Saying It as You See It: How to Lose Friends and Infuriate People

Money laundering compliance kills start-ups, wastes good technology, and banks spend trillions with 0.1% impact. But the flip side of failure is opportunity

Dr Ron Pol
Feb 26, 2020 · 6 min read
Photo by Free To Use Sounds on Unsplash

In US Senate testimony, ex-US Treasury special agent John Cassara quoted me describing money laundering controls as the world’s least effective anti-crime measure.

Start-ups, banks, and other firms know they must comply with relevant regulations, but it’s less well known that the modern anti-money laundering experiment has almost zero impact on criminal finances.

For every “Billion Dollar Whale” uncovered, thousands operate unseen. Every few weeks one “Dark Towers” bank or another (and another, last week) appear in the cross-hairs of regulators keen to ‘prove’ their “tough on crime” credentials — yet the harsh reality is that it’s never been shown to make a serious dent in crime. (Even the World Bank can’t stop a sizable chunk of its own payments to governments being spirited away into financial havens, according to The Economist (and report and commentary).

The least effective anti-crime measure, ever?

Every country harbours policy blunders, but the “war on drugs” has long been an obvious contender for the least effective anti-crime measure. Spending trillions of dollars incarcerating millions of people, labelling them ‘criminals’ for low-level offences and destroying lives and families for generations, only made the problem worse.

However, the war on drugs never reached global proportions. Some countries didn’t buy into the rhetoric, and most others abandoned the grandiose “war” as a failed experiment; opting instead for policies that work.

In contrast, the “war against money laundering” is slavishly followed by 205 jurisdictions. (That’s more places than there are countries; 193, according to the UN). Of course, measuring success isn’t easy. It depends critically on the metrics used, and promoters of any status-quo paint their endeavours in the best light. But, despite trillions of dollars, standardized laws spanning the globe, and three decades of prodigious effort, the evidence is grim. Not only does it have almost no impact on crime, but the modern anti-money laundering movement itself also causes social and economic harm.

Start-ups, fintech, banks, and citizens harmed more than criminals

The eye-watering cost and hassle of anti-money laundering compliance profoundly affect countless individuals, communities, start-ups, technology firms, banks, and even countries.

For start-ups, compliance costs are a major barrier to market entry. Challenger banks, cryptocurrency firms, money-transfer companies, mobile-payment facilitators, and other businesses streamlining financial transactions must create compliance departments and buy costly technology before they can even start delivering better customer experiences.

Current rules also make technology firms focus their talents on “compliance solutions” endlessly ‘sweating’ the 0.1% impact on crime already done well. Unimaginative regulators socialized in a common narrative — characterized by shared beliefs, stylized language, idiosyncratic ratings, and a constant stream of self-reinforcing ‘in-group’ gatherings — unwittingly make tech firms drive cost and complexity into customers’ business models, rather than propelling meaningful results by leveraging their passion for elegant, effective, less costly solutions.

Nor are banks immune from anti-money laundering zealotry. Banks are forced to build huge compliance departments (sometimes nearly one in 10 staff), and the mere threat of regulatory breach can shut them down, losing tens of thousands of jobs. Others face ruinous penalties and punishing costs responding to allegations and doing “more of the same”.

All of that might be OK if the rules worked.

But mounting evidence exposes serious flaws and lousy results (like those listed in bullet points below). Worse, a regulatory framework designed 30-years’ ago like a giant stack of colanders to catch water seems locked-in by a culture seemingly indifferent to effectiveness and outcomes as it is generally understood in public policy, as the impact and effect of regulations.

In failure, however, lies opportunity.

The flip side of failure is an opportunity

Rather than an endless cycle of more regulation, more compliance, and mounting costs — repeatedly targeting 0.1 percent of crime already tackled well — untapped possibility lies in the 99.9 percent zone uncharted by three decades of unwavering devotion to a compliance operating model hastily cobbled together over a few months in 1990.

