Anti-Money-Landering Laws — a Sheep in Wolf’s Clothing

David Siegel
Sep 6 · 6 min read

This is a chapter in the Digital Money Book.

Humans are very good at creating and maintaining delusions. A persistent delusion is that the international FATF regime of anti-money-laundering regulations help prevent money laundering. In this essay, I show that AML is possibly the least-effective regulatory intervention in history. It is a sheep in wolf’s clothing that prevents innovation and financial inclusion. AML is another part of a badly broken financial system in need of a complete overhaul.

If you want the video version, watch my interview with AML Ron Pol:

What are Anti-Money-Laundering Laws?

From Wikipedia:

Money laundering is the illegal process of concealing the origins of money obtained illegally by passing it through a complex sequence of banking transfers or commercial transactions. The overall scheme of this process returns the money to the launderer in an obscure and indirect way.

Most anti-money laundering laws openly conflate money laundering (which is concerned with source of funds) with terrorism financing (which is concerned with destination of funds) when regulating the financial system.

The goal of the international Financial-Action Task Force is simple: find bad guys who are trying to launder their money, take their funds, and put them in jail. This is supposed to stop sex trafficking, wildlife trafficking, tax evasion, terrorist financing, and international fraud. The method is complex: banks and financial institutions must collect identification and source-of-funds information on any transaction that looks suspicious. Know Your Customer (KYC) is the term for gathering name, address, and other identifying information on each client.

If you open a new account at a bank and deposit $5,000, they won’t have any problem. But if you deposit $500,000, the bank’s AML officer will have you fill out forms to explain your source of funds. That way, they will catch you if you are trying to launder money.

Does AML Work?

We’ve now had thirty years of AML enforcement. What’s the track record so far? The world is running a roughly $85 trillion economy. Here are the three numbers you need to know:

Each year, financial institutions and governments spend over $600 billion to interdict $3 billion, which amounts to 1/10th of one percent of all money successfully laundered globally. To promote the delusion, this is called the “success rate.” I’ll put it another way: if we could make AML laws TEN TIMES more effective, they would still only catch one percent of all money successfully laundered and would still only recoup five percent of the costs of the program.

What’s the cost-benefit here? Some of these things regulators want to prevent, like human trafficking, are very bad. There’s no reason that the laws should be profitable. But if we are going to spend more than $500 billion each year, we should not see a 99.9 percent failure rate.

AML/ATF laws, which began in 2002, have no effect on terrorism, drugs, or human trafficking:

Two industries benefit enormously from AML rules: organized crime and organized compliance.

— Ron Pol

What Role Do Banks Play?

Have you tried to wire money lately? It’s a convoluted process of filling out forms, double-confirming, and then talking with as many as three different people on the phone to confirm that your transaction is legitimate. And then it still takes 2–3 days. Banks have a lot of compliance people, yet from 2010 to 2018 they were fined more than $27 billion for violating AML compliance requirements. These fines are roughly equal to the amount of money interdicted during that same period, yet the industry continues to spend over $600 billion each year pretending to look busy protecting consumers.

While most of the fines are for noncompliance, many banks actually help their clients launder money, to the tune of hundreds of billions of dollars per year. Between 2007 and 2015, Danske Bank laundered more than $220 billion in client funds (and was caught). In 2012, HSBC was fined $1.9 billion for actually laundering Mexican money. If you run a large drug organization, all you have to do is buy a bank and work your way into the international financial system.

Anti-Innovation

These laws require that any institution working with money have huge (and growing) staffs of compliance people. We’ve already seen that it doesn’t work. But it hurts small companies and helps incumbents. Small companies want to give customers better service and more choices. They need to raise extra money from investors to stay compliant. Large banks love AML not because it works, but because it increases expenses for smaller competitors.

In 2016, India removed its small-denomination bills from circulation in an effort to reduce crime and money laundering. It didn’t work. Organized money launderers weren’t affected, and hundreds of millions of small businesspeople were hurt badly. This is the Matthew effect at scale.

Think about places like Africa and Asia, where many people don’t have bank accounts. Setting up a banking infrastructure is hard. The right thing to do is ignore the ineffective AML requirements and just try to help people get the tools and services they need. But then they will be seen as criminals, when in fact they would be doing the right thing. AML and AFT laws are preventing hundreds of millions of people from getting access to a system that is badly broken and in desperate need of reform.

The Emperor Has No Clothes

These rules have never worked. Because it’s international, we are at an inadequate equilibrium. Even if each country realizes that AML/ATF laws are nonsense, they can’t go first, because they will be seen as international lawbreakers.

This must stop. This must be brought to the attention of the G20 as a high priority, not to discuss for ages how to improve the system but to quickly find a way to abolish it. We should spend more money actually finding and apprehending criminals and no money ticking boxes and making life for average people difficult. If this century is going to have a chance of keeping up with the demand and the changes technology will bring, we urgently need a fresh look at the entire banking system— from cash to monetary policy to banking regulations to ownership, custody, payments, transmission, and much more.

Summary

AML regulations are tailor-made to facilitate money laundering and cover up illicit gains. Given that the fines are no more than a rounding error on their economics, criminals probably prefer today’s system to no system at all.

The financial system is important and badly broken. It enfranchises rent-seeking incumbents who influence the rules and break them daily. We need a new task force that plans a transition to a better financial infrastructure worldwide. It is time for fresh thinking about money.

Recommended Reading

Fragile by Design — this book shows how banks evolved to work with governments to extract rent and create crises.

ML = BS and AML = BS2, by Ron Pol

The Digital Money Book — I’m writing a book on Medium.com to expose the fraud that is today’s banking system. My goal is to find and fund intelligent people to collaborate to create the new world of money for the 21st century.

David Siegel is a thought leader in blockchain and an expert on digital money. He is the author of The Token Handbook. His new project can be found at Permissionless Finance.

Thanks to Maarten van Doorn

David Siegel

Written by

Entrepreneur, writer, investor, blockchain expert, start-up coach, founder of the Pillar project and 20|30.io

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