April 24, 2024
L Burke Files, DDP, CACM
President, The American Anti-Corruption Institute (AACI)
The first Anti-Money Laundering law was the United States Bank Secrecy Act. It was passed in 1970, the Nixon Administration’s knee-jerk reaction to the boatloads of cash flowing into US banks. There were a few additions in 1986 and 1988, reacting to how the criminals had learned to evade the BSA provisions, but nothing substantive.
Substitutive changes in AML and global financial compliance came from the OECD (Organisation for Economic Co-operation and Development) in 1989, which formed a sub-entity called the FATF (Financial Action Task Force). The initial purpose of the FATF was to reduce harmful tax competition and the possibilities of tax avoidance.
It was not until the terrorist attacks on the United States on September 11, 2001, that the concept of crime prevention occurred to the FATF – but it was still about harmful tax competition.
From the OECD: “Countries concerned about the flight of capital and savings from their jurisdictions to low- or no-tax jurisdictions engage in the cycle of tax competition to attract investment. This spiral involves enormous amounts of lost revenue for governments, as well as facilitating the laundering of proceeds from criminal activities. The phenomenon has reached such proportions as to be considered harmful and become a priority on the OECD Fiscal Committee’s agenda.”[i]
In 1990, the “First FATF Report on the extent and nature of the money laundering process and FATF Recommendations to combat money laundering” was published. The report contained: i) a thorough analysis of the money laundering process, its extent and methods; ii) a presentation of the international instruments and national programs already in place to combat money laundering; iii) a set of action recommendations on how to improve the national legal systems, enhance the role of the financial system, and strengthen international cooperation against money laundering; and 40 FATF Recommendations.”
Why does this matter? Any formal recommendation from the OECD (and the FATF is part of the OECD) is binding upon all members. From the OECD Convention Article 5: “In order to achieve its aims, the Organisation may: (a) take decisions which, except as otherwise provided, shall be binding on all the Members…” So when the OECD’s FATF crafts a finding or a recommendation, it is binding upon the national members of the OECD to take those recommendations and turn them into laws and regulations.
It was the first pivotal change in money laundering since the BSA and its small amendments. This report’s recommendations required all members of the OECD to pass laws in accordance with the FATF’s recommendations.
I am probably one of the few who read the 1992, 1994, and 1998 AML acts, and the entire Patriot Act. I read these in preparation for the first big conference on AML and the Patriot Act in New York in late January 2002. I met with several US Senate staffers and two US Senate special investigators, and quipped: “These bills have nothing to do with preventing crime. It is about butting up an economy so you can tax it!” Their rebuttal was not what I expected. I expected an argument and was ready for a point-counter-point discussion. Their answer was “ya, you’re right.”
Currently, there are 38 members of the OECD, representing 42 per cent of the world’s GDP. So, how do the OECD members get the other non-member nations to adopt similar laws? It’s called extortion. The non-member nations, especially OFCs, were initially referred to as the Non-Compliant Countries and Territories (NCCTs), later known as the “Blacklist.” The NCCTs were told they would be banned from the world’s financial markets and banking systems if they did not adopt specific rules, regulations, and laws.
The required rules, regulations, and laws, are updated from time to time when the FATF discovers more about how money moves and avoids taxation. The titles of the updates cover: Mobile payments; real estate; virtual assets; trade-based money laundering; the proliferation of weapons of mass destruction; politically exposed persons; beneficial ownership; correspondent banking; securities; non-profits; and many titles on “Best Practices of…” The more recent activity of the OECD is the global minimum tax rate of 15 per cent on corporate profits, also referred to in the EU as BEPS 2.0. AML Laws are about tax revenue and have nothing to do with stopping crime.
From 1990 to 2001, many laws were passed, making money laundering nearly impossible. What was the outcome? In the early 2000s, Wachovia was accused of laundering $110 billion for the Mexican drug cartels. From the late 1990s through 2006, HSBC was accused of laundering $881 million for drug cartels, and Standard Chartered Bank was accused of laundering over $600 million for Libya, Iran, Burma, Cuba, and Sudan. In 2013, Liberty Reserve was shut down for laundering $250 million for criminals. In 2020, Westpac was fined $920 million for over 23 million violations of the AML laws. In 2018, Danske Bank was found to have laundered $230 billion for Russians and was collectively fined about $2.4 billion.
