UK: Money laundering legislation costs business

Anti money laundering compliance procedures have become more of an exercise in box ticking than a concerted effort to prevent criminal activity, according to Professor Jackie Harvey of Newcastle Business School, Northumbria University.

The first money laundering guidance notes were introduced in the early 1990s and marked the start of a painstakingly slow process. Up to and including the 2007 money laundering regulations we have seen some 15 changes to the money laundering regulatory framework. The rationale underpinning this regulatory creep is provided by the presumed (but untested) positive correlation between legislation and the costs of money laundering; and the suspicion that there is criminal wealth that cannot be causally connected to specific crimes within the economy.

The police (supported by a government desperate to be seen as being ‘tough on crime’) wanted to attack these criminal assets directly and to do so required new and stronger powers. The upshot is that law enforcement authorities are now in the position of being able to target the funds of criminals separately from targeting the criminals themselves. As a result, a suspected criminal does not need to be convicted of a criminal act to see his ‘unexplainable’ assets confiscated. Of course, establishing the size and ownership of these assets requires close scrutiny of the financial affairs of the suspect, which is where the financial institutions come in.

Detection or self-protection?
AML legislation has effectively transferred some of the detective activities of law enforcement into the compliance and supervisory functions, with some banks establishing internal detective functions. With this comes the inherent presumption that banks are in some unspecified way able to distinguish criminal from legitimate account activity, bearing in mind the fact that money is money and by its very nature is neither clean nor dirty. Indeed, all they can reasonably do is point to transactions that, against a given history, might appear unusual – the leap of faith inherent in the approach being that ‘unusual ‘by definition must equate to ‘suspicious’.

Add to this the risk that reporting the unusual is driven by a desire to avoid regulatory censure, particularly where business sees such reporting as absolving them of responsibility, and we have a scenario where there is a geometric rise in the number of suspicious activity reports. Indeed, I am aware of banks using the number of SARs submitted as an internal performance measure, while at least one bank has been told that for their size they should be submitting more reports. Put against this the most recent mutual evaluation report (FATF, 2007) which comments on the apparent lack of FSA disciplinary sanctions and one wonders if the whole process is to tick the box rather than uncovering criminal activity.

A vested interest
Unfortunately, what is clear from recent market history is that damage to reputation is brought about not by criminal account keeping, but by failures in other areas of risk management.

We have created a win-win situation for the many agencies whose existence and expense are justified by the dubious assumption that there is a huge volume of crime money that (if laundered) would threaten the integrity of the global financial system. Whether or not the assumptions are proven is irrelevant for justifying the costly existence of a host of anti-laundering agencies. The result is a global security business supporting an ever expanding list of security consultants, training, conferences, journals, bulletins and updates. It is hard not to conclude that there exists a strong vested interest in maintaining the status quo. It is hardly surprising that compliance is now regarded as a profession in its own right. Naturally their interest is to reinforce the threat of money laundering and the continued importance of their function which is a cost overhead on the real business.

The ultimate tension will be between the desire to collect increasing amounts of criminal money and the consequent demands for ever more information from financial institutions. While assets have been recovered from criminals, it’s been at significant cost to the law enforcement agencies as well as to business, at a time when business can least afford it.

Source: AccountingWEB