AML-measures: are they effective and legitimate? Paper by Eleni Tsingou

Anti-money laundering (AML) legislation is not only affecting large organisations and the state. Increasingly small and medium sized entities have to comply with national and international AML-rules. For a long time I am wondering why Dutch sources (including governmental sources) do not pay any attention to general questions regarding effectiveness and legitimacy of AML rules.

Recently I came across a paper by Eleni Tsingou, dating from 2010 but still very interesting and relevant.

She stresses that the achievements with respect to the AML rules’ goals remain modest at best in relation to its ambitions, while important side-effects raise concerns about its role, efficiency and legitimacy.

Privatisation of compliance

Tsingou comments on the growing trend towards passing compliance responsibility to the private sector and the trend that governments want to show their success through quantifiable confiscated sums and convictions (while the financial sector assesses success in terms of lack of problematic instances).

Financing of terrorism was added to the AML-legislation without a good foundation:

An additional problem is one of methodology: the funding of terrorism is often based on resources that are clean and legitimate, requiring banks to essentially make value judgments about future use of money, as well the potential of a customer who has not to this day acted unlawfully to do so in the future. This is a subjective and time-consuming strategy that, in the absence of consistent, forthcoming, updated and adequate intelligence information, can lead to discrimination on the basis of ethnic background and create biases linked to personal characteristics.

Market entry barriers for smaller institutions

Another consequence of the growing demands, is that big institutions are in a better position to take the requested measures. In practice AML-rules are creating market entry barriers for smaller institutions:

While the initial cost of such programmes is high, financial institutions admit that the programmes have several valuable uses, including getting to know more about clients’ needs and customize products accordingly, offer global consistency for corporate and individual clients in global financial relationships across business lines, and create sophisticated ‘valuable customer’ profiles. Big institutions are also in a better position to have confidentiality arrangements in place which facilitate business-wide programmes, thus overcoming restrictions imposed by banking secrecy and data protection provisions. These methods have been further endorsed by the Wolfsberg Group which promotes a risk-based approach focusing on country, customer and services variables. Dealing with AML/CFT requirements in terms of risk management also leads financial institution compliance departments to conceptualize reputational risk, including due diligence, brand protection and marketing. Finally, large financial institutions are trained to better understand the demands of law enforcement; they are in a position to recruit compliance officers from law enforcement bodies and to build informal channels of communication with judicial authorities. In this sense, while banking practices have changed in terms of the collection and storing of data, they have been adapted to traditional marketing principles.
Smaller, local institutions, where ‘know your customer’ and reporting requirements are less automated are likely to feel the burden of compliance more strongly. While risk-based approaches are also in operation (for the private institutions and their expected assessment by regulators alike), it is unclear whether in cases of irregularity such considerations carry much weight with respect to fines or criminal investigations. The reactive role of the private sector in the AML/CFT regime thus has a greater effect on small institutions, highlighting a justified concern in this part of the industry for policies that reflect their relative role in the financial system and are more appropriately proportionate to the effectiveness of the regime. Often, many of the smaller institutions do little more than document due diligence; they are also in a less privileged position when it comes to interpreting intelligence and establishing productive working relationships with examiners and law enforcement agents.

She concludes that the AML-regime does not rely on provable effectiveness, is mostly symbolic and reflects OECD and in particular US interests.

Side-effects

She mentions the side-effects of AML-rules regarding developing countries (non-OECD-countries) in the paragraph “Counting the Costs and Addressing the Side-Effects“. Other side-effects are a consequence of ill-considered KYC systems: the marginalization and financial exclusion of certain groups and individuals. Increasingly cashtransactions are criminalized.

The side-effects of AML-legislation affect the weakest and poorest members of society in developing and developed world alike, she writes.

Lack of evidence

Tsingou in her conclusion challenges any claims regarding the effectiveness of the AML-regime:

The absence of data, both on money laundering and terrorist financing activities and on the usefulness of the regime in terms of prevention or convictions severely limits any assessment of the efficiency of a ‘proceeds of crime’ and ‘proceeds for crime’ approach. The lack of evidence, especially in determining the benefits of the regime, also affects the validity of an evaluation based on a cost-benefit analysis, whether at the national or at the global level. Yet despite the difficulty of providing concrete justification for the regime, its development and purpose are seldom questioned.
Corresponding and unofficial concerns that are served by AML and CFT measures are a contributing factor. There is a clear need to address complex public issues such as drug trafficking, corruption and terrorism; the resulting policies, however, have amounted to little more than rhetoric and have offered regulatory and administrative solutions to ill-defined problems. Similarly, despite the emphasis on financial integrity, the regime has addressed competitive pressures from specialized and offshore financial centres; the globalization of AML/CFT standards appeases only some of those worries. Finally, the private sector (or at least, segments of it), at the centre of the theoretical cost-benefit analysis of the AML/CFT regime is, in some cases, not quite a loser; large financial institutions have used compliance as an opportunity to develop sophisticated marketing techniques and to consolidate their expertise and market positions.
While the effectiveness of the regime is at best fuzzy, the imposition of detrimental effects on the weaker or least influential actors of the system is more easily detectable. This suggests that the eradication of money laundering as such is not, nor could it be, its ultimate aim; there is an inherent contradiction between an ‘effective’ AML regime and global financial integration as witnessed over the past 30 years. A zero tolerance regime of AML/CFT controls would be incompatible with the free flow of money and the AML regime is thus most likely destined to remain symbolic.

Research necessary

This kind of information stresses the necessity of independent scientific research regarding measures taken in the areas of AML, anti-corruption and international sanctions. It is not enough that political institutions like FATF, OECD or IMF think certain measures useful and their ‘impact assessments‘ cannot be relied upon.

Indignation regarding financial crime should not lead to inappropriate measures that cost a lot of money, are ineffective and harm people.

More information:

  • Eleni Tsingou, Global financial governance and the developing anti-money laundering regime: What lessons for International Political Economy? (2010).
  • Researchgate profile of Eleni Tsingou
  • Related: The governance of global wealth chains by Leonard Seabrooke and Duncan Wigan, (February 2017). They mention that recent work on AML policies has discussed power asymmetries in the determination of anti-money laundering policies and how AML policies are often poorly targeted and administratively expensive.
  • A book by J. C. Sharman, The Money Laundry: Regulating Criminal Finance in the Global Economy (2011) also looks interesting but is not freely available. From the introduction by the publisher: “In The Money Laundry, J. C. Sharman investigates whether AML policy works, and why it has spread so rapidly to so many states with so little in common. Sharman asserts that there are few benefits to such policies but high costs, which fall especially heavily on poor countries. (…) Despite its ineffectiveness, AML policy has spread via three paths. The Financial Action Task Force, the key standard-setter and enforcer in this area, has successfully implemented a strategy of blacklisting to promote compliance. Publicly identified as noncompliant, targeted states suffered damage to their reputation. Subsequently, officials from poor countries became socialized within transnational policy networks. Finally, international banks began using the presence of AML policy as a proxy for general country risk.

Related posts on this blog:

Over Ellen Timmer, advocaat ondernemingsrecht @Pellicaan

Verbonden aan Pellicaan Advocaten, http://www.pellicaan.nl/, kantoor Rotterdam, telefoon 088-6272287, fax 088-6272280, e-mail ellen.timmer@pellicaan.nl ||| Weblogs: algemeen: https://ellentimmer.com/ || modernisering ondernemingsrecht: http://flexbv.wordpress.com/ ||| Motto: goede bedoelingen rechtvaardigen geen slechte regels
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