BNP Paribas had to pay $8.9 billion for illegally processing financial transactions for countries subject to economic sanctions. Singling out the BNP Paribas matter is telling. The bank’s management went to elaborate lengths to conceal prohibited transactions, cover its tracks, and deceive the authorities. BNP Paribas knew their actions were wrong; it was not an accident. The outcome was that a few people were fired, and the shareholders paid an $8.9 billion fine. Allowing the bankers to privatise the gains, called bonuses, and socialise the losses, the shareholders pay the fine; there is zero incentive to stop. It is a ‘heads I win, tails I win’, zero-risk event for managers. Officers and directors will continue to launder money until they have skin in the game.
If AML Laws Don’t Stop Money Laundering, What Do They Do?
The AML laws allow companies to be fined for failing to comply with the AML laws. Many firms get fined for small things like “failure to follow your compliance manual.” The larger financial institutions not only get hefty fines, but also have large legal bills, and inevitably add more compliance people to the employee roles. According to the ABA, the total cost of financial crime compliance for US financial firms in 2022 was $45.9 billion. According to Tookitaki, in 2022, the cost of financial crime compliance across financial institutions worldwide was $274.1 billion. It is even more when one considers all the check cashing firms, real estate firms, jewelers, auto boat and aircraft dealerships, trust companies, and law firms.
A study by the Competitive Enterprise Institute reports that large firms are now reporting the average cost to maintain compliance can cost as much as $10,000 per employee. Plus, if the financial institution gets it wrong, the financial institution gets fined. They want to comply, but the rules are too complex and unevenly administered. So, that is why financial institutions now refer to the fines as the ‘AML Spank Tax.’
Many I have spoken to want to comply, but at the same time, it becomes an issue of costs. Because of the costs, many have begun to automate their AML. The result of mindless compliance, automation is the root of the stories of businesses with the same bank for 20 years having their accounts closed. A client had a longterm relationship with the bank and informed their banker they were raising $3 million in a Reg D offering. The bank was told in advance and provided a copy of the PPM. The account was frozen when the deposits came in from the sale of shares, causing my client to bounce a $75,000 check.
I had a problem when under contract with the Asian Development Bank to help draft the AML laws for Pakistan. The bank froze my company account because I was getting money from the Philippines from an “unknown fictitious bank”, and sending money to the UK, Uzbekistan, Pakistan, and Australia. All were suspicious, gray-listed countries. The unknown fictitious bank was the Asian Development Bank. The compliance officer froze my account because they saw no such bank licenced in the Philippines. It nearly bankrupted me.
Civil asset forfeiture is another feature of the AML laws. In civil asset forfeiture, law enforcement officials seize property on the mere suspicion of a crime — the suspicion of a crime, not the proof of a crime. To recover the property, the owner must try to prove the property’s “innocence.” Guilty until proven innocent.
Forfeiture outrages span the country. In Volusia County, Florida, it’s standard practice for police to stop motorists going south on I‑95 and seize any cash they’re carrying in excess of $100 on suspicion that it’s money to buy drugs. After seizure, it’s left to the victim to prove that the money is not for buying drugs. New York City police routinely seize cars from those accused of a DUI (driving under the influence). In 2010, Philadelphia police tried to seize a grandmother’s house and car because, without her knowledge, her son sold less than $200 worth of marijuana from the house. In 2017, the Pennsylvania Supreme Court overturned the seizure. Philadelphia has abused civil forfeiture so brazenly — seizing over 1,000 homes, more than 3,000 vehicles, and $44 million in cash over an 11‐year period — that the Institute for Justice filed a class‐action suit that was settled in 2018 with the city agreeing to reform its practices.”[ii]
Police can and do seize items based on unsubstantiated claims. It is called “Policing For Profit.” The targets are overwhelmingly poor and are working in the cash economy. We know this as the average forfeiture is under $1,400, yet the federal government raked over 4 billion in 2022 from civil asset forfeiture. The police are now US government-sanctioned privateers. In those states that have prohibited this type of activity, the crime rates have not changed. It is clear civil asset forfeiture has little to do with crime or safety, only more cash for the government.
