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Anti-money laundering rules do nothing to stop money laundering


On 22 December 2001, Richard Reid boarded American Airlines flight 63 from Paris to Miami with a homemade bomb below the soles of his shoes.


He couldn’t ignite the explosive chemicals because sweat from his feet had seeped through. Passengers noticed him trying to light his soggy shoelaces, and wrested the matches away.

Coming as this plot did immediately after the 9/11 plane hijackings, security at airports became a defining feature of air travel. Despite no detection of attempted shoe bomb smuggling in the years since, we’re still required to shuffle barefoot through an x-ray machine before getting to the departure gate.



We instinctively know that “a lot of what passes for security at airports is more theatrical than real”. Counter-terrorist expert, Tom Mockaitis told NPR in 2016 :


"I've seen, in this country, us waste literally millions of dollars on what I call placebo security — highly visual measures like armed guards strutting up and down in our airports, you know, creating a feeling of well-being and a feeling of security without providing any real added benefit."


The security theatre of removing shoes before a flight is irritating, but also paternalistically comforting. After all, what harm does it really do?



 


If airport security theatre is unproductive but benign, then anti-money laundering measures are unproductive and malignant.


9/11 laid bare how groups with criminal or terroristic intent can exploit weaknesses in the global financial system. The 9/11 Commission said in its 2004 report;

After the September 11 attacks, the highest-level U.S. government officials publicly declared that the fight against al Qaeda financing was as critical as the fight against al Qaeda itself. It has been presented as one of the keys to success in the fight against terrorism: if we choke off the terrorists’ money, we limit their ability to conduct mass-casualty attacks.

9/11’s impact on financial regulation

The US Bank Secrecy Act (BSA) was Richard Nixon’s attempt to curtail a tidal wave of Colombian cocaine cash flooding into the US banking system. It was the beginning of banks’ obligation to detect and report large cash transactions to the police. It became known as anti-money laundering (AML) and counter-terrorist financing (CFT) compliance.


Al Qaeda’s sophisticated use of the global financial system to orchestrate the 9/11 attacks instantly made the financing of crime and terrorism a global problem. OECD governments poured money into a formerly sleepy intergovernmental agency, the Financial Action Task Force, and committed to implementing AML/CFT compliance regimes into banks and police units in their own countries.


Global AML/CFT compliance started mutating from a mild Victor Frankenstein into his malevolent Monster.

The unforeseen consequences of global AML/CFT compliance

The purpose of AML/CFT compliance is to detect and deter money laundering and terrorist financing, to stop drug traffickers from dumping dirty cash into the banking system and stymie terrorists from executing murderous attacks.

But it doesn’t work. Money laundering in banks isn’t being detected and terrorists aren’t being deterred. What it does do, is make our engagement with the financial system harder, and more expensive. It throttles growth in underdeveloped economies and accelerates global inequality. A particularly grim conclusion of recent research found,


[A]nti-money laundering policy intervention has less than 0.1 per cent impact on criminal finances, compliance costs exceed recovered criminal funds more than a hundred times over, and banks, taxpayers and ordinary citizens are penalized more than criminal enterprises.


The mutated consequences of AML/CFT compliance are;


  • A staggering financial cost passed on to customers

LexisNexis’ 2020 report projects the total cost of compliance across financial institutions worldwide is $213.9 billion. It’s not the banks’ shareholders and executives wearing that cost, it’s the banking fees you and I pay,


  • Choking economic growth

Applying AML/CFT measures on an artisan yoghurt maker can cost banks the same as applying them to Chobani. This incentivises banks to fund the growth and trading activity of large, established businesses over smaller upstarts. The financial neglect of competitive, innovative small businesses prevents a diverse and sustainably prosperous economy.


  • Isolating vulnerable communities

When Barclay’s Bank shut down the bank accounts of the last legally operating Somali remittance companies in the UK, citing their unwillingness to assume the compliance cost and risk of facilitating financial flows into the country, Oxfam declared it a humanitarian crisis.


AML/CFT is crime prevention theatre

The busier governments and banks stay dusting the windows with compliance, the more freedom criminals and terrorists have to ransack the house.


The societal harm caused by crime and terrorism is obvious, but the societal harm caused by AML/CFT is sly. We must switch channels from compliance theatre to ideas and actions that can impact criminal and terrorist activity;


  • Blockchain is introducing transparency into financial transactions, allowing law enforcement to target illicit actors with a sniper rather than scatter bomb;

  • Governments are taking responsibility for facilitating financial flows to vulnerable countries

  • Businesses are diverting resources away from the compliance black hole and toward ways to reduce their attractiveness to criminals in the first place.


Airport security and compliance theatre are equally ineffective, but only one has unforeseen consequences that harm us. The stakes are too high to accept the status quo; the post 9/11 world is now the post-post-9/11 world with different threats and new tools to protect us against them.