The leaked revelations about the tax-evading activities of the Swiss subsidiary of HSBC Bank rumble on. Britain’s Chancellor of the Exchequer has faced questions as to why, despite evidence of 1,100 tax-evading accounts being passed to the government in 2010, there has been only one prosecution—and why the chairman of HSBC was subsequently made a government minister.
The scandal is a reminder that the global institutions which try to prevent money laundering are not just ineffective—they’re also incredibly expensive to maintain. It’s time to cut them down to size.
The multilateral Financial Action Task Force (FATF), which ostensibly regulates money laundering, emerged as a response to the war on drugs and has expanded during the war on terror. The rules now officially cover almost every country. Not only banks but also lawyers, car dealers, currency exchanges, casinos, and realtors are required to report “suspicious” customers who appear to have more money than they can account for through legal transactions. If laundering activities that banks fail to report are subsequently uncovered, banks may get heavily sanctioned: HSBC itself was previously forced to pay $1.92 billion in fines related to laundering Mexican drug cartel proceeds.
Michael Levi of Cardiff University and Peter Reuter of the University of Maryland have studied the global anti-money-laundering system (PDF http://bit.ly/1AFwSjt) and conclude that it has helped facilitate some criminal investigations and prosecutions. But at best, it snares just a fraction of 1 percent of criminal income flows. A lower-end estimate for global laundering transactions is 2 percent of global gross domestic product—or about $1.5 trillion. Global money laundering convictions involve at the most hundreds of millions. In the U.S., a generous estimate of seizures would amount to a mere 0.2 percent of all laundered funds.
In a later study commissioned by the International Monetary Fund, Levi and Reuter along with Terence Halliday conclude that “[t]here is substantial skepticism about the efficacy of global systems and national regimes to control money laundering and the financing of terrorism,” and no demonstration of its benefits. In part that’s because the regulations are enforced so poorly—the U.S., for example, does not have a register of company beneficial ownership (listing who receives how much of a company’s proceeds), a key FATF requirement.
And an experiment (PDF http://bit.ly/1EqHFkA ) that involved sending 7,400 fake e-mail solicitations to corporate service providers in 182 countries asking to create anonymous companies—in which the e-mailer appeared to be involved in illegal activities—found that almost half of all replies did not ask for proper identification as required under FATF regulations. Service providers in the U.S. and U.K. were even less likely to ask for identification than companies based in developing countries and tax havens.
In the best of cases, anti-money-laundering efforts are likely to do no more than raise the cost of transactions. A system that misses all but a fraction of a percent of criminal financial flows is almost guaranteed to miss terrorism finance in particular, which involves very small sums: The Madrid and London terror bombings cost no more than $10,000 to finance; the Sept. 11 attacks, less than $500,000. That may be one reason why none of the reported money laundering prosecutions to date have involved terror finance.
Though the regulations have limited impact on criminal activities, they still cost money. Tracking illicit money flows requires a considerable bureaucracy. Enforcing the regulations cost an estimated $7 billion in the U.S., and probably far more.
Mauritius, a small, middle-income country of just 1.3 million people, has 25 government officials working on FATF implementation. That’s more people than are listed as opticians in the country. Each bank in Mauritius will also have staff tasked with carrying out customer investigations.
Perhaps most insidious, the regulations have disproportionately affected the kinds of business transactions that serve small, poor economies. FATF rules are why Merchants Bank of California cut off money transfers to Somalia last week, the last U.S. financial institution to do so. Between $160 million and $180 million of remittances will be affected by Merchants Bank’s action, but from its point of view, cutting services is the only safe course. It faced immense potential liabilities if it turned out that one of the accounts receiving funds in Somalia was linked to terrorist activity. Yet there’s no evidence any of the remittances were going to fund terror groups; most were being used to support schooling, housing, food, and other living costs for Somalis. The country is one of the poorest in the world and remittances are equal to about one-third of the country’s GDP.
No doubt, Somali expatriates will find other ways to send the money, but they will cost more and are likely to involve less savory financial institutions as intermediaries. Given that, and the link between people losing their livelihoods and terror recruitment, it is all too possible the FATF regulations will give rise to better-funded and larger terrorist groups.
We need global cooperation to track illicit financial flows and catch tax cheats, but the rules governing that cooperation should be reasonable, effective, and fairly enforced. The Financial Action Task Force is made up of a semi-formal group of representatives from the world’s largest economies who meet for a few days each year. Its recommendations are subject to no analysis of costs and benefits or democratic scrutiny. Yet any country worldwide that does not meet FATF standards can be subject to financial sanctions—despite the record of partial enforcement by task force members themselves. It’s time for this incompetently authoritarian global organization to be held to account, and a set of money laundering rules that do far more harm than good to be significantly reformed.
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