Anton Moiseienko, Senior Lecturer and Research Director at the Australian National University Law School, introduces GAB readers to his new book on AML with the following observation —
The contemporary anti-money laundering (AML) regime effectively prevents criminal infiltration of the economy and delivers value for money. Said no one, ever.
Critiques of AML efforts abound among practitioners, policymakers and scholars alike. This near-universal lack of confidence in today’s financial crime rules is the starting point of my new book Doing Business with Criminals: Between Exclusion and Surveillance, which explores the objectives, unintended consequences, and history of the global AML regime.
The sheer degree of discontent with the existing framework begs the question of what went wrong. There has been no shortage of literature seeking to provide an explanation or proffer a solution. Seminal works include Peter Alldridge’s What Went Wrong with Money Laundering Law?(2016) and Nicholas Gilmour and Tristram Hicks’s The War on Dirty Money (2023). A valuable recent contribution is the article ‘How Well Does the Money Laundering Control System Work?’ by Mirko Nazzari and Peter Reuter, published in Crime and Justice and reviewed by Rick Messick on this blog.
These books and articles make varied and useful contributions, as do many other studies. Still, several further avenues need to be pursued to advance the debate on how to address the problem. They include revisiting the history of AML to understand why today’s widely criticised regime has evolved in the way it has – and, crucially, how that history has defined its current objectives.
The Forgotten History
The evolution of AML measures is widely known. Those with even a passing familiarity know they originated at the Financial Action Task Force’s (FATF) inaugural meeting in 1989 and the subsequent publication of the first edition of its 40 Recommendations. Almost as well-known are the key precursors: enactment of the Bank Secrecy Act 1970 and Money Laundering Control Act 1986 in the U.S.
Far less understood is the thinking that underpinned those reforms. For instance, even the most well-informed observer would be hard-pressed to explain how and when the notion of suspicious activity reporting emerged, or why money laundering became a separate criminal offence as distinct from a form of complicity in predicate offences. In other words, we lack a fully-fledged ‘intellectual history’ of money laundering, which was one of the motivations in writing the book.
This history is most usefully traced to the aftermath of the U.S. Supreme Court’s judgment in Sullivan in 1927, holding that the requirement to declare criminal income did not breach the prohibition against self-incrimination. This famously paved the way for Al Capone’s prosecution for tax evasion. The story crediting the term ‘money laundering’ to Capone’s use of launderettes to generate a plausible cover for his wealth is apocryphal, but it discloses a historical truth about organised crime figures. In the wake of Sullivan, they needed to either hide their assets or come up with an explanation for how they came by them.
In the decades since, multiple congressional inquiries into organised crime took place, with varying degrees of focus on its financial dimension. In 1950, the U.S. Senate’s Special Committee to Investigate Crime in Interstate Commerce, better known as the Kefauver Committee after its chairman, Senator Estes Kefauver, launched an extensive examination of organised crime in the U.S., including its finances. The Committee’s hearings reflected a preoccupation with what we would describe today as ‘professional enablers’, such as a former IRS agent who was involved in falsifying tax accounts for the mob with the committee quizzing him as to whether he was, in effect, aiding and abetting an illicit enterprise. Despite a raft of tax-related recommendations, the Kefauver Committee did not contemplate the development of a distinct AML regime separate from tax enforcement.
It took another 20 years for that regime to be ushered in. In 1970, the U.S. Senate Committee on Banking and Currency took on the question of how overseas bank secrecy enabled crime in America. That led to the introduction of multiple reporting obligations, including currency transaction reports, under the Bank Secrecy Act. (Hence the title of the Act, intended as it was to deal with the challenge of overseas bank secrecy, rather than to protect US bank secrecy.)
A set of remarkably modern concerns can be discerned in the testimony of key witnesses, such as the cost of compliance or ‘the possible impact of the bill on the international position of the dollar’, highlighted by First National City Bank (now, Citigroup). Nor were the law enforcement benefits of the new reporting requirements taken for granted. The ideas behind them harkened back to the ‘unusual transaction’ reports required instituted under the Trading with the Enemy Act in 1945, which the government recognised had been of limited utility due to banks’ differing interpretations of what ‘unusual’ meant. Unusual transaction reporting nonetheless made a comeback in the form of suspicious activity reporting in the early 1990s, following the first iteration of the FATF’s Recommendations.
There are many more milestones in money laundering – and anti-money laundering – than can be summarised here, but several observations emerge. First, given the well-known deficiencies of the current AML regime, it may be tempting to paint its evolution as a knee-jerk reaction by governments saddled with the need to do something in response to money laundering, regardless of how ineffectual that something might be. That would be to understate the seriousness and thoughtfulness of policymaking and legislative processes that spanned multiple decades and jurisdictions and to miss several important truths.
In terms of its broad outlines, the emergence of an AML regime was close to inevitable. The criminalisation of money laundering; the obligation to know who one’s customers are; and the introduction of some form of reporting obligations are all natural responses to a series of scandals and well-documented deficiencies. In other respects, the system we now have is a product of historical accident, such as the FATF’s endorsement of some financial crime controls and not others at its fateful initial meetings: for example, privileging suspicious activity reporting in the Recommendations rather than other types of reporting, such as international transaction reporting or geographically targeted reporting obligations, by now almost proven to be no less effective in certain jurisdictions at a lesser financial and privacy cost.
What Is AML For?
