KYC (CDD) Risk used for sociopolitical aims?


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KYC (CDD) risk imperatives and Compliance challenges remain controversial both abroad and in the U.S.

Late last week in our AML Partners’ blog, we discussed the looming BNP Paribas fine, the pushback by some French leaders, and the challenge of whose rules and regulations prevail when there are so many competing interests involved.

These competing interests and political stakes arise in domestic enforcement, as well. A recent case is Operation Chokepoint, a U.S. Justice Department probe that has some bloggers and analysts afire with concern about regulatory overreach and the presence of politics in the potentially selective enforcement of financial regulations.

Details on Operation Chokepoint have been slow in emerging, but in essence it appears to be an effort by the U.S. Department of Justice to close off access to the banking system for businesses they identify as a threat in some manner.

The Wall Street Journal’s Law Blog reported last week that a 2013 internal memo from the Justice Department described the probe as a collection of civil and criminal investigations into a number of banks and payment processors that act as middlemen between other banks and certain types of merchants.

The Justice Department has defended the probe and has asserted that it has pushed financial institutions to improve their attention to fraud and illicit activity in payment processing. However, some critics, including some American lawmakers, have questioned whether the Department of Justice is pressuring financial institutions to close off payment processing with controversial but legal merchants like payday-loan lenders, escort services, get-rich-quick offers, online gun and ammo retailers, and credit-repair businesses, to name a few.

According to Washington Post blogger Todd Zywicki, the Justice Department is using the rationale that these businesses pose “reputation risk” to the banks, but many of the businesses targeted are legal under U.S. law.  He also noted the irony in pushing for banking access for marijuana growers who though they may operate in pot-legal states are still violating national laws.

The situation overall raises the question of the purpose and reach of regulation in the financial sector and the degree to which political and social undercurrents can affect enforcement in some circumstances. Zywicki suggests that if one extends the logic in Operation Chokepoint, elements of KYC (CDD) risk and other Compliance requirements may be used to choke out businesses  and industries that run counter to whichever sociopolitical interests are in power at a particular time.