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Who does AML hurt?

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I’m hoping somebody can send me a plausible and documented cost-benefit analysis for anti-money laundering legislation but it’s proving difficult to find one. I’m not saying it’s a waste of money, I’m just saying that I don’t know whether it’s a waste of money or not. Please note this is a repost as the original was lost through a tear in the spacetime continuum.

Minty Clinch is a well-respected British travel writer. She writes about going off of the beaten track here and there.

More and more tourists are going on organised trips to remote or dangerous locations in search of adventure and travel kudos; Minty Clinch joins a group trekking through the High Pamirs of Tajikistan.

[From Magazine / Geographical]

Minty had an account at Barclays Bank for more than half a century until it was closed earlier this year after an electronic credit to her account for an article that she had written. Apparently this triggered some kind of bonkers transaction trap and she was booted out of the banking system.

Freelance travel journalist Minty Clinch told the BBC Radio 4’s You & Yours programme this morning that Barclays had blocked a payment into her bank account because it was for an article about Iran.

[From Barclays blocked payment to journalist for mentioning Iran | Edmund O’Sullivan]

So, receiving a payment that mentioned “Iran” in the remittance advice springs the trap. How dumb are these terrorists? I certainly wouldn’t put “money for bomb” in the description field for my PingIt payment to the Al Qaeda quartermaster-general, but perhaps I don’t think like a proper terrorist. Still, it’s good to know that anti-money laundering (AML) legislation is in place and effective.

The topic of AML came up time and time again in the discussions around Money2020 in Las Vegas, whether in the sessions about cryptocurrency or remittances or innovation or anything else.

This is astonishing when you consider the incredible amounts of money spent on AML. According to a KPMG survey, the cost of compliance with anti-money laundering (AML) regulations grew “beyond expectations” for banks last year. In fact, it grew by nearly two-thirds. I’ve been unable to find any authoritative figures to show how much global money laundering fell last year in response to this. The World Bank say that money laundering is between two and five percent of global GDP and in 2009 the World Bank calculated it to be four percent of global GDP. I’ve seen estimates of around two percent of GDP for the UK. I’m no expert, but it seems to me that there is an awful lot of money laundering going on and no evidence that vastly increased AML spending has had any impact. So where is the cost-benefit analysis (CBA) for AML? I found one from a few years ago and it concludes that for AL to be effective we would need to spend around half

Using the multiplier model of the relationship between criminal markets revenues and money laundering activities and data for 2004, the value of money laundering is equal to US$ 1.2 trillions (2.7%of the world GDP), while the maximum theoretical benefit in combating money laundering using financial regulation – in steady state – is equal to S$ 280 billion (0.6% of the world GDP).

[From Worldwide Anti-Money Laundering Regulation: Estimating Costs and Benefits by Donato Masciandaro, Raffaella Barone :: SSRN]

I can see why politicians are in favour of tough AML (it doesn’t cost them anything) and I can see why lawyers are in favour of it, since it is in essence a full employment act for them, but where are the figures that show the expenditure on AML makes any sense? And the way that AML regulation is structured and “managed” means that the market is being undermined.

“Banks need a specific set of expectations which, if followed, would shield them from blame,” David Landsman, the executive director of the National Money Transmitters Association, told American Banker in 2012. “Right now they do not have that.”

[From A Modest Attempt to Ease AML Rules Side Effects – Bank Think Article – American Banker]

Indeed. It sometimes seems to me that the regulators feel that infinite AML would offer infinite protection and should therefore be the natural target. But AML doesn’t exist in isolation. It has a horizontal relationship with other regulation and a vertical one with the industry it is constraining.

We have the eternal conflict between AML and Data Protection where there is more than one specific point of friction:

[From Inconsistencies between the European Payments Legislative Proposals]

In addition, there is the pernicious impact of potential future action by (largely US) prosecutors.

One way to help banks overcome hesitations about working with money transfer companies would be to offer a legal safe harbor designation to institutions that do their due diligence, according to Schryer-Roy. This would protect banks from prosecution for money laundering charges.

[From A Modest Attempt to Ease AML Rules Side Effects – Bank Think Article – American Banker]

The reason I get so exercised about this is because the regulation on AML in practice translates into a tax on the poor and the disadvantaged. The serious money launderers just buy a bank, whereas the poor find they can’t send money home to their families. Therefore, in my opinion, we need to take on board the risk-based approach that the FATF recommends. Just as Bill Gates has suggested, we should remove low-value payments from AML and let innovators find ways to use new technology to serve excluded groups.

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