My business got a KYC letter last year. So far I've ignored it. They haven't shut the account yet.

These things are usually treated as box ticking exercises, not as fervent investigative due diligence.

I would guess money laundering happens elsewhere.

For as little as $1m you can set up or buy a bank of your own. For $10m or more you can buy a regulated operating bank with employees and deposits.

The process is more complicated than plain old incorporation, but I would guess it won't be unduly troubling to people with a lot of spare cash at hand.

I suppose you can ignore the letters, if having your bank account suspended for some weeks doesn't cause major business risks to you. The downside with box ticking exercises is that eventually, someone may calculate the ticks, and his/her guidelines will say that this account belongs to a risky category.

In EU there is an anti-money laundering directive, but it’s mostly up to member countries how they’ll implement it.

As usual some countries implemented it reasonably while others didn’t.

The regulation is rather new, and at least Scandinavian banks seem to be hyper sensitive to be on the safe side from the money laundering risk point of view. In part this is due to the allegations and campaigns against Nordea and the actual laundering scandal at Swedbank. The privacy of customers (against having to provide personal information to the bank) is secondary.

There are new stricter rules coming in 2020, which is, some theorise, a major motivation behind brexit ...

Your bank doesn't need to be so invasive, so if they are you need to switch. There is no EU directive that tells them to clarify things using some sort of weird video proof.

But that may still be the easiest of ways required by the financial authority - which comes up with its own rules, the EU rules only being the minimum of what regulators in each country must implement. Often regulators want to be stricter, in order appear as "good tax collectors" and to avoid being targeted by social media campaigns etc.

This is what puzzles me. Why they need an explanation how money flows in their own system? Don't they see all transfers?

They may see who is the sender of transfer, but that in itself is not a sufficient explanation for where the funds actually come and whether they are legitimate.

Series of transfers are a basic step in money laundering processes, so from that point of view the need for clarification of each step is understandable.