Money Finds a Way: Increasing AML Regulation Garners Diminishing Returns and Increases Demand for Dark Financing.

AuthorLewis, Jacquelyn B.
PositionAnti-money laundering

Table of Contents I. Introduction 530 II. Background 531 A. Obfuscation 533 1.Ownership 533 2. Transactions 533 3.Other Laundering 534 B. Why It Matters: Transacting in Goods, Services, and Misery 534 C. History of AML 534 1. Identifying Beneficial Ownership 537 III. Analysis 538 A. FATF Compliance 538 B. AML Effect on International Crime 539 1. FinCEN Files 540 2. Inadequate Incentive/Deterrence Structures 541 3. Too Big to Fail: HSBC Case Study 541 4. AMLA 2020 543 5. Too Small to Save 545 6. Financial Exclusion 547 IV. Solutions 550 A. Dependency 550 1. Users 551 B. Focus on Transparency 552 C. Capitalizing on Windows of Opportunity 554 VI. Conclusion 557 I. INTRODUCTION

"It's the critics who are the true optimists. "-Jaron Lanier (1)

For decades now, the international community has steadily increased its focus on fighting money laundering. However, global antimoney laundering (AML) proponents have lost sight of AML's purpose. Money laundering is part and parcel to modern, large-scale crime, but it is a symptom, not a cause. So long as major predicate crimes (drug and human trafficking, for example) continue, money laundering will persist, flow through new channels, and create new service markets to exploit the global financial system. While domestic and transnational regulations and governance have an undeniable role to play, that role has become at once hazy and bloated, pushing the costs of AML regulation to regulators and regulated entities beyond present benefits and decreasing the deterrence value of AML enforcement. (2)

Financial institutions are already subject to many regulations and mechanisms for liability. (3) They are also often directly related to harmful behavior and criminal activity, financing known bad actors or colluding with corrupt officials, knowingly or unknowingly. (4) Like supply chain links, financial institutions often escape commensurate liability, indicating that the global regulatory environment for financial institutions is an insufficient deterrent, (5) and victims' attempts to find justice are often futile. (6) Consumer demands do not have the same impact on banks as on retailers because, to a large extent, customers are at the mercy of banks, not the other way around. This Note explores current domestic and transnational efforts to combat money laundering. Part II will discuss the history of money laundering and AML legislation and how the purpose of financial reporting regulations has drifted over the last half century. Part III discusses modern advances in AML and the result of this expensive regime. Part IV will discuss possible solutions and the current debate amongst scholars and policy experts over the direction that AML regulation can and should go to advance global law enforcement and economic goals while meeting modern AML challenges. This Part will also propose that AML funds be reinvested in development. Part V will conclude.


    Money laundering is the mechanism of routing criminal earnings to disguise their illegitimate origin. (7) Where a sudden, unaccounted-for influx of revenue may raise suspicion, money laundering gives illegal revenue the appearance of legal income. Laundered money thus becomes viable tender for all financial activities without raising further suspicion. (8) In 2015, laundered money likely accounted for between 3.5 and 5.7 percent of the global gross domestic product. (9) Though any criminal organization is likely to utilize laundering, drug trafficking, terrorism, and human trafficking are most commonly associated with it; these crimes are also the primary target of most anti-money-laundering/countering-the-financing-of-terrorism-regimes, commonly now referred to as AML regimes or "AML/CFT." (10) According to Transnational Institute's Tom Blickman, AML/CFT regimes have five goals:

    (1) removing profit out of crime through confiscation; (2) detecting crime by following the money trail; (3) targeting third-party or professional launderers, who through their services allow criminals to retain the proceeds of crime; (4) targeting the upper echelons of the criminal organization whose only 'visible' connection to the crime is the money trail; and (5) protecting the integrity of the financial system against abuse by criminals.

    The international Financial Action Task Force (FATF) has listed corruption as the primary obstacle to effective AML regimes in certain countries. (12) In most areas, however, the obstacles are more difficult to name. The perceived strong connection between street criminals and money laundering is not fully accurate and belies the wealth, power, and sophistication of many beneficiaries of money laundering, which often include powerful government officials including judges, ministers, and, in the case of Nigeria, even presidents. (13) This conception feeds into risk assessment burdens that disproportionately impact low-income areas, resulting in devastating financial exclusion. (14) Conversely, it allows high-income areas to benefit from a presumption of legitimacy of which they are undeserving.

