KYC Part 1

The evolution of KYC – Part 1

From Ancient tax-dodging Chinese merchants, through Al Capone & to the invention of “offshoring” money. 

This is the first in a three-part article series that covers the history of KYC (Know Your Customer) legislation and the three primary drivers of the need for such legislation: money laundering, tax evasion, and the financing of terrorism.

As industry insiders know KYC stands for ‘Know Your Customer’ and it is meant to verify the identity of customers and assess their suitability to be a customer. While it may seem insignificant to customers, it is crucial for businesses. 

How did KYC come to be? 

It all started with the first recorded incident of money laundering which is said to have happened in China approximately 4000 years ago. Merchants would hide their wealth from rulers in order to avoid it being taken from them. In modern terms, this is also known as tax evasion. However, and perhaps somewhat surprisingly, the foundation of modern KYC laws was not laid until the 1950s. 

The core principles of money laundering haven’t changed much over the centuries. But the mechanism of laundering money has changed drastically. 

Let’s begin our little KYC history lesson almost 100 years in the past: 

1920s: Al Capone & the modern invention of money laundering

The term ‘money laundering’ is said to have originated from Italian mafias in the United States (US) during the 1920s where criminals such as Alphonse “Al” Capone, or Scarface, were purchasing laundromats to comb in their illegitimate business proceeds with legal profits. They were literally “laundering”. 

During his short-lived career as a mafia boss, Al Capone managed to launder an estimated $100,000,000 of illegally gained proceeds per year. When you think about it, it’s a large value of money for that era. 

All that changed when a small band of ace financial investigators known as the Internal Revenue Bureau’s Intelligence Unit (IU) was commissioned to combat tax evasion and bribery of Treasury officials. The IU investigations led to the arrest of Al Capone which was sentenced to  11 years in prison. 

Al Capone was not convicted for his money laundering or other notorious criminal activities but for tax evasion of a mear $1,000,000 in 1931 — only a small fraction of his laundering efforts. 

1930s: Enter Mayer Lanksy and his money laundering Casinos

Following Al Capone’s imprisonment in Alcatraz which ultimately brought an end to his Chicago-based operations, criminals were forced to become more “organized” in order to avoid Capone’s fate. Later gangsters such as Meyer Lansky quickly grasped the importance of creating businesses as a “front” to disguise illegal proceeds. 

As part of the mechanism to launder money, Lansky used casinos and developed a gambling empire that stretched across the world. Lansky and his connections also bribed their mob connections to protect themselves against law enforcement and other criminals.

1940s: The lights of Las Vegas and the secrecy of Swiss Banking

Las Vegas was infamous for being a tool of money laundering during this period, especially by the likes of Lansky and Benjamin “Bugsy” Seigel. To protect himself from meeting the same fate as Al Capone, Lansky transferred his money to a Swiss bank account where he was protected by the 1934 Swiss Banking Act which kept him anonymous. 

He quickly saw the benefits of offshore banking and eventually bought an offshore bank in Switzerland which was used to launder his money through a network of shell companies. Lansky perfected the art of money laundering and pioneered the use of shell companies. 

Click here to switch to Part 2 and continue reading about the fascinating history of KYC. The next chapter prominently features the well known Narco boss Pablo Escobar.