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What is anti money laundering?

Are current anti-money laundering laws and regulations, hurting or harming the American financial system?

  • Is there any proof that these laws and regs are preventing money laundering or are they adding onerous burdens to financial institutions, the costs of which they are passing onto consumers and businesses?

  • Answer:

    To answer the second part of your question, first: there are numerous examples of successes in identification, prosecution, and/or deterrence of money launderers. Go to http://www.fincen.gov, the Financial Crimes Enforcement Network, for information about US "successes"; and http://www.fatf-gafi.org, the Financial Action Task Force, for information about global and international activities. Current anti-money laundering regulations most definitely impose onerous and challenging requirements on financial institutions, including casinos, payday lenders, and others who you wouldn't ordinarily consider to be covered within those worlds.  In fact, some regulations actually impact ALL US persons (e.g. OFAC regulations, ("Office of Foreign Assets Control", a unit of the US Treasury) either here or abroad:  if you are a US "person" (individual or business) you cannot do business with, or engage in certain types of transactions, with Specially Designated Nationals, or countries; at least not without talking to OFAC, first. http://www.treasury.gov/about/organizational-structure/offices/Pages/Office-of-Foreign-Assets-Control.aspx Throughout history, the most effective way to track, identify, and deter criminal activity, including amoral or terrorist activity, is to follow the money.  The legendary Chicago mobster Al Capone was not brought down by the FBI, for jury-tampering, racketeering, or murder; but rather by the IRS, for tax evasion. http://en.wikipedia.org/wiki/Al_capone.  In that way, anti-money laundering regulation as imposed on US banking institutions sets a baseline for reporting potential criminal activity, and serves the public interest.  The reality is that if those regulations didn't exist, noone would be reporting - consider Riggs Bank, an extremely successful bank in Washington DC that's now part of PNC Financial, with a deep expertise providing financial services for consulates, embassies, and diplomats.  They were willing to accept suitcases full of cash for deposit from Pinochet, the Chilean dictator; and a Saudi opened and housed two accounts for the 9/11 hijackers through them.  If Riggs had been fully compliant with US money-laundering laws, and had fully "known their customer" as any banker with high-profile clients should, they wouldn't have been prosecuted and fined $25mm+, and may still exist, although it probably would've cut into their profitability to turn away those kinds of clients, or to develop better and fully compliant reporting procedures.  http://en.wikipedia.org/wiki/Riggs_Bank This may be a bit of heresy, and against my self-interest in ever finding employ in banking or financial services ever again, but, I'd argue that money-laundering regulations as applied to financial institutions are appropriate and a way to keep the people and corporations that make money from the business of money accountable, beyond US Federal Sentencing Guidelines for organizations (http://www.ussc.gov/Guidelines/2010_guidelines/index.cfm) or general public outcry.  The crux of the problem is that there are people out there who act amorally and who engage in heinous acts, ranging from petty frauds and thefts, including identity theft and elder abuse, to narcotics trafficking, murder, and even genocides, and they all use, or try to use, the banking system.  Just because other countries might allow those people to use their financial systems, and don't try to mandate a filter to sift through and identify who those people and businesses are, doesn't mean we shouldn't either, so that we can remain competitive and get their business.  We don't want their business; as a banker, I'm not at all interested in working with people who use child labor in their factories to sew clothes for the US market; or who rape and pillage their countries of their natural resources to get money so they can start a hip-hop label in the US; or who provide money transmitter or currency exchange services for drug cartels, even if it's an extremely profitable business for US banks and the folks who run those money transmitter businesses. http://neglectedwar.com/blog/archives/4028 There is a significant cost associated with compliance, and, not to sound all patriotic or republican or anything Bush/Reagan-like (yikes! so unfashionable!), but there is a significant cost associated with vigilance, too.  The real problem is not with the spirit or intent of the anti-money laundering regulations; the problem is with the letter of the law and the mumbo-jumbo, one-size-fits-all adminstrative rules and regulations, and the cumbersome, inconsistent, and erratic processes associated with both implementation and enforcement.  We don't always think about law enforcement or banking as hotbeds of creativity and innovation; we prefer to be conservative, stable, risk-averse.  However, there's clearly opportunity, here, to be more effective and efficient in meeting what is indisputably an important public policy goal.  It's just that there doesn't seem to be a lot of money in it; rationalizing the morass of money-laundering regulation and trying to work through it requires a different balancing of priorities and mission, that's somewhat inconsistent with the profit motive of financial organizations.  I'll suggest that quality of care and ethical standards in the healthcare industry provide a sort of analogy for anti-money laundering regulation within the businesses of money; and just as that's all messed up in healthcare, it's messed up in the financial industry, too. Perhaps because it creates a huge moral wrinkle in the implementation of a capitalist, attempt-to-be-a-free-market economic system, but I'll defer the big picture analysis to those who are better equipped than me to discuss it.  As law enforcement becomes more sophisticated in its use of technology and systems, and banking institutions upgrade and improve their existing technology and processes for CRM and other kinds of customer due diligence, perhaps the regulations and administrative process for anti-money laundering will become less onerous, on all of us.

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and have answered well, I would just like to add certain points on what they have cited. Improved and/or revised AML laws & regulations do not necessarily harm the American financial system.  What these laws are doing, to a larger extent, is that they are closing (read: mitigating) certain loopholes and/or innovative banking practises that aid money laundering. The costs in most cases are not passed on to the end consumers or businesses. They are part and parcel of doing business for banks and/or other regulated financial institutions. So, there is natural resistance within the banks in incorporating and implementing new rulesets as it is more work, compliance and audit checks, but no one has lost business because of it. There are definite measures and benchmarks that can very accurately gauge how much money is mitigated, etc. but this is protected under the Banking Secrecy Act and is reported only to FinCEN, etc. and not made public knowledge. What they cannot measure are money-laundering practices that are exist within the system, but no traps have been defined to catch and identify them. With regulations passed in the last couple of years, and amongst them Dodd-Frank Act (Section 1073 for Remittances) and other related circulars as published by FinCEN and other regulatory bodies, the US banking and financial system requires that both domestic transactions and international transactions be subject to the same scrutiny and checks. This means overseas financial institutions are now also required to be registered with FinCEN and obey US AML checks (in case of Remittances and overseas payments). They do burden financial institutions as you can very well imagine, implementing rule sets into the core banking and/or its BI systems is not always an easy task. But the financial burden is rarely passed on to the consumers (I cannot recall a single case-study or report that I have read, which such financial burden was passed onto consumers). Overall, these checks and balances are improving the banking and finance eco-system to be more accountable, granular and transparent to the financial regulators and/or oversight organisations.

Faisal Khan

The more regulations you pass against money laundering, the more profitable the practice becomes. The higher taxes rise and the more regulations prevent economic activity, the higher the rewards become for successful money laundering. Certainly, some of the costs of monitoring fall onto financial institutions, and prices must then be passed on to customers and other entities. Other countries become more attractive centers for finance and trading with every new onerous regulation. The more that capital becomes constrained within American borders, the greater the opportunity rises elsewhere where contracts are at least somewhat respected. The real question isn't about whether or not money laundering regulations are harmful but whether or not we have too many non-crimes classified as crimes. Trading in narcotics shouldn't be a crime. Taxes are immoral. The efforts dedicated towards pursuing money laundering of the proceeds of non-crimes could be re-purposed towards pursuing actual criminals like frauds and thieves.

John-Charles Hewitt

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