How do you encode in a smart contract that the counterparty is not a fraudster and is not funneling money for fraudsters? That is the core risk that banks are e

How do you encode in a smart contract that the counterparty is not a fraudster and is not funneling money for fraudsters? That is the core risk that banks are exposed to, because they are the ones who are on the hook for stolen funds. Secondary risks are those enforced by regulators: KYC, AML, BSA. The government does not want your bank handling money for sanctioned individuals, countries, or terrorists. How do you encode in a smart contract that the counterparty does not represent one of these categories?