In other words, the 0.1 percent “war” zone is packed with armies of earnest policymakers and diligent regulators seemingly unable to visualize the vast expanse of the unexplored 99.9 percent. That’s where the most serious profit-motivated criminal enterprise has always operated, visited from time to time by law enforcement agencies with a different mindset and better tools.

But, therein lies opportunity. Bank leaders, tech firms, blockchain entrepreneurs, innovative universities and think tanks, proactive government agencies, and even start-ups could invite politicians and bureaucrats to allow the anti-money laundering system to have a real impact on serious profit-motivated crime and other financially-indicated crime, including terrorism — with less harm, and less cost.

But, realizing the opportunity for change, with rules that make a difference — rather than onerous regulations hurting businesses, customers and taxpayers more than criminals — involves recognizing reality.

The good news is that considerable evidence already exists.

Go forth, armed with evidence

Like climate change ‘known’ only by scientists four decades ago, researchers began exposing major problems, and solutions, a quarter-century ago — but, still marginalized by a stifling ‘official’ narrative, most of it remains misinterpreted or overlooked, amidst the ‘noise’ of incessant demands for “more of the same” regulations, rather than more effective rules.

Much of the truth about money laundering is therefore hidden in plain sight; with the public and policymakers unaware of abject failure, or the prospect of better results.

But, differences between climate change and the “war” against money laundering suggest optimism. First, the problems are merely difficult, not intractable. Second, evidence of failure exists, and acknowledging uncomfortable reality starts the process of overcoming it.

New research exposes fundamental flaws…

This is the first in a new series reaching behind the paywalls of academic journals to reveal:

· why the current innovation-stifling anti-money laundering paradigm is almost completely ineffective;

· how a global rating system intended to assess effectiveness is, by design, unable to assess effectiveness or outcomes as it intends — yet low ratings profoundly affect countries and business’ access to financial markets;

· how some governments learned to ‘game’ the global rating system for better scores, disproportionately benefiting their countries’ firms over others;

· how hidden knowledge in global ratings helps foster insight and innovation;

· why the EU response to European banks’ money laundering scandals delivered ‘solutions’ perpetuating the status-quo, punishing legitimate businesses, citizens and taxpayers more than criminals.

Overall, a multi-disciplinary research agenda combining regulatory effectiveness, outcomes, and compliance data for the first time exposes the stark reality of puny impact and huge costs inadvertently destroying value across the global economy.

It also reveals opportunities to start marrying good intentions with real-life results.

…and leadership, beyond followership

If business and political leaders want crime prevention efforts to work, and if they’re tired of the tedious processes and the staggering cost of conforming to rules with almost zero impact, unreflective followership isn’t the only option.

Critical, proactive, inspirational leadership for outcomes offers the prospect of a significant, demonstrable, sustainable impact on serious crime.

But, to overcome any problem, first, we must recognize it. This new series systematically deconstructs arguably the world’s least effective anti-crime measure, and suggests an opportunity for better outcomes, with substantially less cost and hassle for legitimate businesses and ordinary citizens.

— — —

What do you think?

Please engage, comment, share, connect, or follow to be notified about upcoming articles.

— — —

This series, thus far…

  1. Saying It as You See it: How to Lose Friends and Infuriate People
  2. Anti-money Laundering “Almost Completely Ineffective.” Why it Harms us All
  3. Global Ratings Designed to Fail, But Some Countries Benefit

Acknowledgements: The metaphorical shoulders of giants, for sightlines to pathways for better outcomes. Jonar Nadar’s book, for title inspiration.

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Dr Ron Pol

Written by

Outcomes science, applied to life. Current main focus AML/CFT. Outcomes architect, loves engaging with open minds. See:

The Startup

Get smarter at building your thing. Follow to join The Startup’s +8 million monthly readers & +786K followers.

Dr Ron Pol

Written by

Outcomes science, applied to life. Current main focus AML/CFT. Outcomes architect, loves engaging with open minds. See:

The Startup

Get smarter at building your thing. Follow to join The Startup’s +8 million monthly readers & +786K followers.

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