A core talking point of Republican Donald Trump’s presidential campaign is that, once in office, he will build a wall along the U.S./Mexico border, a mammoth structure he promises the latter country would pay for
The candidate’s recent meeting with Mexican President Enrique Peña Nieto has reignited the question of how, exactly, would Mexico be pressured to cut that multi-billion dollar check? The needed “encouragement” may ultimately mean more work for banks’ compliance teams.
A plan published on the Trump campaign’s website explains that in order to force Mexico to foot the bill, his administration would rely on an expanded version of the “know your customer” rule, a requirement that financial institutions verify the identity of their clients, seeking out relationships and red flags that might otherwise entangle them in a money laundering scheme or sanctions violation. KYC mandates were enacted as part of the post-9/11 Patriot Act.
Trump’s plan would leverage the executive branch’s authority to issue and amend KYC regulations. “On Day 1,” his administration would promulgate a proposed rule amending the existing rule to redefine the list of covered institutions to include money transfer companies and redefine "account" to include wire transfers. There would also be a requirement that “no alien may wire money outside of the United States unless the alien first provides a document establishing his lawful presence in the United States.”
“On Day 2, Mexico will immediately protest,” the policy statement predicts with bold, nearly psychic certainty. “They receive approximately $24 billion a year in remittances from Mexican nationals working in the U.S. The majority of that amount comes from illegal aliens. It serves as de facto welfare for poor families in Mexico.”
On Day 3, the Trump White House will announce “that if the Mexican government will contribute the funds needed to the United States to pay for the wall, the Trump Administration will not promulgate the final rule, and the regulation will not go into effect.”
The threat to expand KYC requirements would be supplemented by other efforts, including trade tariffs and a threat to block visas for Mexican nationals.
Aaron Klein, a fellow in economic studies at the Brookings Institution and an unpaid member of the Clinton campaign’s Infrastructure Finance Working Group, points out what may be a serious flaw in the plan. In an article published on the think tank’s website (and on Fortune.com), he reminds that “anyone can open an account with proper identification for taxes and proof of identity” and “there is no requirement that banks see your birth certificate or passport.”
The proposed rule change’s requirement that “no alien may wire money outside of the United States” without establishing their lawful presence could also have global ramifications. “That means that anyone in the U.S. wishing to send money anywhere in the world would have to establish lawful presence in the U.S.,” Klein wrote. “Rather than just being targeted at Mexico, Trump’s plan would affect China, India, the Philippines, and Nigeria—countries with citizens who, combined, receive almost twice as much money from family members living in America than do all citizens of Mexico combined.”
Virtual currency advocates could emerge as big winners from the brouhaha. Blocking remittances to Mexico might very well be a boon for Bitcoin and blockchain, with their proponents predicting a surge in the use of virtual currencies as a means to bypass a restriction on cross-border fund transfers.
The bad news for compliance officers: not only would they have expanded KYC protocols to worry about, the mainstreaming of Bitcoin and virtual currencies would bring with it a host of challenges. Regulators at the state and federal level would be likely to follow the lead of New York’s Department of Financial Services and, in rapid fashion, expand upon rules for protecting customer assets, anti-money laundering compliance, account verification, capital requirements, and cyber-security safeguards.