The tenuous relationship between the fight against money laundering and the disruption of criminal finance.

• Author: Cuellar, Mariano-Florentino

This article examines the fight against money laundering as a case study of the separation between an enforcement system's objectives and performance. To launder money is to hide its illegal origin. The fight against money laundering is supposed to disrupt laundering in its various forms--especially what is done by third party launderers and leaders of criminal organizations. In the process, the fight is supposed to undermine the process of financing and profiting from crimes ranging from drug trafficking to terrorism. Yet this fight delivers less than what it promises. Like many other enforcement systems, the fight against money laundering involves three major components: statutes with criminal penalties charged by prosecutors, rules administered by regulators, and detection systems primarily run by investigators. A close analysis of its three components reveals the fight to have quite a limited scope, involving (1) the disproportionate imposition of severe penalties on predicate offenders who are easily detected; (2) lax and narrowly-focused regulatory authority; (3) limited capacity to detect a range of chargeable domestic and international offenses; and (4) global diffusion of a fight against money laundering that leaves implementing authorities plenty of room for discretion and lax enforcement. These limitations probably arise not because of blindness or bad intentions but because the major players involved in running the system--including legislators, prosecutors, investigators, and regulators--face a tangle of incentives that leads them to dilute the intensity and scope of enforcement against some targets and to enhance the sanctions faced by other targets. While there is some evidence that suspicious activity reporting probably helps identify drug money placement in banks, the system seems ill suited to detecting and disrupting the larger universe of criminal financial activity that is so often vilified by the rhetoric justifying the fight against money laundering. All of this makes it hard to target terrorist financing using the anti-laundering system, even though it is easy to freeze assets allegedly linked to terrorism. Some changes in the system such as enhancing audit trails and strengthening suspicious activity reporting and analysis could be defended in the name of making the system work, though politics would make them difficult to achieve and their ultimate consequences are hard to predict. In the meantime, any inequities in the detection of predicate crimes end up being reproduced in money laundering prosecutions, and the system's most compelling objectives--detecting crimes in a new way, and targeting third-party launderers and leaders of criminal networks-seem mostly beside the point.

INTRODUCTION

Here is a classic description of the "money laundering" game. (1) A drug dealer has a large amount of currency earned from the sale of crack and heroin. (2) His immediate problem is getting someone to turn stacks of crumpled $10 and $20 bills into balances at a local bank branch that can be easily transferred around the world, or across town to pay his supplier. (3) Once the money is credited to an account and moved around enough, it can be plowed back into more of the same criminal activity, invested in the legitimate economy, used to finance other criminal activities such as terrorism (so we are told in a post-September 11 world), or simply enjoyed by someone as profit.

To fight this system of criminal finance, governments aver a commitment to use a combination of criminal investigators--including undercover agents who offer to launder money and then catch the criminals who accept their generosity--as well as informants and regulatory tools, such as reports of large currency transactions to supplement traditional methods of criminal investigation. (4) Banks insist they cooperate with investigators and regulators by telling the government about suspicious transactions and trying to ensure that their accounts do not become coffers for laundered money. (5) Banks, along with other financial institutions, are especially vigilant when confronted with large currency transactions--which subject them to government-mandated reporting requirements. Cash evinces such suspicion because it is anonymous. (6) With it, a person can pay for an airline ticket, a box cutter, a chemical, a rented car, or a baseball bat without leaving much of a paper trail. With cash reporting requirements and the vigilant cooperation of financial institutions to help keep an eye on other transactions, the authorities can "follow" dirty money back to its nefarious source, (7) freeze assets and punish predicate crimes like drug trafficking, terrorism, (8) and corporate fraud. In short, the fight against laundering allows authorities to disrupt financial activity linked to crime and to deter future offenses. (9)

Or does it? It turns out the preceding scenario gives a radically incomplete picture of money laundering, the fight against it, and the broader patterns of criminal financial activity that might in principle be motivating the fight against laundering. For example, the picture above assumes enforcement to be relatively effective, and obscures the larger question of what it means for the fight against money laundering to be effective. Neither does the preceding account recognize that the fight against laundering--like many other enforcement systems--is the product of statutes, rules, and detection strategies each controlled by different institutions and individuals. In fact, we know precious little about how the fight against money laundering really works, either in the United States, where the fight was first christened and aggressively instituted, or across the world where it is has been fast adopted either in principle or practice, (10) Nor does most of the scholarly work on money laundering really address this question, as most of it focuses on whether banks and the government strike the right balance between disrupting financial activity connected to crime and protecting financial privacy and autonomy, (11) what precise interpretation should be given to the complicated federal laws criminalizing money laundering,(12) whether there is enough international cooperation to fight money laundering, (13) or what form that cooperation should take. (14)

So who or what is caught with the fight against laundering? (15) After all, the scenario of the drug trafficker with bags full of crumpled paper currency to deposit does not even begin to describe the full extent of criminal financial activity that the federal government says it has an interest in disrupting. (16) The core anti-money laundering criminal statutes have a long list of predicate offenses that may have little if anything to do with drugs, and perhaps even little to do with currency. (17) Money from these predicates, such as wire fraud in the course of running an energy-trading company, (18) can trigger criminal liability under the money laundering statutes just as surely as drug money laundering can. (19) Nor are currency transactions necessarily the only ones that are anonymous or nearly so. (20) Using bank accounts sheltered by protective bank and corporate secrecy laws in offshore financial havens, individuals can move and exchange resources without leaving an easy trail for law enforcement to follow. (21) Indeed, the growing concern over terrorist financing in the wake of September 11 poignantly illustrates the disconnection between the rhetoric about the fight against money laundering and the larger challenge of disrupting criminal finance. While federal government officials emphatically describe the targeting of terrorist financing as a major part of the fight against laundering, (22) sponsors of terrorism may start with money that originates from non-criminal sources and is never in physical currency form. (23) The terrorist hijackers funded their life and learned to fly using money that itself flew across the world from the United Arab Emirates to the U.S. through almost a dozen wire transfers, not bulk currency shipments. (24) Neither are financial institutions consistently reliable partners in the search for laundered money, because they might have at least as much of an interest in getting business as they do in supporting the government's policy objectives. (25) All of which reveals a gap between the simple picture of laundering described above and the more heterogeneous universe of what one could term "criminal finance," which includes the obvious scenario of simple cash placement laundering but also encompasses more complex schemes of currency laundering, non-currency laundering of proceeds from fraud or corruption, and the financing of crimes such as terrorism--whether the money comes from crime or not.

Abandon the more simplistic description of the laundering, and it starts to become plain just how much of the actual results of the fight against laundering depend on the intersecting effects of ambiguous criminal statutes, regulatory provisions, and detection strategies, all of which interact to produce the output of an enforcement system. Supposing that criminal statutes give prosecutors substantial flexibility regarding the conduct that counts as "laundering" (they do), then the sort of conduct that will end up being punished as such will depend on what sort of criminal activity is detected (it does). The more that the regulatory and investigative systems used to detect laundering or its close cousins rely on traditional investigative methods such as victim reports (for fraud) and undercover investigations (for drugs), the more that prosecutions for laundering and closely related crimes will tend to mimic the patterns of detection of the underlying predicate crimes. This dynamic should make one skeptical about the claim that the fight against money laundering is likely to be an effective means of detecting despised predicate offenses or...