Many binary options traders are asking themselves, and often the broker appointed account managers a simple question: why does it take longer to withdraw funds than to deposit them? In many ways, with all the bad cases of withdrawal refusals Fair Binary Options dealt with over the years in mind, binary options withdrawal process is becoming a major source of frustration for many traders that feel anxious when placing a withdrawal request. While we cannot deny there are many times when such fears were grounded, as our own experience shows, there are many reasons for withdrawals to require more effort than simply depositing.
One of the biggest sources of discontent among traders is the process of ID verification that is part of the anti-money laundering regulation enforced globally. In this article, we want to talk about anti-money laundering (AML) regulations in binary options, but we will also cover some general facts about this global regulatory framework. Many customers are reluctant to give their personal information to the broker just to receive their money. We hope that after this article explaining the reasons behind these anti-money laundering measures, traders will find it easier to understand the whole process and the reasons for the delay that is tied to ID verification, or as many binary options brokers call it – know your client (KYC) policy.
Online trading and anti-money laundering and its global impact
With the rise of a globalized economy, not just trade and finance found their way to shaping global events. Issues such as organized crime and terrorism are global forces that are in many ways determining the deployment of anti-money laundering measures. A. Mitchell and other colleagues from the University of Manchester cite that fact that IMF and World Bank estimates are that globally, money laundering amounts to about $500 billion. This is data for the end of the 90s. Today, the FATF (Financial Action Task Force)- an international body created to “promote the implementation of legal, regulatory and operational measures for combating money laundering” – estimates that money laundering is reaching 2.7% of global GDP – or about 1.8 trillion USD.
For comparison, this means that money laundering is reaching the proportions of nominal GDP of Russia in 2014.
This is a huge sum that also shows that these activities have grown since the turn of the century, by about 30% when measured as the share of global GDP. Not only the fact that the scale of money laundering has grown is causing increased interest and broadening of the scope of regulation traders are experiencing through the KYS policies of their binary options brokers. The fact that global economy became more interconnected while the rise of international banks and IT infrastructure based transnational financial networks has made it more complex to practice oversight. This kind of spread obviously requires the involvement of accounting firms, banks, nonbanking financial corporations and other businesses. Many of these are just doing their job and may not even be aware that the funds going trough their networks are coming from a criminal activity. Others, as we have seen in numerous news articles recently, have done this intentionally.
What is money laundering?
Before we talk further about the effects of money laundering, it may be important for traders to know what is meant by this term. According to ICA (International Compliance Association) – money laundering is a way for criminals to disguise the proceeds they earn from criminal activities in order for them to make these proceeds appear as if they were coming from a legitimate source. Since criminals earn much more than they would currently consume, they have a need to close the gap between their reported income and generated wealth that is benefiting from the criminal activity.
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In order to do this, they follow a three-step process that involves placement, layering, and integration. Placement is the introduction of funds into the financial system. Criminals can simply deposit their money into a bank or do some more complex procedures. Layering includes activities that aim to create a dense network of transactions that hides the original point of entry. By doing this money, launderers are trying to make the funds hard to track back to the criminal activity that resulted in these. Integration is most often the phase everyone knows – creating transactions with legitimate businesses in order to show them as results of normal commercial operations. This is one of the points we are interested here when describing the reasons of anti-money laundering regulations enforcement in binary options. These funds can be deposited with a broker and later withdrawn in order to make them appear as if they were a result of trading success.
Why is money laundering having impact on development
As mentioned at the beginning of this article, the new globalized economy we are participating in sometimes can have their victims that may not have much to do with the activity directly. Global finance is one of the strongest economic integrators on the planet. As many financial experts from the best universities have advocated, including the Nobel prize winner Robert Schiller, we should use finance to aid development and enhance economic growth. There are many ways to do this. However, money laundering is taking up the capacity of the global financial system and skewing incentives of not just financial and non-financial companies, but government themselves.
