In section 7.6, we'll talk about Anti Money-Laundering. What is Money-Laundering and what are the rules that governments have imposed? Especially in the US that affect Bitcoin, some Bitcoin related businesses. The goal of Anti-Money Laundering policy is to prevent large flows of money from crossing borders or moving between the underground and legitimate economy without being detected. I talked earlier about capital controls, where countries are just trying to prevent money from crossing borders. In some cases countries are just fine with money crossing borders, but they want to know who's transferring what to whom and where that money came from. Anti Money-Laundering is aimed at trying to make certain kinds of crime more difficult especially organized crime. Organized crime groups often find themselves getting a lot of money coming in in one place and wanting to ship it to somewhere else but not wanting to explain where that money came from, hence the desire to get money across borders. Or they find their self making a lot of money in an underground economy and wanting to get that money into the above ground legitimate economies so that they can spend it on sports cars and big houses or whatever it is that the leaders of the group want to do. Anti Money-Laundering is designed to make that more difficult to either try to catch people trying to do those things or else prevent them from doing it, in order to detect certain kinds of crimes, or make organized crime more difficult. One of the rules that goes with Anti-Money Laundering is something called know your customer, sometimes called KYC. And the details of this can be a little bit complicated, depend on your locale, but the basic idea is this, that know your customers rules, require certain kinds of businesses that handle money, to first of all, identify and authenticate who their clients are, to know who these people are and to get some kind of authentication that they really are who they claim they are, and that those claimed identities correspond to some kind of identity in the real world. A person can't just walk in and say, I'm John Smith from 123 Main Street in Anytown, USA. They have to actually give an identity and have that be checked in order to engage in certain kinds of business. Second, after identifying and authenticating the clients, the business may be required to evaluate how risky it is, what the risk is with respect to a certain client engaging in underground activities. And this will be based on how the client behaves, how longstanding their business relationship is with the company, how well known they are in the community and various other kinds of factors. But know your customer rules generally would require some kind of risk analysis with respect to individual clients, and would require a company that's covered by KYC to treat clients whose activities seem riskier with more attention. And then finally third, typically there's a requirement to watch for anomalous behavior, to watch for behavior that seems to be indicative of criminal activity or money laundering or of other sorts of things. Tying that together with the risk evaluation to understand what's the level of risk with respect to a particular customer, and what to watch for with respect to a particular customer. KYC will often ask a company to cut off business with a client who looks too dodgy or who's unable to authenticate themselves or their activities sufficiently for the rule. As I said, this gets complicated but this is the basic outline. There are mandatory requirements in the United States that are worth talking about. For example, companies in a broad range of sectors have to report currency transactions that are over $10,000. They have to file something called currency transaction report to say what is the transaction? Who is the other party to the transaction? And there's some requirement to authenticate who they are. This has to be reported to the government and that goes into databases and then might be analyzed to look for patterns of behavior that are indicative of money laundering. Companies are also required to watch for clients who are engaged in what's called structuring, that is in structuring transactions to avoid reporting. For example if someone engages in a series of transactions that are $9,000 in value, as a way to get around the $10,000 transaction reporting rule, that amounts the structure and it looks like an attempt to evade the reporting requirements and a company that sees structuring is required to report it and they're required to watch for it. And so that requires filing of a suspicious activity report again filing that with the US government. And that again goes into a database, might lead to investigation of the client. The requirements differ here by country. I am by no means trying to give you legal advice about whether you need this or what you have to do. I just want to give an idea of what kind of requirements are imposed by Anti-Money Laundering rules. But I do want everyone to note that the US government and other governments take Anti-Money Laundering rules very, very seriously. This is not the kind of rule you can just blow off, and deal with it if you get a complaint from the government later. Bitcoin businesses have been shut down. They have been shut down temporarily. They have been shut down permanently. Business people have been arrested. People have gone to jail for not following this rules. This is one of those areas where government will enforce the law vigorously and where if you're interested in going at any kind of a business, that is handling certainly, large transactions, or, for sure, currency or fiat currency value in quantity. You had better be talking to a lawyer who understands these rules. This is an area in which government absolutely does regulate Bitcoin and has, ever since they noticed that Bitcoin was large enough to pose a risk of money laundering.
