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Avoid the virtual trap

In today’s financial climate in which banks’ credibility has already taken a hit, any further reputational damage needs to be avoided at all costs. While financial institutions have come a long way in ensuring measures are in place to tackle money laundering, the class action taken against NatWest in the US by victims of a terrorist attack in Israel highlights how even conducting the correct due diligence can sometimes not be enough - leaving a bank’s name tarnished.
 
Furthermore, social networking sites such as Second Life and Facebook are providing new opportunities for the money launder or criminal to exploit. This is causing banks to think radically about how they defend themselves against these threats, particularly where hard currency is converted into virtual currency before being re-introduced once again into the banking system in the form of hard currency. Banks need to satisfy themselves about a customer’s underlying transaction – this can easily be established if bricks and mortar are involved, but this presents unique challenges if the deposit originates from the sale of a virtual asset.  
 
As banking is established on trust, this means that banks can no longer do the bare minimum to comply with money laundering regulations. It raises an interesting dilemma for banks as the person hiding behind the Avatar may be a criminal, terrorist or drug trafficker. Arguably this elevates the reality of traditional KYC at a time when sanction screen checking is coming under very serious scrutiny. Stronger regulation of the virtual world is required otherwise banks face the prospect of further hefty fines, or more crucially, have their reputation severely compromised either through association or failure to adequately evaluate or take steps to mitigate the threat.

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