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What is "appropriate" AML?

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I’m not smart enough to know what the most appropriate AML rules are, but I think I am smart enough to know that the current rules are not.

In his first major speech, the new European Commissioner for Financial Stability, Financial Services and Capital Markets, Jonathan Hill, talked (amongst other things) about innovation in digital money and virtual currencies, saying that:

when considering electronic financial services, we need to strike the appropriate balance between guarding against fraud, hackers and money laundering and maintaining ease of use for customers.

[From European Commission – PRESS RELEASES – Press release – Turning around the telescope – consumers at the centre of financial services policies]

He is right about this, of course, but I wonder what the benchmark for determining what is “appropriate” is? I don’t think we should cripple the development of digital money by applying benchmarks that are so stringent, so rigorous, so absurd that they stop progress completely. We should be building digital money systems that are better than cash, yes, but to pick on one of the Commissioner’s specific points, we should not be applying utterly inappropriate, expensive and pointless anti-money laundering (AML) rules, especially when Europe as a whole is doing nothing about cash.

I noticed this in a story in “The Times” (21st August 2014). The story is headlined “Playboy Saudi prince ‘blackmailed’ after Paris ambush” and concerns the theft of £400,000 in cash from a 12 car convoy taking the entourage of the prince to Le Bourget airport. (The newspaper reports that, in a plot worthy of a John Grisham novel, the theft of the cash may have been a cover for the theft of documents containing sensitive information.) Now, if you or I were to carry more than €4,700 into or out of France, we would have to declare it to customs. However at Le Bourget, as “The Times” puts it, such controls are not “strictly” applied. Not strictly applied, as a phrase, means (I’m sure) not applied at all, so rich people can fly as much cash as they like in and our of France in their private planes. For those without private plans, though, the cross-border payments infrastructure is less facilitating.

In addition, money-laundering regulations are putting impossible demands on systems designed to serve the poor, requiring, for instance, “know your customer” procedures like taking copies of ID documents for anyone receiving an international payout.

[From Remittance rip-offs – WorldNews]

So you can’t help but wonder what the point of stringent KYC/AML/ATF controls over people sending part of their meagre paycheque from the UK back to Somalia or from South Africa back to DRC are, when rich people with private planes can import and export unlimited amounts of untraceable cash? The impact of such controls, as far as I can see, is twofold: firstly, criminals and terrorists use cash so we can’t monitor their activities and, secondly, the costs of sending money are higher than they should otherwise be.

Africa pays a “remittance supertax” of nearly $2bn a year due to the higher-than-average cost of sending money to the continent, according to… The Overseas Development Institute,

[From Africans face $2bn yearly ‘remittance supertax’, says report – FT.com]

Average remittance fees for sending money to Africa are around 12% (as opposed to the global average of 8% and the UN target of 5%). And remember, these fees fall on people sending money home to their families.

The biggest challenge for the MSB sector is adapting and responding to the global banking de-risking agenda, which is threatening the development and recovery in emerging economies and post-conflict states around the world.

[From Operating in conflict zones: lessons from a financial institution in Somalia | Guardian Sustainable Business | The Guardian]

Now, it’s not as if the powers that be do not know about this problem. The international body that is charged with reviewing such things is the Financial Action Task Force (FATF) and in their February 2013 paper on “Anti-Money Laundering and Terrorist Financing Measures and Financial Inclusion” [PDF] they themselves point out overly prescriptive legislation can cause payment organisations to be so risk-averse that millions of people are excluded from global remittances. And, as Consult Hyperion has noted in its work for the UK government in this area, payments organisations are wary of offering services even when they think they comply with such overly prescriptive legislation because of their worries about future turns of events. As Neil Burton, who knows a thing or two about international payments, wrote earlier this year:

Easily said, but less easily resolved, when fines are in excess of $1bn, and the right to operate in the US is at risk.

[From INTERNATIONAL PAYMENTS COMPLIANCE: SEEKING CERTAINTY AMID COMPLEXITY]

Surely there is something fundamentally wrong with a set of legislative arrangements that mean that the rich can ship money around freely but the poor have to pay 12% to transfer tiny amounts. The current system cannot be “appropriate” whichever way you look at it.

2 thoughts on “What is "appropriate" AML?”

  1. paul_emmerson8373@gmail.com' Paul Emmerson says:

    AML is not bad because it fails cost benefit analysis; its bad because its unethical.

    Law in Western democracies is based on the idea that you are innocent until proven guilty. AML turns this principle on its head; everyone is guilty until proven innocent in the banking system; this is why the writer you cited had her bank account closed. She was never accused of any crime, not put on trial, not proven guilty and had her bank account closed for no reason whatsoever. This cannot happen with Bitcoin, and when people start moving their money with it, it will be like a breath of fresh air. No forms to fill out, no surveillance, no hassles, and no waiting.

    AML and KYC are a tax on the poor and the rich, a tax that serves no purpose, and as you concede yourself, cannot catch the “criminals” who use their own banks to move their money freely.

    Innovators are finding ways to route around AML and KYC. Bitcoin is going to mainstream all the practices that have been developed over decades, and you will find that the sky will not fall; in fact, quite the opposite will happen. The poor will be less poor, people will be more free and it will be an entirely good thing.

  2. iang@iang.org' Iang says:

    On behalf of the poor of the world who can’t say it: THANK YOU!

    The entire whole everything blockage to financial inclusion is regulation and regulators working on behalf of banks. Kenya proved that, although nobody wants to admit it. Central Bank of Kenya let mPesa go forward, and held the banks at bay.

    OK, so now the party is over, AML is in place in Kenya. But it is too late — the innovation is bedded into society, and the banks cannot stop competition in payments any more. Other countries can only learn: If you love your people, do not stop mobile money with regulation, AML, banking, identity, fears uncertaity and doubt.

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