Many developing countries and their financial systems have been damaged this way because they specialized in drawing this kind of funds by not respecting global anti-money laundering regulations. Peter Quirk, in his IMF essay (PDF) on macroeconomic impacts of money laundering, is showing a nice example of this. He is describing an IMF mission in one country that was walking trough the capital to find a large number of small banks. Actually, this was a country that had more than 100 banks while having less than 100,000 residents. Later it was revealed that many of these banks were not legitimate. This draws many conclusions. Banks were set up to deal with money inflows from suspicious sources trough offshore companies and also, the country obviously suffered opportunity costs of not having a developed financial system that was specialized on local projects to boost growth instead.
Global anti-money laundering frameworks
This kind of stories illustrates best why there was a need to create a global regulatory framework that would try to curtail such activities. Not only that anti-money laundering laws could increase the cost of doing criminal activities, but they can also have effects on growth and development by preventing the financial system from being used as a tool for shady business. This does not only apply to financial firms, but also to nonfinancial firms and so-called noncore finance firms. Binary options brokers can be categorized as nonfinancial firms or non-core finance companies, depending on the type of regulation they are subject too. The most common form, however, is the Cypriot Investment Firm, meaning that EU regulated binary brokers are usually categorized as non-core financial firms, even though those regulated by MGA on Malta are considered non-financial firms.
In any case, all of these companies can receive funds from their customers and some are more exposed than others. Especially countries where cash demand is high have been showed as countries with high levels of crime. Studies have shown that 10 percent reduction in crime is associated with 10% reduction in currency demand and 6 percent reduction in broad money demand (deposits, checking accounts etc). This makes it easy to understand why businesses that deal directly with cash transfers and do not offer products, but as a result of the service customers can get more cash, are perfect for money laundering and must be part of this regulatory framework. The table below shows a classification from before binary options were included, but one can see sites such as casinos, where customers can also withdraw money, are listed.
First anti-money laundering regulations were developed in the late 70s in the US as a way to combat use of international banking services for tax evasion. Already then we could see the first issues that may arise when the financial system becomes truly global. Later, the range of criminal activities covered grew to include cigarette smuggling, corruption cases, casinos, terrorist finance and more. The pressure to expand oversight was increased after the 9/11 attacks. This also broadened the requests for more oversight as the offshore financial centers. Great Britain, Canada, Australia and other countries followed.
Since 1999, there is also a formal process that imposes sanctions on countries that do not implement international rules. Later bombings in Madrid and London subway only increased the push to implement these initiatives more broadly. Some of the international organizations responsible for these rules are FATF, the Egmont Group of FIUs, the International Organization of Security Commissioners, the UN Office of Drugs and Crime, the Basel Committee on Banking Supervision and others. Patriot Act in the US allowed the Treasury to regulate persons and companies involved in securities transactions, currency exchange, fund transfers, and real estate closings and settlements.
Binary options anti-money laundering – customer due diligence
Anti-Money laundering regulations include prevention, regulation and enforcement. From binary options perspective, the most interesting part is the prevention. This “pillar” includes customer due diligence, reporting, supervision and sanctions. While sanctions make the most buzz in the press – we will come to this in just a moment, for binary options traders asking why does the withdrawal take so long, customer due diligence part (CDD) is the most interesting. It ensures that the binary options broker knows the info about the customer. The idea of AML here is to make it easier to track funds that each person is transacting with in case a investigation is launched to determine of the binary options trader actually invested funds that are result of criminal activities. This is why traders are asked to provide proof of identity and address. When it comes to banks, these checks are much broader.
It is no coincidence that banks were in the spotlight in the last few years when it comes to sanctions for enabling money laundering operations. Riggs Bank of Washington was found guilty for failing to conduct CDD, thereby allowing some large transactions with funds that stemmed from accounts connected to ex-Chilean dictator Pinochet or President Obiang of Equatorial Guinea. While it is certainly not to expect binary options brokers to be responsible for shielding funds from dictators, criminals sometimes do use the technique of “smurfing” that involves breaking up cash transactions into smaller deposits that are below the regulatory minimum for reporting. This is why binary options brokers require account verification no matter the size of the deposit.
