Somewhere, buried under all the glossy headlines about confiscation of criminal proceeds, technology ‘solving’ financial crime problems, and the resources major global firms keep piling on to combat money laundering, is a starkly different, more sobering, truth. The current regime, as it stands, is not helping us prevent money laundering.
There is a small, but growing, body of evidence to support this claim. Coming mostly from academia, there have been several research pieces in recent years that look at a range of issues across the Anti Money Laundering environment globally, aiming to analyse how and why the lofty goals simply are not being met.
Taking a step into the archives, the initial mandate of the Financial Action Task Force, as taken from the 1989 declaration, is:
“…to assess the results of cooperation already undertaken in order to prevent the utilization of the banking system and financial institutions for the purpose of money laundering, and to consider additional preventive efforts in this field, including the adaptation of the legal and regulatory systems so as to enhance multilateral judicial assistance.”[1]
“Logic would rightly dictate that a measure of success here would have seen a dwindling of cases”
This is now a (nearly) three-decade old statement of intent, and logic would rightly dictate that a measure of success here would have seen a dwindling of cases. Both key elements of the statement focus on the preventive elements in the case against financial crime, but as evidenced by recent news (too much to stuff into one article!), there are no shortage of money laundering related events occurring.
“…there has been minimal effort at evaluation of how well any AML intervention does in achieving its goals.”
AML Assessment and Effectiveness
A pair of articles from this year by Dr Ron Pol[2] got some limited media coverage, but are, in our opinion, of essential reading for any compliance, AML, or Financial Crime practitioners. Usefully, these journal articles have now been made free until the end of September by the publisher, Emerald Insights[3]. Kudos to them for working to advance this conversation.
Building on a seminal research article from Halliday, Levi, and Reuter[4], which focused on assessing the assessments under the third round of Mutual Evaluation Reports (MER3), Dr Pol took this further when analysing the idea of effectiveness as an ‘outcome’ based on the updated FATF Methodology[5] for assessing technical compliance (for the fourth round of Mutual Evaluations, MER4) from 2013 (revised early in 2018).
In “Anti-money laundering effectiveness: assessing outcomes or ticking boxes?”[6], Dr Pol found that the FATF “Effectiveness” methodology does not yet fully reflect an “outcome-oriented model as it purports”. Part of this hinges on the method by which FATF have determined, and described, outcomes, as opposed to ‘Outputs’, which give a very different view if what and where ‘Effectiveness’ may come in. A second element builds on the previous research from Halliday et al (2014) that “in the third round of AML/CFT evaluations (before the fourth round ‘effectiveness’ criteria), FATF failed to demonstrate that objectives were more likely to be reached by compliance with FATF Standards”.
Evidence based analyses of assessments from both the third and fourth round of Mutual Evaluations thus seems to provide no evidence that ‘effectiveness’ has been improved, and therefore that we are not closer to the ‘prevention’ of money laundering over time.
Does the System Work?
One of the most frequent questions regarding Anti Money Laundering to be asked by both individuals and organisations, globally, is whether “the system is working”. Of course, this is an almost impossible question to answer, depending on what one views as the ‘system’, and how one evaluates something as ‘working’, or being of potential benefit.
Talking to practitioners often gives a slightly more nuanced point of view. It is not uncommon to hear someone who specialises in this area say something along the lines of “it doesn’t matter, if we fulfil our regulatory requirements’. Whilst there is some truth in this (from a purely black/white operational perspective), it misses the wider point that if all we are doing is ticking the legal and regulatory box, how are we moving any closer to fulfilment of the initial FATF mandate to “prevent” money laundering? What if, fundamentally, the overall global policy framework is not fit for purpose?
Measuring impact of policy is challenging. Challenging, however, does not mean we should not try. In a follow up research article[7], Dr Pol looks at metrics for success with regards to enforcement of Anti Money Laundering policy globally. The somewhat (and purposely) provocatively titled “Uncomfortable truths? ML=BS and AML= BS2” looks at interdiction rates (the proportion of criminal funds seized or forfeited) across a range of jurisdictions including the UK, Canada, Australia the EU, and New Zealand.
Across the board interdiction rates are abysmally low, indicating a lack of success in enforcing the ‘Anti’ in AML. Dr Pol finds that “only about 0.2% of criminal funds laundered annually is seized by authorities, compared with more than 20% of the globally produced illicit opiates […] and more than 40% of the cocaine”. As far back as 2011 the UN Office on Drugs and Crime (UNODC) asked “whether money launderers really are so much smarter than drug traffickers, or whether there is something wrong with the existing control system”[8].
Is there enough Data?
Another recent paper from Levi, Reuter and Halliday[9] once again asks the questions of evaluation without better data. As stated in the opening of their paper, ‘Can the AML system be evaluated without better data’, “there has been minimal effort at evaluation of how well any AML intervention does in achieving its goals”.
This is a fascinating point to consider; in nearly all lines of work and business, decision on policy direction, strategy, and intended outcomes, are made with data at hand. Yet when it comes to global Anti Money Laundering, the researchers “find that data are relatively unimportant in policy development and implementation”.
To Conclude…
We are in a situation where there is:
- Little to no evidence that the current system is proving effective at ‘preventing’ money laundering
- Limited data available to evaluate outcomes effectiveness of the current system, even though it is meant to be focused on outcomes effectiveness
- A vanishingly thin layer of discussion about this issue at supranational policy level, in the media, or in regulatory structures
It is almost inevitable that the organisations charged with applying Anti Money Laundering policy, when it comes to ‘on the ground’ work, rely on a tick box approach to compliance, when there is such limited discussion or analysis of outcomes effectiveness. It is, or should, be clear to all that the current system and policy framework clearly is not working as intended. This is not to say it is for lack of effort, but that we need to have a fresh think about how, in a fundamental sense, we work to truly ‘prevent’ money laundering.
Avenues for wrongdoing will only grow as technology develops and the world becomes more intertwined. It is time to think about how we do what we do, why we do it, and who, in those years to come, will be at the forefront of this cultural and leadership challenge.
[1] http://www.g8.utoronto.ca/summit/1989paris/communique/index.html
[2] https://www.linkedin.com/in/ronpol/
[3] https://www.emeraldinsight.com/
[4] http://faculty.publicpolicy.umd.edu/sites/default/files/reuter/files/report_global_surveillance_of_dirty_money_release_date_30_january_2014.pdf
[5] http://www.fatf-gafi.org/media/fatf/documents/methodology/FATF%20Methodology%2022%20Feb%202013.pdf
[6] https://www.emeraldinsight.com/doi/full/10.1108/JMLC-07-2017-0029
[7] https://www.emeraldinsight.com/doi/full/10.1108/JFC-08-2017-0071
[8] https://www.unodc.org/documents/data-and-analysis/Studies/Illicit_financial_flows_2011_web.pdf
[9] http://orca.cf.ac.uk/103392/1/Levi%20Reuter%20Halliday%20final%20pre%20print%20version%20accepted%20210717.pdf
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