After three-and-a-half decades, the verdict on “Know Your Customer” (KYC) and the Financial Intelligence Centre Act (Fica) is unmistakable: it is a regime of enormous cost, derisory efficacy and significant collateral damage. It has failed in its declared mission, reduced tax collection and succeeded in constructing an apparatus of surveillance that imperils centuries of humanity’s strivings for both privacy and liberty.
Since 1989, when the G7 countries established the Financial Action Task Force (FATF) to combat money laundering, KYC protocols, subsequently known in South Africa as Fica, have metastasised across the globe. Today virtually every bank, insurer, broker, asset manager, legal practice, estate agent, casino and lately even businesses selling items of R100 000 or more are compelled to collect, verify and retain exhaustive personal data about their clients before undertaking the most ordinary of transactions.
The ostensible rationale for all of this was originally unimpeachable: to stymie the laundering of illicit gains (mainly drug money, it was said), the illicit proliferation of nuclear arms, and even what was termed the “white slave trade”.
After the 9/11 World Trade Center attack, this rationale was rephrased to interdict the “financing of terrorism”. After the global financial crisis, “to bolster the integrity of the global financial system” was also added.
Yet the actual practical outcome of KYC and Fica has been considerably different: it has become one of the most prodigiously costly regulatory experiments of the modern era, with negligible comparable demonstrable benefits, accompanied by an insidious encroachment upon individual liberty, fundamental human rights and personal privacy.
Business institutions worldwide now expend the equivalent of hundreds of billions of dollars annually upon compliance infrastructure, specialised software, dedicated compliance staff and relentless auditing.
The obligations imposed directly upon clients are similarly burdensome and costly in terms of time, effort and personal expense. Passports, ID documents, utility bills (or a range of alternative proof of residence documents), tax returns, proof of funds and source-of-wealth declarations are demanded with numbing frequency, regularly duplicating prior submissions.
Bureaucratisation of ordinary life
This has led in large part to the bureaucratisation of ordinary life – something that would have been dismissed offhand only a century ago. Could it be that in another century we might need to carry large folders of documents with us when we purchase milk and eggs at the local grocery store? All in the name of “public safety”, of course.
Prohibitive costs cascade throughout the economy.
The World Bank and the Institute of International Finance have repeatedly observed that KYC and Fica compliance suppresses competition, disadvantages small enterprises and inflates the costs of all goods as well as financial and other services. Fintech innovators and cross-border traders are particularly badly impeded, as their business models struggle to comply with and absorb the regulatory overburden. Moreover, regulations in some jurisdictions directly contradict those in others.
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And yet despite colossal global investment, the empirical evidence is damning. The UN Office on Drugs and Crime continues to estimate that between 2% and 5% of global GDP is laundered each year, a ratio that has remained stubbornly constant since the inception of the KYC and Fica regime. Three decades of global compliance has scarcely dented the illicit flows.
With apparent political imperatives disguised as regulation, KYC has always appeared to observers to be more about politics than genuine efficacy. As noted above, in the 1990s it was framed as a weapon against drug cartels. After 9/11 the rhetoric shifted to counterterrorism. More recently, the emphasis has migrated to corruption and to what many see as the real original intention, tax evasion. These rhetorical mutations serve chiefly to entrench an ever-widening net of costly compliance measures.
Beneath these shifting justifications lies a less palatable truth.
The principal driving force has been the desire of the US, supported by certain European powers, to extend its fiscal and surveillance reach. Through FATF “recommendations”, nations have been coerced, under threat of black (or “grey”) listing and other sanctions, into adopting regimes that in practice facilitate the monitoring of capital flows, legitimate tax avoidance measures and defensive offshore wealth protection. The grand moral narrative of crime prevention thus obscured a far more prosaic ambition: tax collection and the extraterritorial projection of US and European regulatory power.
The implications of this assault on personal privacy and liberty are profound. Individuals are required to yield sensitive information, identity documents, addresses, employment details, income streams, even the minutiae of asset provenance. This data is warehoused by private institutions across myriad databases, frequently insecure, and routinely shared with foreign states.
The risks are manifold.
Cybercriminals covet such troves and breaches have already exposed millions of individuals to fraud and identity theft. Governments, for their part, are increasingly tempted to exploit these repositories for purposes far beyond their original remit. Once citizens are habituated to constant financial and other personal disclosures, the barriers to expanded state intrusion, be it in the form of asset seizures, tax surveillance or restrictions on lawful expenditure, are perilously weakened.
It was not long ago when Canada, known as a free society, saw its government utilising these instruments to freeze the bank accounts of truckers (and their supporters) who protested the heavy-handed lockdowns in that country. Closer to home throughout Africa, political activists are closely watched and threatened with having their financial lives upended if they get too vocal.
In short, KYC and Fica are not merely an inefficient regulatory burden. They are the scaffolding of a surveillance state, steadily eroding the principle of financial privacy, which has long been regarded as a cornerstone of civilised democracy and individual liberty.
Grotesquely disproportionate
Apologists for KYC assert that even modest disruption of illicit finance justifies the costs. Yet this argument collapses under scrutiny. The trade-off is grotesquely disproportionate: billions expended, vast numbers of legitimate transactions delayed or abandoned, while criminal enterprises adapt within this very system and thrive.
The phenomenon of “de-risking” is especially pernicious: banks, faced with onerous compliance, simply sever relationships with entire classes of customers or entire countries. Migrant workers, small charities and entrepreneurs in developing markets are disproportionately excluded from the financial system, not because they are criminal, but because they are deemed administratively inconvenient.
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Perhaps the most striking fact is the absence of serious independent empirical evidence demonstrating KYC or Fica’s success in reducing crime. Successful prosecutions of substance have been minimal. Illicit finance remains resilient, its operators nimble, its networks global. Regulators are perpetually several steps behind.
If KYC and Fica were a private corporate initiative, shareholders would have terminated it long ago. A scheme that devours such vast sums of capital, time and effort while producing such nugatory results would long have been judged an embarrassing failure. That it persists is a testament not to its effectiveness but to its political utility and symbolism.
The imperative is not to abandon the fight against financial crime, but to confront the reality that current methods are woefully misaligned with the objective. Urgent rational reform would:
- Adopt risk-based models, focusing regulatory effort upon genuinely high-risk jurisdictions, sectors and transaction types, rather than blanketing every client with intrusive demands.
- Harness technological innovation, such as decentralised identity verification systems that permit individuals to control their own data, releasing it only when strictly necessary or demanded by a legal process.
- Promote AI- and human intelligence-driven enforcement, concentrating scarce resources upon meaningful investigations rather than the bureaucratic box-ticking that now persists.
- Use common sense monitoring.
After well over three decades, the verdict on KYC and Fica is clear. It is a practice of vast cost, piffling efficacy and significant unintended detrition, ironically reducing tax collection because of the much-increased costs of doing business. It has failed in its declared purpose, succeeding in constructing a system of surveillance that inures citizens to the violation of their privacy, jeopardising centuries of the strivings of humanity for life, liberty and dignity.
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The business community bears the brunt of this folly, functioning as unwilling auxiliary police at colossal expense and inconvenience. Unless leaders in finance and commerce across the globe summon the resolve to challenge the orthodoxy, the ratchet will continue to tighten. More cost, more difficulty, more intrusion, less growth, less dignity, less liberty.
The promise of KYC and Fica was noble; the reality is dismal. It is time to acknowledge failure and to re-imagine a system that is proportionate, effective and respectful of fundamental rights.
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- The author, Brian Benfield, a retired professor from the department of economics, University of the Witwatersrand, is a senior associate and board member of the Free Market Foundation