Some prominent cases of anti-money laundering charge
Other prominent cases of money laundering include the ABN Amro case. The bank was fined $80 million in 2005 as it allowed Russian citizens, as well as individuals from other former Soviet republics to move $3.2 billion to shell companies in the United States. They also failed to prevent their Chicago and NewYork branches in wire transactions that violated imposed sanctions on Iran and Libya. Later, the new owner of ABN Amro, the RBS, settled for another $500 million for anti-money laundering charges. FATF Annual report in 2004 showed that wire transfers, widely used with binary options brokers, as a payment method were one of the most popular methods of money laundering (22%). Also, just recently Deutsche Bank started and investigation to determine if the staff has provided certain Russian citizens with money laundering services which could reach $6 billion.
So, now that readers understand the genesis of the AML policies that are implemented by binary options broker, we hope they will find it easier to understand the withdrawal process. There are also many separate rules and possible complexities we did not cover in this article about binary options withdrawals and anti-money laundering policies in order to make it shorter. In any case, there is still one issue that relates to the future that we want to address, and it concerns electronic money – Bitcoin
Money laundering with bitcoin
Some binary options brokers allow traders to deposit and some, even to withdraw in bitcoin. Bitcoin is the so called cryptocurrency that only exists in electronic form. Since it was not created nor it is controlled by the government, it is also out of reach when it comes to money laundering regulations. We have recently reported the fact that Belgian regulator is forbidding trading with options based on bitcoin, but this does not cover the money laundering since it is about transactions from and to customers account that cannot be traced adequately with bitcoin. However, since Bitcoin is hard to be stopped without halting every node of the network. This is the reason it is hard to track bitcoin transactions.
FBI and other law enforcement agencies investigated the potential of Bitcoin to facilitate money laundering and other illegal activities. While bitcoin could be used for illegal activities, it can also be used for legitimate activities, like grocery shopping or, depositing with a binary options broker for trading. This is why it was hard to conclude that the cryptocurrency itself violates any laws. Recently founder and creator of the drug trafficking website, Silk Road was convicted for life in prison, he appealed the judge to leave him last years of his life in a “heartbreaking letter” however, judges decided to show no mercy in this first case of this kind.
Bitcoin is not yet accepted by all regulators
However, that case cannot be classified as money laundering, and the FinCEN (Financial Crimes Enforcement Network) actually included Bitcoin in its report which was seen by many as validation. However, the acceptance of Bitcoin by other regulators, in Finland, ECB, BaFIN (German authority for financial regulation) have actually rested on the argument that it is not a currency. In any way, this shows acceptance for the use of Bitcoin, as BaFin recognized it as a financial instrument of payment. From this, we can read that traders won’t have problems depositing in bitcoin for binary options trading.
While AML policy can be a little annoying, binary options brokers are bound to execute it in order to keep transaction in a legal territory. This way they are ensuring the regulatory framework works as it should, and they are protecting their own businesses from actually being prosecuted for not complying with all the rules. This also has positive effects for the industry, since it would be a very bad publicity for binary options trading in general if binary options brokers were scrutinized for not complying. We have seen this happen with Bitcoin, after Mt. Gox went down. Perceptions of customers can change fast.
For binary options brokers, this is a routine task and nothing more. Traders should see it that way too. Trough the years we have named many ways that withdrawals can be delayed, especially if the customer accepted a bonus. Traders should be on the lookout for these kinds of restrictions. We hope our article managed to clear this issue and ensure traders that withdrawal delays tied to the AML are unavoidable since it is highly unlikely that we will see global AML regulations get scaled back in the future. The best way to make the process faster is to prepare all the required documents before withdrawal so the processing does not take long.
References on money laundering:
- Vito Tanzi: Money Laundering and the International Financial System
- Giovanni Castaldi: Anti Money Laundering and the New Regulation on Customer Due Diligence
- FATF: International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation
- Danton Bryans: Bitcoin and Money Laundering: Mining for an Effective Solution
- UNODC: How Much Illicit Money Is Out There