The term KYC may sound like a misspelling of a fried chicken take away franchise, but it is the one thing that unites banker and client in irritation. Bankers hate it, clients hate. Bankers kind of understand the idea, clients seldom do. So what is it?
According to modern legislation (and particularly MiFID) a bank has the legal responsibility of knowing their client. This encompasses so many things from the client’s life, that it is a miracle that private banks are even able to open accounts anymore.
In the good old days KYC consisted of a copy of a passport (any old passport would do) a utility bill and a big bag of readies in any internationally recognised currency.
Nowadays? Woohoo! Nowadays it’s a whole new world.
Because of anti-money laundering and terrorism financing protocols, the bank has to find out the origin of the client’s money and be satisfied that the money has been obtained in a legal manner and does not constitute part of any money laundering, terrorism or organized crime. (Tax evasion has also now become a factor).
For obvious reasons, ascertaining the origin of assets can be difficult. A good example is Russia. How do you clearly find out the origin of a wealthy Russian’s fortune, who claims to have made the money after the fall of the Soviet Union? Not an easy task. It is reasonable to expect that paperwork could be somewhat lacking.
You can also use yourself as an example. If I was to ask you how you obtained your savings, you would probably say you earned it, or inherited it, or both or something else. But if I was to ask you for proof, you might not be a) Able to supply the appropriate paperwork and b) Be bothered to jump through so many hoops just to become a client of a bank.
After all, shouldn’t the bank be serving you the client, not interrogating them?
Now we’ve only gotten started. Next the client is asked to list their assets. Go on try it now. How much do you have in real-estate? How much in equities? How much in Bonds? What about cash? Hedge Funds? What’s the price of tea in China?
The bank will also want to know about your marital situation and your kids incase you get run over by a truck and people come asking about your money.
They also want to know about your politics. Yes, politics. Are you a PEP: Politically Exposed Person. In laymen’s terms it means are you a corrupt F*&%er.
At this point many potential clients get a tad offended, they start wondering why the bank is asking them all these things and what business is it of the bank’s to ask them such questions of a personal nature.
So once the potential client feels suitably offended, then the bank gives them a spot quiz, a real old fashioned type of school test. Or at least that’s what it feels like for the client. The test consists of asking them a bunch of multiple choice questions relating their experience with different assets classes; bonds, equities, FX structured products and so on. For example, how many years of experience, how many trades a year do they do, how do they rate their own knowledge of different types of investments etc. etc.
All of this so the bank can find out the client’s “risk profile” which in itself is such an absurd concept that I will save that for another blog post all together.
So do you agree with me now that it’s a miracle any accounts get opened at all in private banks nowadays?