My familiarity with money laundering goes back over 30 years. That is long before the OECD used the Financial Action Task Force (FATF) to help stamp out "Unfair Tax Competition” which morphed all of the current Anti Money Laundering (AML) laws and regulations.
Between chasing fraudsters, assisting offshore banks and trust companies with compliance, and the fanciful tax-dodging schemes, bribery schemes and the ploys such as consultant fees, appearance fees, speaking fees, book royalties and owner blind credit cards to move the money, I have not seen all of the money laundering schemes, but I am close.
I am no fan of crime or corruption.[i] The AML laws need to be scaled back but meaningful punishments need to be added. The AML laws on the books do not work. The prima facie evidence is crime has not stopped or reduced tax evasion. It has just adapted to get better at not being discovered. The AML laws are harming the world’s economy. I knew from the beginning the laws were all about buttoning up an economy so it could be taxed. That was the OECD's/ FATF’s publicly-stated objective from day one. I also thought this might work to address frauds and address the cancer of corruption. I was wrong. It has been 20 years since the FATF's 40 recommendations, the Patriot Act, and the EU's First AMLD. Crime and money laundering continue unabated. In 2004, I teased a group of bankers at a conference. "I guess you can't launder money anymore." One smiled and retorted, "Mr. Files, with the new laws, we can now charge even more for the service." We all laughed.
I have tried to think of an analogy to conceptualise the failures laws and the perverse incentives have created for law enforcement. The best I can come up with are boat launchings. A lake has a peculiar set of rules. No boat can be launched into the lake by a crane, only trailer-launched boats. To enforce this rule, all marine services, such as gas stations, chandlery shops, and boatyards, must report suspicious boat activity on an SBR*. A pinhead at the gas station is sure that all Mangusta Yachts are crane launched. Thus, he reports all Mangusta Yachts to the lake police. The lake police are now going after every yacht that even looks like a Mangusta.[ii] A few crane-launched boats were fined. However, millions were wasted by many proving their boat was not crane launched. However, if the lake police look around the lake's shore, they would find 20 boat ramps and two cranes!
While AML laws have produced some results, the same laws are a tremendous burden on honest business-people and individuals. Everyone has to ensure that they are not on a crane launched boat and invest the time and expense of taking photos of their boat being ramp launched into the lake, occasionally being required to attest that the boat did not come in from a side channel known for crane launching boats.
The AML laws have caused money centre banks to go through spasm after spasm of de-risking their correspondent clients in hard-to-bank nations; in some cases, completely cutting off all correspondent services for an entire small nation.
According to a 2012 World Bank Report, the AML laws hurt the poor by making banking more expensive and harder to access.
LexisNexis quantified the costs of AML compliance. The total expenditure of global compliance is US$213.9 Billion.[iii] That is greater than the GDP of 140 nations!
The perverse incentives of warrantless asset seizure and policing for profit, continue to cause real damage. The initial idea was to take the profit out of crime. Drug kingpins and the corrupt would simultaneously lose their ability to move cash, and the good guys could seize the assets and take the profit out of crime. How could that be a bad idea?
US law enforcement has seized over US$68.8 billion in civil asset forfeiture cases. Well over half of the forfeitures were for under US$1,300[iv]. A US$1,330 average is not very kingpin-ish.
A food truck owner had his business, home, cars, and bank account seized. This was the result of him depositing 8-9K in cash in every Tuesday. He was suspected of smurfing deposits just under the 10K CTR (currency transaction reporting) requirement. The judge unwound the action. The young man told everyone that he “takes cash because it takes too long for a card to clear a machine,” adding he would be happy to deposit over 10K every Tuesday but needs a few more patrons. How did this happen? The bank did not do their KYC and police did not bother to investigate the suspicions.
A man was arrested by city police on suspicion of drug dealing and had his car seized because he was black and driving a new US$180,000 Mercedes with no lien. The driver is an aeronautical engineer and jet broker. The city is now called "defendant".
The UK’s Unexplained Wealth Orders are a tragicomedy in concept and execution.
Policing for profit has too many perverse incentives to work. It is all too human to see the dollars a police officer could harvest for their departments. The once noble idea is failing in execution. In many cases, the AML laws and civil asset forfeiture inflict untold tragedy when exercised without a warrant let alone an investigation.