    1. Obfuscation

      Criminal operations obscure the true nature of ownership and products or piggy back off of real transactions to sneak through illicit financial flows (IFFs) with numerous other legitimate transactions. (15 ) Tracking IFFs is paramount to AML and requires identifying the true recipient of funds, also known as the beneficial owner, and differentiating transactions for legitimate goods and services from illegal transfers.

      (1.) Ownership

      Determining beneficial ownership is critical to combatting money laundering. Shell companies mask the beneficial owner of the company and therefore the true recipient of the proceeds. (16) This mechanism is more difficult and sophisticated than trade-based money laundering and poses a serious problem for AML regulation and international law enforcement. (17)

      (2.) Transactions

      Trade-based money laundering (TBML) mimics legitimate commercial activity and, in some cases, coincides with legitimate transactions. (18) TBML became a common money-laundering mechanism in the last decade, and works by falsifying commercial information to disguise the true nature or extent of a transaction. (19 ) This may include misrepresenting pricing or quantity, misidentifying goods and services, invoicing for shipments never sent, or charging consultancy fees that actually represent an illegal transfer. (20) A cursory customer due diligence (CDD) check may not uncover underlying fraud. (21) Enforcement officers must use enhanced due diligence (EDD) to uncover false transactions as well as forged, altered, or illegally obtained identification documentation.

      (3.) Other Laundering

      Another sophisticated method of laundering called "cuckoo smurfing" allows launderers to hijack legitimate transactions by substituting their "dirty money" for a third party's clean money, of which they then take ownership. (22) Thus, the dirty funds move via a legitimate transaction, shielding them from scrutiny.

      "Straw men" are another common method for beneficial owners to avoid identification. As a sort of human shell company, a straw man will have no overt connection to a criminal organization and thus can pass a CDD check if they are not already established banking customers. (23) The list of laundering mechanisms goes on and is beyond the scope of this Note.

    2. Why it Matters: Transacting in Goods, Services, and Misery

      Richard Hobbs introduced the term "glocalization" to describe how the model of AML law exemplifies the intensely local nature of the effects of transnational crime and money laundering. (24) Money flowing through the illegal narcotics market fuels atrocities in communities where drug cartels operate, beyond the detrimental health effects of drugs on users. Funded inadvertently by recreational drug users in the United States and elsewhere, and facilitated by, at best, lackadaisical banks like HSBC, cartels maintain their dominance with bribes, violence, and torture. (25) In the early 2000s, over seventeen thousand people were killed in a four-year span in Mexico as cartels competed for a larger piece of the $25--$40 billion illicit drug industry. (26)

    3. International History of AML

      Just as no one mechanism describes all money laundering, no one legal mechanism entirely captures illicit financial flows. AML began as a primarily domestic issue, and many nations have their own domestic FATF-type institutions. The United States, for instance, monitors money-laundering activity through the Financial Crimes Enforcement Network (FinCEN) in the Department of the Treasury. (27) Similarly, France has TracFin. and the United Kingdom has the Financial Conduct Authority (FCA), to name a few others. (28)

      The Banking Secrecy Act of 1970 (BSA) was an early form of US AML legislation aiming to trace illegal streams of money, rather than end them outright. (29) Then, after years of financial institutions ignoring the BSA's reporting requirements, the Reagan administration showed renewed interest in a "follow the money" approach as it intensified its focus on the rampant illicit drug trade of the 1980s. (30) Congress passed the resulting Money Laundering Control Act in 1986. (31)

      The United Nations (UN) first included provisions against transnational money laundering in the 1988 Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances. (32) As the international community observed the rise of powerful cartels in Colombia, Peru, and Bolivia, the G7 worried the prevalence of drug money threatened the collapse of national financial and judicial systems in South America. (33) Money laundering quickly became a high priority for international institutions. (34) The UN Office on Drugs and Crime (UNODC) also pursues money laundering, partnering with the International Monetary Fund (IMF), World Bank, and international law enforcement agencies. (35)

      Since its founding at the G7's Paris summit in 1989...

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