Why all the formalities and all the questions just to open one little bank account? Why do I have to show ID to prove who I am? The answer is simple: Financial institutions are strictly required to prevent their activities from being abused for money laundering or terrorist financing, and they are required to notify the authorities of such conduct. Other parties are subject to the same obligations, including lawyers (when they provide certain services); auditors; life insurance companies; and real estate agencies.
Not just hardened criminals
Through money laundering, violators try to make ill-gotten funds look as though they were obtained legally, and then use the funds for their business activities without arousing suspicion. But it is not only hardened criminals who are guilty of money laundering because, according to the Act on Measures Against Money Laundering and Terrorist Financing, the violator need not have committed the crime (such as robbery or drug dealing) that actually generated the ill-gotten gains. Merely accepting funds for services provided could be a violation if there is a suspicion that the funds were obtained illegally.
The best-known method of laundering money is to deposit it to an account with a financial institution and then transfer it between various accounts and countries, use it in simulated transactions, and so forth, so that it becomes more and more difficult to trace the funds back to the original crime. The funds eventually end up in the hands of those who actually profit from the criminal activity, such as drug lords.
Information gathering
Financial institutions must therefore get to know their customers in order to assess whether there is a risk of money laundering. In order to do this, they need, for instance, to gather personal information about individuals and have individuals verify their identity by showing identification. Official data on companies, their management, and their owners are requested as well. There is also a stringent requirement to determine whether individuals have political connections; i.e., whether they hold any official position such as a seat in Parliament or local government. This is because such individuals are considered more vulnerable to corruption and bribery than others.
A bill of legislation was passed in December and entered into force on 1 January. It can be expected that, with the entry into force of the new Act, financial institutions will be even stricter than before about gathering information from customers, as the new legislation contains explicit penalty provisions. Financial institutions could face administrative fines ranging from ISK 5 million to ISK 800 million if they do not follow the rules.
Finally, it is worth stressing that notifying the authorities of suspicious business practices is not considered a violation of customers’ personal privacy or of bank employees’ obligation to observe confidentiality. This is justified by the social interests at stake in allowing bank employees to report suspicious activity to the authorities without making themselves guilty of breaking the law. In this way, financial institutions can do their part in achieving the objective of the law, which is to reduce the incentive to break the law by making it more difficult for violators to enjoy the proceeds of their violations. Surely, this is a goal that we can all agree upon.