The desire for profits from asset seizures has taken an absurd grotesque turn.
The US Securities and Exchange Commission, SEC and The Financial Agency Regulatory Authority (FINRA) are battling in a case that is now before the US Supreme Court. The SEC has been flexing its ever-expanding prosecutorial wont and has chosen to enforce laws of another agency, the Financial Crimes Enforcement Network (FinCEN), a bureau within the Treasury Department. Congress gave the department primary enforcement discretion under the Bank Secrecy Act (BSA). The SEC’s grab of the independent authority to enforce the BSA’s Suspicious Activity Reporting requirements and the ability to fine ignores Congress’ decision to entrust enforcement of the BSA to the Treasury Department. While the SEC acknowledges this, it has argued that Congress has acquiesced in the SEC’s power grab by not stepping in to stop it.[v]
Why are two government departments battling all the way to the Supreme Court on who can fine who and for how much? It is a turf battle. Two under-bosses disagree on the turf from which they can extract "tribute".
The AML laws are no longer about stopping bad behaviour or even crime. They are about collecting money every time you can find a crane-launched boat. Law enforcement could remove the cranes. The Lake Judiciary could ban the offenders from ever coming back to the lake, no matter how their boat might have been launched. But that would cut off the money.
Bank of America has paid over US$80bn in 214 fines, Citigroup US$25.5bn in fines, Goldman Sachs US$16.4bn, and the list of companies and amount of the fines run to just over US$1.1 trillion. So how many bank officers have gone to jail or have personally been forced to pay one of the fines? Exactly. The bankers run the bank and push the limits to collect their performance bonuses. If the banks get fined, it is no big deal because the shareholders pay the fine. Several bankers told me that compliance fines are a "Spank Tax.” The costs of the eventual fines are built into the margins it charges the customers. Individually, they are not worried. Large financial institutions, like governments, are so burdened with bureaucracies you cannot find a single person responsible for anything.
If the AML laws were used to arrest or claw back all of the bonuses from the many bad-faith individual actors, as the trillions in fines suggest, one might argue there is some justice. But if that were done, there would be no more tribute. It is financially wiser for the regulators and law enforcement, if inauthentic, to continue to harvest tribute than stop the crimes that produce the tribute.
The belief in AML as a crime stopper is a concept that has died. The notable successes outweigh the economic costs, commercial toll, and personal tragedies. The regulators know that they are losing the game. It is much like playing cards with a 7-year-old. Every time they lose, the rules change until they make no sense. The absurdity of the Beneficial Owner disclosure falls right in line with the 7-year-old concept of regulation. Every three or four years, the FATF comes up with more regulations that make everything tidy, burden the economy, and accomplish nothing. The law-abiders spend additional billions on compliance, there are more opportunities for regulators and law enforcement to collect tribute, the customers and shareholders lose, and the criminals adapt, dodge, and ignore.
It is time to repeal the AML laws, kill the farcical black, white, grey lists, stick with KYC and SARs, provide full immunity to banks who report, personally fine and jail bad bankers, and cease warrantless civil seizures.
P.S. I know it's me but shouldn't the banks that helped to launder money out of the countries who are our adversaries get some form of bonus points or tax credits?
[i] I work as an international investigator on fraud, due diligence, and corruption. I also serve as the President of The American Anti-Corruption Institute, non-executive.
[ii] I used Mangusta Yachts because I was on one, and the experience was incredible.
[iii] LexisNexis Risk Solution 09 June 2021
[iv] Institute for Justice "Policing for Profit: The Abuse of Civil Asset Forfeitures.” 3rd edition
[v] No.21-82 Alpine Securities Corporation v. United State Securities and Exchange Commission.
*SBR = Suspicious Boating Report
L. Burke Files DDP CACM
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 and 24-hour gold, silver, and foreign currency trading. 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 wining 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. Mr. Files is active in several civic organizations. In the past Mr. Files has served as a member of the Arizona Governor’s Board on Solid Waste Management, as an advisor to the Governor’s Board on Economic Planning and Development. Mr. Files has also received a Commission and a Medal of Merit from the President of the United States.