Aglobal surveillance system monitoring the financial transactions of billions of people is almost completely ineffective in disrupting criminal finances. Its massive cost is paid by businesses and ordinary citizens, and a regulatory framework focused on a tiny fraction of the problem limits the value of technology solutions, including artificial intelligence, machine learning, blockchain, etc.
Eye-wateringly expensive compliance obligations (ultimately paid by all of us, in higher fees and taxes) hasn’t made us safe from crime, despite 30 years’ effort, high-profile arrests (like this alleged $250M crypto theft), and trillions of dollars complying with regulations with a success rate a fraction of one-percent from complete failure. Rather than help solve the real issue, technology ‘solutions’ framed in a self-limiting regulatory paradigm often ‘sweat’ the 0.1 percent impact already achieved.
However, the gap between intention and results is so ludicrously large that it might help trigger a leadership revolution, finally enabling real impact on crime, more strategic use of technology, and less compliance, less cost, and less hassle for businesses and ordinary people.
How did we get here?
In 1989/1990, the Financial Action Task Force (FATF) was set up by the G7 group of large industrialized nations to harness the intelligence value of financial transactions to combat serious crime, particularly drug trafficking.
FATF was remarkably successful promoting money laundering controls, but not for reasons you might think. After a sluggish start, rather than persuade governments to join by demonstrating how following its guidelines would help substantially reduce serious crime (which it couldn’t do), FATF used a trick from The Godfather’s playbook: voluntary coercion.
FATF rated compliance with ‘recommendations’ and publicly named non-conforming nations. With no power to enforce compliance, banks did FATF’s work for it, treating its ratings as a proxy for risk. Virtually overnight, countries’ access to financial markets was tied to FATF’s tick of approval. Governments quickly signed up.
Bizarrely, whether anti-money laundering laws work, or not, hardly matters. Today, 205 countries and jurisdictions embed FATF’s standardized template in their laws. (That’s more places than there are countries: 193, according to the UN). Those nations’ laws require millions of businesses to operate anti-money laundering programs and monitor billions of financial transactions daily. That would be a good thing, if it worked. But theory and practice are very different things.
Good in theory…
It sounds logical. Criminals use the financial system to make illicit income appear legally earned (this is called money laundering). Therefore, ‘gatekeepers’ to the financial system (like banks, lawyers, and realtors), so the theory goes, should prevent their firms being used for money laundering, and report any possibly dodgy dealings. This helps identify illegal activity, triggering investigations and criminal asset confiscation. It should make it harder for criminals and make us all safer.
The only problem is those “shoulds”.
…shame about the reality
Unfortunately, the anti-money laundering system didn’t work when its core operating model was hastily cobbled together 30 years ago; and, unchanged, unquestioned, and seemingly unquestionable, still doesn’t work.
That last paragraph will be contested, not least because what works, or not, depends on the measures used, and promoters of any status-quo paint their endeavors in the best light, with metrics showing some sort of progress. But evidence-informed common sense tends, eventually, to prevail.
How do we know it doesn’t work?
Effectiveness and outcomes is this article’s main theme. In the anti-money laundering context, this means asking not just if countries implement anti-money laundering laws, whether the laws meet international standards, or if firms comply with them (this is where most tend to stop), but whether the rules work. Do they produce intended outcomes?
The key issue, then, is how to identify and measure outcomes.
The goal was to use money flows to detect and prevent serious crime and the harms caused by crimes like drug trafficking — so it is against such outcomes that effectiveness might best be judged.
Curiously, however, no such metrics were identified by officials tasked with the role back in 1990. Or since. Instead, ‘effectiveness’ was judged against compliance with simplistic effort and activity measures, and is still assessed that way today.
The anti-money laundering industry’s seemingly stoic indifference to outcomes science and evidence contrary to its narrative is legendary.
For example, despite independent research exposing serious flaws since at least 1994, for over two decades FATF flatly refused to countenance that its ‘recommendations’ were inherently incapable of assessing effectiveness in terms of outcomes achieved. As a testament to intransigence, countries were subjected to three rounds of onerous evaluations between 1991 and 2014 before a new methodology was ushered in. The only problem is that it offers the appearance rather than reality of change. In essence, 11 so-called ‘outcomes’, like FATF’s 40 ‘recommendations’, focus on simplistic measures of effort and activity, not real outcomes like preventing serious crime.
In the absence of meaningful official metrics, this article uses interception rates (the proportion of criminal funds seized or confiscated) as an interim effectiveness indicator. The United Nations calls this the “success rate” of money laundering controls.
Anti-money laundering works (for criminals)
Globally, the UN reckoned that just 0.2 percent of laundered criminal funds is seized annually by enforcement agencies. This means that up to 99.8 percent of illicit funds remain in criminal hands, plus accumulated and invested criminal proceeds: helping protect, support and enable the operational success and expansion of serious criminal activity.
Similar findings hold elsewhere.
Across the European Union between 2010–2014, 2.2 percent and 1.1 percent of criminal proceeds were respectively seized and ultimately confiscated annually, according to Europol, frankly acknowledging that it’s “only a small proportion of estimated criminal proceeds: 98.9 percent of estimated criminal profits are not confiscated and remain at the disposal of criminals.”
Nor do individual countries fare much better.
For example, in Australia, with average annual criminal seizures and confiscations of $128 million and $37.6 million respectively between 2009-2013 compared with $10 billion total proceeds of crime suggests a success rate of 1.28 percent seized and 0.38 percent confiscated. In classic understatement, Australian officials conceded that “the value of property taken from criminals” is “small compared to what criminals generated.”
Challenging to claim success
Updated research puts the global figure at 0.1 percent, but at such small amounts the difference is trivial. In any event, with official bodies uninterested in collecting data enabling more nuanced assessment, these findings (necessarily based on incomplete, inconsistent, and often poorly validated data) are broad indicators only.
Nonetheless, it is difficult to claim anti-money laundering success. Some criminals are profoundly affected by money laundering controls, but the impact on ‘Criminals, Inc’ is hardly a tax on crime, and scarcely a rounding error in criminal accounts.
Jarring dissonance, catalyst for leadership?
Political and business leaders presumably want the anti-money laundering experiment to affect crime. Many of their advisers, and officials responsible for the system, firmly believe that it is, or, eventually, ‘should’ be, effective — if only its dictates are followed more assiduously.
However, markedly and persistently poor results (despite trillions of dollars and three decades of prodigious effort) seem inconsistent with such beliefs.
Bridging the chasm between well-meaning intent and its realization may need something known as a ‘perspective transformation’. Such events are rare for individuals. Collectively, rarer still. Moreover, despite frequent changes to details, the anti-money laundering industrial complex is deeply change-resistant; marked by a common world view, ritualized ratings, and stream of ‘in-group’ gatherings constantly reinforcing shared beliefs.
Nonetheless, the anti-money laundering regime is so jarringly ineffective that a logic crisis may, eventually, trigger a questioning of core assumptions (known as a disorienting dilemma, after sociologist Jack Mezirow). Anecdotally, there are signs of a tipping point, which may be the spark needed for transformative leadership enabling changes in design, action and behaviors re-oriented towards meaningful crime prevention objectives, as intended by the G7 and other nations.
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What do you think?
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Read more in this series…
- Saying It as You See it: How to Lose Friends and Infuriate People
- Anti-money Laundering “Almost Completely Ineffective.” Why it Harms us All
- Global Ratings Designed to Fail, But Some Countries Benefit
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Primary source: Uncomfortable truths? ML=BS and AML=BS squared, Journal of Financial Crime