There’s universal disdain for money laundering. However, the politics of Anti-Money Laundering (AML) legislation is a complex social and political question that touches on numerous debatable topics. If it were easy, every jurisdiction would enact and enforce the same rules.
Convergence of AML Global Regulation and Policy Coordination
Since money laundering activities typically cross borders, it is imperative that there’s some cohesion between countries. Otherwise, global companies would have an even more difficult task to ensure compliance and launderers would be able to better exploit loopholes. To this end, the Financial Action Task Force (FATF) was created in 1989 to “to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.”
The FATF set out 40 recommendations in 1990, which with revisions, was agreed to by 180 countries in 2003. Since then, these recommendations have continued to be revised, was a major revision in 2012 and the latest update in November 2017.
While the FATF recommendations act as a guideline for individual jurisdictions, each jurisdiction needs to pass their own laws and manage their own regulatory system. Just agreeing to a set of recommendations from 15 years ago means little, if not implemented. Thus, it comes to the legislative agenda of each country: their willingness to follow international standards, their desire to combat corruption versus their turning a blind eye to the windfall of incoming money, their resolve to operate a powerful regulatory oversight system to enforce AML laws.
It is telling that in the Basel AML Index 2017 Report, only one country—Finland—was rated a low risk country. While that cut-off point is somewhat arbitrary (1/3 out of the total ten points), even if an alternative risk-level distinction is used, only 33 countries are in the low risk category, 79 are medium risk and 41 are high risk. Those numbers indicate that there’s still a lot of work ahead for many countries to establish powerful AML systems.
Demands of the Public
As with any political issue, public interest in AML rises and falls depending on circumstances. When corruption scandals—such as the Panama Papers or the Paradise Papers—hits the news, the public takes notice. In response, politicians and regulators note the loopholes and various actions are either proposed, or are actually implemented.
The most serious response came as a result of 9-11. The FATF expanded its mandate to cover terrorist financing with eight recommendations (expanded into nine, and then evolving into the overall recommendations) in October 2001. The Patriot Act was passed in the US on October 26, 2001 and amongst other issues, had significant AML amendments. Numerous other countries passed similar legislation, often referred to as Counter-Terrorism Financing (CTF) laws.
Leadership for AML
The leaders of any organization set the tone, the priorities, and the agenda that permeates throughout the system. Government is no different, with the caveat that all systems aren’t the same; leaders have different influence and impact based upon their amount of political capital, the willingness and strength of the bureaucracy to push through or downplay the leader’s decisions, and the vagrancies of the courts and legislators.
Some leaders will downplay regulations in favor of a free-market approach, while others will see value in improving transparency and strengthening the power of regulators.
Leaders can impact how regulators operate, even without actually changing regulations. Just as in any workplace, workers understand what the higher-ups want and overtly, or even unconsciously, modify their actions. Should regulations be strictly enforced, or be more lax? What type of action should regulators focus on? The letter of the law is one thing, the enforcement can be substantially different.
Detecting AML Issues
As noted earlier, it’s when AML issues are made prominent that more action is likely. There seems to be a trend driven by digital technologies, towards transparency; more tools for uncovering wrongdoings and more avenues of dissemination can lead to more corruption being exposed.
The use of ethical hacking, best described as “penetrating an organizations systems and networks using the same knowledge and tools as a malicious hacker, but in a legitimate and ethical manner” to test for any vulnerabilities, is a new tool for detecting money laundering.
The Paradise Papers were a result of computer detective work, as was the money laundering evidence against Paul Manafort. In the Paradise Papers situation, while the original publisher —German newspaper Süddeutsche Zeitung — did not state where they got the documents, offshore legal firm Appleby stated, “our systems were accessed by an intruder who deployed the tactics of a professional hacker and covered his/her tracks.”
For all the efforts, the work done by governments to create international policies and by regulators to enforce laws, the demands of public, and all the work done by the press and others trying to expose the corruption, unfortunately money laundering continues to be ongoing and prevalent. As a recent article in Politco states, “most money launderers get away with it.” That article looks a variety of studies and comes to the conclusion that over 99 percent of money laundering is not caught. Or as Ron Pol, a respected money-laundering expert, states, “Anti-money laundering legislation is the least effective of any anti-crime measure, anywhere.”
We need to do better; better AML coordination between countries, better leadership, better tools and a more determined public. If we want to decrease crime, corruption, and terrorist financing, improving AML compliance systems is a massive step in the right direction.