“This paper uses anti-money laundering as a case study to illustrate the benefits of cross-disciplinary engagement when major policymaking functions develop separately from public policy design principles. It finds that the anti-money laundering policy intervention has less than 0.1 per cent impact on criminal finances, compliance costs exceed recovered criminal funds more than a hundred times over, and banks, taxpayers, and ordinary citizens are penalised more than criminal enterprises.”[iii]
“The current framework, particularly the anti‐money laundering (AML) rules, is clearly not cost‐effective. As demonstrated below, the AML regime costs an estimated $4.8 billion to $8 billion annually. Yet, this AML system results in fewer than 700 convictions annually, a proportion of which are simply additional counts against persons charged with other predicate crimes. Thus, each conviction costs approximately $7 million, potentially much more.”[iv]
The AML laws sold to the public as a way to end crime and terrorism don’t work. The AML laws have not reduced crime one iota. Drug gangs have gotten bigger and more powerful since 1990 and have morphed into multinational criminal organisations. In 1991, there were 15,719 deaths due to terrorism. In 2021, it was 19,546.[v] According to the UN, if global GDP has held constant at 1.5 per cent of GDP over 30-plus years, crime has also increased. Police have been turned into privateers and turned against those they swore to protect.
Lastly, AML implementation has been a net negative for governments. Not only are governments taking in less revenue because of decreased corporate profits, but investors are also making less, and the governments are paying an army of clerks to force compliance to something that ultimately harms the government. Who pays for the cost of AML compliance? We all pay more in the form of higher banking fees, transaction costs, and lower yields on our investments.
The AML laws need to be drastically reformed or repealed and recrafted. The OECD/FATF know nothing of commercial or financial flows; they know little of crime, but they do know tax. The world has been sold a bill of goods. AML laws are about tax collecting, period, and full stop — they have zero impact on crime or terror financing.
“…The Wall Street Journal reported on October 10, 2023, that cryptocurrency wallets connected to Hamas received about $41 million between 2020 and 2023, and that wallets connected to another US-designated terrorist organisation, the Palestine Islamic Jihad (PIJ), received as much as $93 million over a similar period.”[vi]
When crafting laws, one must carefully consider the unintended consequences of the rules. One has to ask of the law being considered: How will this law do damage? What will be prevented or encouraged as a result of a law? If we are doing battle with an enemy, how do we avoid damaging ourselves? There are no absolutes. To be an absolute, it has to be something that does not depend on something else. While confidence is required, overconfidence can be fatal, like taking a sip from a bottle labeled scotch, which turns out to be rat poison.
AML has become a dangerous farce of efficacy and security that only Mrs Umbridge could appreciate.
Sources and References
[i] Anti-Avoidance and Harmful Tax Competition: From Unilateral to Multilateral Strategies?, by Marika Toumi,, Published 2002, 978-1-4613-5380-5
[ii] https://www.cato.org/cato-handbook-policymakers/cato-handbook-policymakers-9th-edition-2022/civil-asset-forfeiture-reform
[iii] https://www.tandfonline.com/doi/full/10.1080/25741292.2020.1725366
[iv] https://www.cato.org/blog/money-laundering-laws-ineffective-expensive
[v] https://ourworldindata.org/the-global-terrorism-database-how-do-researchers-measure-terrorism
[vi] https://crsreports.congress.gov/product/pdf/IF/IF12537
Photo by Pixabay: https://www.pexels.com/photo/200-euro-between-500-euro-164529/
About the Author
L. Burke Files DDP CACM
President, The American Anti-Corruption Institute (AACI)
Mr. Files is an international financial investigator and due diligence expert who has run cases in over 130 countries and has visited over 100 countries. Mr. Files has tackled investigations running from a few hundred thousand dollars to over 20 billion. Along the way, he became familiar with the knowledge of what people need to do, for due diligence, preventing corruption, and to avoid helping criminals launder money. He brings this experience of hands-on investigating and problem-solving experience to his lectures on Due Diligence, AML, and Anti-Corruption. Prior to founding FE&E, Inc., he served as the Director of Corporate Finance for American National an investment bank focused on development stage venture capital. He was also employed by Oppenheimer/Rouse as a commodities specialist trading customer accounts in Agri-Business, 24-hour gold and silver, and foreign currencies. Mr. Files has authored six books, and many white papers and articles. He has been quoted in major publications including The Guardian, The Financial Times, Forbes, US Newsweek, and more. He is the author of the award-winning book Due Diligence For The Financial Professional 2nd Edition. Mr. Files serves on the board of directors for several private companies, funds, and non-profits. The companies include Unicus Research a specialty advisory service for fund managers and family offices, SGS Glazing a specialty glazing design and estimating firm, and NSI a premium spirits company.
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