Are anti-money laundering laws ineffective?

Published in Opinion category by Interest.co.nz

* Ron Pol details his research revealing that anti-money laundering rules are almost completely ineffective

A new study published in an international peer-reviewed journal extends the anti-money laundering industry’s open secret. Despite nearly three decades, and global ubiquity, money laundering controls (and associated supporting measures) scarcely have the impact of a rounding error on criminal accounts.

New study tests the resplendence of Emperor AML’s cloak

The anti-money laundering industry is based on a series of assumptions, seldom critiqued, let alone tested by practitioners and governments. For example, that money laundering threatens economies, that money laundering controls are effective, that extending anti-money laundering (AML) obligations to new industries will have a big effect, and that a new global ‘effectiveness’ methodology based on specified outcomes is an adequate measure of effectiveness.

The latest study, just published, tests the second and third of those assumptions. A separate study tests the fourth. (Many elements of the first premise have been tested elsewhere in the academic literature).

Not yet in its thirties, the anti-money laundering industry is marked by global reach and prodigious endeavour. Millions of businesses spend billions of dollars each year on compliance staff, risk assessments, consultants, training and software. A core goal is to identify suspicious financial activities; to help detect and dismantle serious profit-motivated crime. The intent is laudable. But, is it working?

Outcome effectiveness

Published in the peer-reviewed Journal of Financial Crime, “Uncomfortable truths? ML=BS and AML=BS2” combines money laundering research with policy effectiveness; disciplines with surprisingly few connections in research and practice.

This line of enquiry is concerned less whether rules exist, or meet specified standards, or whether countries implement the rules, or firms comply with them. Policy or outcomes effectiveness explores whether the rules work. Do they produce intended outcomes? And if not, what might?

In motoring terms, compliance professionals and industry consultants are like driving instructors, helping firms follow traffic rules established by authorities.

Irrespective the differences and complexities in the road rules in each jurisdiction, policy effectiveness specialists are concerned whether firms’ and countries’ AML vehicles can reach their intended destinations. Like mechanics or technicians, outcomes effectiveness analysis examines the AML cars themselves of firms and countries. This involves lifting the hood, conducting diagnostic tests, and calibrating the navigation system. Is it capable of reaching its (crime detection and prevention) destination, or is it more likely to become mired in a series of spaghetti junctions liberally interspersed with the AML industry’s proliferation of toll booths?

The industry seems already to know the answer to that question.

AML industry’s open secret: Crime pays, and serious crime pays seriously well

It’s well known in AML circles that the industry’s huge cost and earnest endeavour has limited effect on criminal finances. Yet the industry narrative continues, seemingly unaffected, churning out much the same model each year, with slight modifications; continuously urging the incremental expansion of AML obligations.

I don’t profess to know why knowledge of what seems to have hallmarks of policy failure has not yet materially affected the industry narrative or practice.

Maybe it has something to do with the fact that simply flipping the telescope produces a more comforting view.

Changing the perspective from ‘crime’ to ‘criminals’ enables officials and politicians to serve a steady stream of good news stories. (Especially in an environment when a non-reflective ‘tough on crime’ mantra prevails, it would be a brave politician to reveal what really lies beneath the ‘tough on crime’ rug).

The ‘good’ view is a positive one. The effect on individual criminals and criminal networks identified by money laundering controls truly is significant. Authorities rightly claim success when suspicious activity reports lead to more arrests and seizures of criminal assets. In many countries, the police do this well. ‘Follow the money’ policing often results in mounting arrest and forfeiture figures. These are, indeed, good results. And they may be sufficient to please a non-reflective ‘tough on crime’ constituency.

But, in policy effectiveness parlance, they are merely ‘output’ measures. Illustrated in the following chart, inputs (such as police salaries), activities (dawn raids) and outputs (arrests and assets seizures) may be necessary precursors towards but are not the ultimate (crime prevention) outcomes intended by good policing.

Looking at broader ‘outcome’ measures, and reflecting on the impact and effect of AML and its associated regulations on criminal finances and criminal activity reveals a less comfortable view.

Uncomfortable truths long hidden in plain sight

Academic warnings about limited effectiveness and poor outcomes began sounding at least as early as 1994 (Gold/Levi/UK Police Foundation appraisal of suspicion-based reporting). In recent times, the United Nations examined what it called the ‘success rate’ of money laundering controls and in 2011 starkly announced that just 0.2% (one fifth of one percent) of criminal funds is successfully intercepted by authorities worldwide.

In 2016, Europol frankly admitted likewise. In Europe, a 1.1% interception rate means that “98.9 percent of estimated criminal profits are not confiscated and remain at the disposal of criminals.” Plus, of course, the accumulated wealth from previous years. Compounded annually.

The newly published study extends this evidence-base, indicating that money laundering controls seem “almost completely ineffective” in disrupting the proceeds and funding of serious crime

New study uses policy effectiveness lens

Using countries’ own data, the research found interception rates (ie the United Nation’s ‘success rate’, as the proportion of criminal proceeds seized or confiscated by authorities) between a barely perceptible 0.1 percent and 3.3 percent. (And the highest rate, in New Zealand, was based on figures excluding key areas of criminal funds, so its ‘real’ rate will be lower).

