands. This is not so. Continuing and additional information demands may stem from ongoing reviews as part of the financial institution’s ongoing CDD and AML audits/examinations or arise from EDD triggered by unusual or suspicious transactional activity, changes to the entities structures, ownership, or control, or negative news or information that comes to the attention of the financial institution. Financial institutions do not need to ask the client’s permission or seek the agreement of the client to request information, and financial institutions are not required to justify their ongoing additional information demands.

Some believe they can object to CDD or EDD requests or intentionally hide, withhold, or misrepresent KYC/KYB information. Such actions, especially if done intentionally, can violate several laws. Here are some of the most relevant ones:

Bank Fraud: In many jurisdictions, including the United States, intentionally deceiving a bank, credit union, or trust company to gain monetary benefits constitutes fraud. Bank Fraud is usually a felony punishable by fines and imprisonment.

False Statements: Under United States federal law, knowingly making false statements to federally insured banks, credit unions, and broker-dealers may be a crime.

Identity Fraud or Identity Theft: If a person hides information about their identity or uses someone else’s identity without their permission, it’s considered identity fraud or theft. This may include using a web of shell companies, trusts, fictitious entities, or strawmen to conduct financial transactions in the name of another for one’s benefit.

Money Laundering: A person hiding information may be part of a money laundering scheme if it is in furtherance of a conspiracy or facilitation to disguise the origins of money or for tax evasion.

For example, 18 USC §1956 is a United States federal law that pertains to money laundering. Money laundering refers to the process of making illegally-gained proceeds appear legal. Here’s an analysis of the critical provisions of the law:

Financial transactions: This section of the code makes it illegal to conduct or attempt to intentionally conduct a financial transaction involving proceeds from specified unlawful activities to promote the carrying on of specified criminal activity or to engage in tax evasion or tax fraud by actions intended to engage in conduct constituting a violation of section 7201 or 7206 of the Internal Revenue Code of 1986 as amended.

International and interstate commerce: The law also applies to transactions involving the movement of funds by wire, or other means that either cross state lines or national borders.

“Knowing” nature of the transaction: A critical aspect of the law is that the person involved in the transaction must know that the property involved represents the proceeds of some form of unlawful activity.

Penalties: Violations of 18 USC §1956 can result in severe penalties, including fines of up to $500,000 or twice the value of the property involved in the transaction, whichever is greater, or imprisonment for up to twenty (20) years, or both.

Conspiracy: This law also makes it a crime to conspire to commit any of the offenses defined in this section.

This law is one of the main tools used by federal prosecutors in the United States to combat organized crime, drug trafficking, tax evasion, and financial fraud, because it allows them to prosecute the illegal activities that generate large sums of money and the subsequent efforts to conceal these activities.

Tax Evasion: Hiding income or assets or conducting transfer payment(s) through a shell company(ies) to evade taxes can also be a criminal offense.

Know Your Customer (KYC) Violations: Financial institutions must implement KYC procedures to prevent identity theft, financial fraud, money laundering, and terrorist financing. If a customer provides false or misleading information or intentionally omits essential information, they could be implicated in a KYC violation, resulting in penalties, account closure, and various potential legal consequences.

Please note that the preceding are only general explanations. The actual laws are detailed and nuanced, and their application can vary depending on the case’s specifics.

Also, it’s worth noting that even if a person’s actions don’t amount to a criminal offense, they could still face account closures, negative news, and civil penalties, such as lawsuits or fines, for providing false information to a bank. It’s always best to be entirely truthful and transparent when dealing with financial institutions and seek the advice of competent legal professionals.