By far the most fundamental history lesson is the lack of a clear central objective to the regime. The subtitle of the book, Between Exclusion and Surveillance, reflects the underlying tension between excluding known or suspected criminals from the legitimate economy and surveilancing their involvement in it. As a senior banking compliance expert in the UK used to say, ‘I want criminals to bank with me, so I can report them’. Many bank CEOs would take a different view!
Herein lies the challenge. Both exclusion and surveillance can be valuable, in respect of different threat actors and at various times. Other competing values and principles are at play, too: principally, financial privacy and the presumption of innocence. Put simply, we would not want our regulated sectors to report transactions to governments too readily, nor engage in blanket de-risking solely on the basis that a customer hails from a higher-risk country. Yet the incentives that AML rules create are crude, favouring over-reporting to avoid regulatory penalties and de-risking to minimise the costs of enhanced due diligence or more frequent reporting in higher-risk situations.
One can often hear that the original sin of AML regulation is the deputisation of private businesses with quasi-law enforcement, intelligence-gathering functions. Whether this is truly problematic depends on one’s ideological predilections. From an effectiveness standpoint, the crux of the matter is not deputisation per se, but undirected deputisation. Consider, for instance, a bank setting out its policy in relation to customers of a certain higher-risk background. Whether to keep them on the books or drop them is a delicate balancing act, involving law enforcement equities and broader public policy considerations. It is untenable to suggest that optimal social outcomes can be achieved if the bank acts in accordance with its ‘risk appetite’, or commercial judgment as to the extent of regulatory risk it is happy to take.
The admixture of conflicting objectives at the heart of the regime also makes it exceedingly difficult to measure its effectiveness:
In relation to both exclusion and surveillance, there are ways of ascertaining that the AML/CTF regime does not work: be it a complete lack of the required reporting (as was the case in the U.S. for the first fifteen years or so following the adoption of the Bank Secrecy Act) or an abundance of cases involving the wilful complicity of major financial institutions in money laundering (as was the case in Switzerland between the 1970s and 1990s).
It is far harder to think of the kinds of data that could ever prove the regime does work, or even give us a good sense of the value for money it provides. Financial intelligence is only one enabling component of successful law enforcement outcomes. It is therefore difficult to judge the effectiveness of the financial surveillance of criminals. For example, neither the number of SARs nor whether they trigger an investigation is a good indicator of their quality. Likewise, a financial investigation could be done well yet not lead to a law enforcement outcome. And, of course, successful exclusion of criminal actors from the legitimate economy is impossible to quantify because one cannot prove a negative: are criminal actors truly excluded from the economy, or merely undetected?
Opportunities for Reform
These formidable difficulties do not mean that no improvement is possible. On a technical level, the most promising avenue for progress is further scaling up methods for better alignment of private-sector compliance efforts with law enforcement priorities, such as public–private partnerships, tailored reporting regimes (e.g. geographic targeting orders) or ‘keep open’ laws that prohibit regulated businesses from closing certain higher-risk accounts.
Macro-level change is required, too. Nazzari and Reuter are right to point out that, while thought is being given to fixing ‘weaknesses in the system’, there is a degree of reluctance to rethink ‘its basic architecture’. This is no doubt in recognition of the central role that the FATF’s Recommendations have come to assume, and the political obstacles to securing consensus among its members for any truly major reform.
Cliché though this may be, diagnosing the problem is a useful first step. It is past time to jettison vague invocations of ‘financial integrity’ in favour of acknowledging the multiplicity of objectives pursued by the regime, as well as encouraging countries to develop mechanisms to ensure better alignment of private-sector and public-sector AML efforts. To that end, I propose a set of guiding principles for an effective AML regime, appended below. While no such set of postulates can solve the difficulties besetting this complex area of law and policy, I hope they can advance the ongoing debate in the right direction.
Proposed Guiding Principles for an Effective AML/CTF Regime
- The overarching objectives of AML/CTF law and regulation are: (a) to facilitate the investigation and prosecution of profit-generating crime, as well as the confiscation of its proceeds; and (b) to reduce the ease and profitability of money laundering, terrorist financing and proliferation financing.
- Consistent with those overarching objectives, countries should institute legal and regulatory regimes that enable them, to the extent feasible, to: (a) exclude the proceeds of crime from the legitimate economy; and/or (b) collect high-quality intelligence on the economic activities of suspected criminals or terrorists.
- Competent authorities and regulated businesses should seek to maximise intelligence-gathering opportunities that serve law enforcement purposes while minimising the risk of complicity in money laundering, terrorist financing or proliferation financing.
- A country’s legal and regulatory regime should ensure that the regulated businesses’ AML/CTF compliance efforts are aligned with the country’s law enforcement priorities. While the tools for this are subject to each country’s discretion, they could include public–private partnerships or other arrangements for the sharing of up-to-date financial crime typologies; tailored reporting requirements, such as geographic targeting orders; or the regular provision of feedback on the quality of the regulated businesses’ reporting.
- Any country can identify regulated services subject to special AML/CTF rules. This can include essential services that must be provided to the population at large, such as a basic bank account, whose provision should not in and of itself attract liability for money laundering so long as applicable reporting obligations have been met. This can also include highly specialised, high-risk services that must not be provided if a suspicion exists that the proceeds of crime are involved.
- The nature of the reporting obligations imposed on the regulated businesses should reflect careful consideration of the types of reporting that best support law enforcement activities in the country concerned as well as the privacy trade-offs involved. Possible options include threshold-based reporting; suspicious activity reporting; unusual activity reporting; or tailored reporting requirements, such as geographic targeting orders.
