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Opinion: The Financial Surveillance System May Be Less a Tool for Crime Prevention than a Means of Bureaucratic Ass Covering

Coindesk | David Z. Morris | Aug 31, 2022

Unsplash Christine Roy money laundering - Opinion: The Financial Surveillance System May Be Less a Tool for Crime Prevention than a Means of Bureaucratic Ass Covering

Image: Unsplash/Christine Roy

Do anti-money laundering rules actually stop crime, and is it worth the costs to privacy and fairness?

  • If a tree falls in the forest does anybody care?: In September 2020, a leaked set of documents from the U.S. Treasury’s Financial Crimes Enforcement Network, or FinCEN, showed a disturbing pattern of lax enforcement. When banks reported suspected money laundering to the very agency tasked with monitoring ill-gotten criminal funds, quite often, the authorities did nothing about it at all. This was at least a threefold failure:
    • First and most obviously, transactions flagged by banks in Suspicious Activity Reports (SARs) to FinCEN weren’t actually being stopped.
    • Second, filing the reports shielded the banks themselves from legal liability, allowing them to continue facilitating criminal transactions (and collecting fees on them).
    • Third, it compromised the privacy and security of banking customers who had done nothing wrong.

See:  Cullen Commission Money Laundering Report Estimates Billions Laundered in B.C. Every Year

  • This buck-passing led to absurdities like HSBC (HSBC) moving money for the already-sanctioned WCM777 Ponzi scheme, and Standard Chartered (SCBFF) and Deutsche Bank (DB) indirectly facilitating transactions for the Taliban, all while reporting the transactions as clearly suspicious.
    • As Buzzfeed concluded at the time, it seemed that “laws that were meant to stop financial crime have instead allowed it to flourish.”
  • 'Ass covering' system ain't cheap: “A pretty sound estimate is that the financial surveillance regime we’ve got costs tens of billions of dollars annually globally. And it might be in the high tens of billions,” says Jim Harper, a privacy advocate and senior fellow at the American Enterprise Institute, a libertarian-leaning think tank.  With that budget, banks were pretending to monitor suspicious financial transactions, and enforcement agencies were pretending to control them.
    • This bit of Kabuki invaded the privacy of innocent customers and threatened the banking relationships of legitimate businesses, while drug lords and oligarchs continued doing business.

The entire system may be less a tool for crime prevention than a means of bureaucratic ass covering, with a rich dollop of authoritarian surveillance on top.

“It drives up the price of banking across the board,” Jim Harper says. “So the person who feels they can no longer afford a banking account, that’s because of the surveillance that makes it much more expensive.” While AML requirements may not be the only factor, there’s no denying the rising costs and declining services of conventional banking in recent years, which Lisa Servon documented in her excellent 2017 book “The Unbanking of America.”

  • Perverse impact:  “Regulators think we need to make sure every country has a similar set of standards,” says Collin. “As an economist, I think you want to go after countries that are hosting a lot of illicit finance. And if you look at where the money ends up, it’s countries that actually have good standards.” Specifically, Collin is referring to the United States – now the top global destination for laundered funds.
    • But those countries don’t end up on the [FATF] blacklist,” Collin laments. “ Small African countries end up on the list.”

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