Illustrated in the following graph, “the quantum of criminal proceeds interdicted by authorities is little more than a rounding error in the respective country accounts, and globally, of ‘Criminals, Inc’.”

A brief interlude: Addressing the immediate rejoinder

In my experience, this is typically when someone says, “that may be so, but money laundering controls are designed to combat laundering, not crime.”

I usually resist the temptation to point to an uncomfortable dichotomy. It would be churlish to retort that the industry is replete with claims for its crime detection and prevention capacity, except, it seems, when tested.

Instead, I try to address the issue directly. As expressed elsewhere, if the AML/CFT (anti-money laundering countering financing of terrorism) system focuses only on money laundering, and not crime and terrorism prevention, “what is the point of the complexity and expense of a vast global AML/CFT industry?” If, for example, “the number of money laundering prosecutions matter more than genuine outcome measures reflecting their effect and impact on crime and terrorism prevention objectives, the global AML/CFT complex, and the Financial Action Task Force (FATF), arguably serves little purpose.”

That is because, absent the artificial construct of criminalization, money laundering itself is devoid of concepts of good or bad. Anti-money laundering would be largely meaningless but for its capacity to mitigate, reduce and prevent the economic and social harm wrought by serious profit-motivated crime.

So, if we agree that money laundering controls, and FATF, serve a useful purpose, we might return to AML/CFT outcomes.

The least effective policy endeavour, ever, anywhere?

In 2015, having then completed the initial analysis ultimately resulting in the present study (and finding impact figures below one percent), I remarked to a journalist that the modern AML endeavour is arguably “the least effective of any anti-crime measure, anywhere”. In December 2017, that quote was used to open Congressional testimony, and in February in the context of the Mueller investigation. The now-published study is the research those statements were based on. The study itself concludes that “the standard AML/CFT model is arguably a contender for the least effective policy/regulatory/enforcement intervention, ever, anywhere.”

These findings do not criticise the genuine intent of industry participants. In my experience, most practitioners, regulators and policymakers want their efforts to have a significant impact on crime.

Beyond good intent and rules compliance

The industry narrative is marked by good intent and earnest endeavour. Others have noted likewise. For example, Mr Gold and Professor Levi observed that “many citizens, law enforcement officials, and politicians are searching desperately for signs of success in fighting crime, and most of the bankers we have met would like to feel that they are playing a positive part rather than setting up expensive systems for merely ritual compliance with the demands of law.”

Much like mine, their observation is unremarkable. The genuineness of intent is clear, strong, and self-affirming, particularly in banks and government agencies. What is most striking about Mr Gold and Professor Levi’s observation is when it was made. In 1994.

If today’s equally good intent and now globally ubiquitous compliance framework still scarcely has the impact of a rounding error on criminal accounts, it may be timely to test some of the core assumptions underpinning the modern AML framework.

Time to face, and frankly address, the gap between intention and results?

There are signs that practitioners and policymakers are willing to test elements of the industry narrative.

Finding a “lack of clear and compelling evidence…of results” a Canadian Senate committee, for example, concluded that the time for continuous incremental change “is at an end”. The time for “examination of fundamental issues has arrived.”

Professors Levi, Reuter and Halliday recently remarked that the modern anti-money laundering system is “highly cost-inefficient” and has failed “to produce credible evidence of [its] effectiveness.” And the latest study also tests elements of the modern AML system’s effectiveness.

But, the study ends positively. If there is appetite frankly to address the gap between intention and outcomes, the system may not be broken, simply less effective than intended. If so, although FATF’s first iteration of an effectiveness framework may not be all it seems, FATF remains well placed to lead the development of new pathways to the destination intended by the G7 nations, substantially to cut profit motivated crime and its social and economic harms. And potentially enabling the prospect of demonstrably better outcomes from AML rules, beyond compliance with them.

*Former lawyer Ron Pol (ronald.pol@amlassurance.com) is a legal management consultant and principal at AMLassurance.com. His PhD thesis was supervised by Professor Jason Sharman and is entitled “Effective sentinels or unwitting money launderers? The policy effectiveness of combating illicit financial flows through professional facilitators (lawyers, accountants and real estate agents)”.

There’s a fuller author profile here

The full study

Pol, R. F., Uncomfortable truths? ML=BS and AML=BS2 Journal of Financial Crime, 2018, Vol 25 No 2, pp294-308. NB: Depending on your organization’s access rights to scientific publications, a charge may apply. The author receives no part of any such charge.

*‘Crime pays’ chart

The United States was not part of the study. Data source: FATF/APG Mutual Evaluation: United States (2016), pp5 & 78-79. $4.4-4.6b forfeited in 2014 (pp78-79) divided by estimated $364b proceeds of crime annually from financial crime (2010) and drugs (p5). The former figure fluctuates year by year. The latter excludes criminal proceeds from tax evasion, transnational organized crime, human smuggling and public corruption (domestic and foreign), so the ‘real’ interception rate may be less.