Buzzfeed News and a coalition of other investigators threw a bombshell on the worlds of international finance and law enforcement in September 2020. A batch of hacked papers from the United States Treasury’s Financial Crimes Enforcement Network, or FinCEN, revealed a troubling pattern of inadequate enforcement. When banks reported suspected money laundering to the very agency entrusted with monitoring ill-gotten illicit monies, the authorities frequently did nothing.

This was a three-pronged failure. To begin with, transactions identified by banks in Suspicious Activity Reports (SARs) to FinCEN were not really blocked. Second, the submission of the reports protected the banks from legal culpability, allowing them to continue facilitating unlawful transactions (and earning fees).

This back-and-forth resulted in absurdities such as HSBC (HSBC) transferring money for the already-approved WCM777 Ponzi scam, and Standard Chartered (SCBFF) and Deutsche Bank (DB) indirectly enabling transactions for the Taliban, all while flagging the transactions as blatantly suspicious. According to Buzzfeed at the time, “rules designed to deter financial crime have instead allowed it to flourish.”

The third flaw of FinCEN’s SAR system received less attention: it jeopardized the privacy and security of banking clients who had done nothing wrong. Former FBI special agent Michael German described FinCEN’s stockpile of SARs to Buzzfeed at the time as comparable to the massive “data hoards” generated by other types of mass surveillance.

They provide an excellent target for the type of exfiltration that occurred.

Much of the information in the FinCEN files was requested by Congress as part of its investigation into possible Russian meddling in the 2016 presidential election. It contained troves of information about completely innocent customers, which Buzzfeed and other news companies meticulously censored. However, if the same information had come into the hands of less responsible people, the consequences may have been disastrous.

Taken as a whole, the FinCEN data exposed the SAR system to be essentially a theatrical performance with a large production budget.

“A reasonable estimate is that the financial monitoring system we have costs tens of billions of dollars every year internationally.” And it might be in the tens of billions,” says Jim Harper, a privacy champion and senior fellow at the American Enterprise Institute, a libertarian think tank.

With that budget, banks pretended to monitor questionable financial transactions, while law enforcement pretended to oversee them. This bit of Kabuki compromised the privacy of innocent clients and jeopardized genuine corporate banking connections, while drug lords and oligarchs continued to do business.

The entire system may be less a tool for crime prevention than a technique of bureaucratic assuaging, with a generous scoop of totalitarian monitoring on top.

The major hazards of ‘de-risking’

In theory, anti-money laundering (AML) measures should seek to identify and stop the global movement of funds obtained through criminal activity or designed to fund malicious actors. Designed to The big goal is to strangle the villains’ finances and increase human well-being. These efforts extend into the realm of cryptocurrencies. Due to anti-money laundering, it was necessary to provide personally identifiable information or “know your customer” information when signing up for use registered by crypto exchanges Coinbase (COIN) or Binance.

This requirement represents one of the major trade-offs of his current monitor-heavy AML model. Like FinCEN’s arsenal of SARs, his KYC data at even greater scale poses a security risk to law-abiding citizens. For example, in early 2021, a large amount of KYC data was hacked from Indian payment app MobiKwik.

But the current state of anti-money laundering efforts has deeper and more systemic costs. And they hit the most marginalized and powerless people on the planet the hardest.

The whole system could be a bureaucratic butt cover vehicle rather than a crime prevention tool.

“Bank prices are going up across the board,” says Jim Harper. “For those who feel they can’t afford a bank account, the scrutiny makes it much more expensive.” On modern banking, Lisa Servon writes in her excellent 2017 book The Unbanking of America. documented.

Another considerable concern was the threat of increased regulation on global trade and developing countries. The September 11, 2001 attacks and her post-financial crisis tightening of sanctions regimes and higher fines for offenders in 2008 seem to have helped American banks sever international ties. . This process is commonly called “risk aversion”. The main culprit here is a series of national blacklists maintained by the global Financial Action Task Force (FATF). These lists have grown rapidly in recent years and have had a noticeable impact.

Matt Collin, a global development specialist who works at the Brookings Institution and the World Bank, said, “We have seen a significant decline in our relationship with (international) correspondent banks. For banks in developing countries, the loss of banking ties with major economies, for example, can severely affect the ability of local economies to maintain stable import-export relationships.

“These regulation are probably regressive in general,” says Collin. In other words, it weighs heavily on countries, banks, and other entities with fewer resources and less influence over the system itself.

More specifically, similar to the SAR flooding into FinCEN, the risk aversion process is more focused on meeting certain processes and controls than on addressing the actual problem of illicit funding.

“Regulators believe that all countries should have similar standards,” says Collin. “As an economist, I think you want to go after countries that have a lot of illicit finance. And when you look at where the money goes, it’s a country that actually has good standards. Colin specifically mentions the United States – currently the world’s most money-laundering destination.

“But these countries are not on the [FATF] blacklist,” Colin regrets. “A small country in Africa finally makes the list”

Does AML really work?
These risks and obstacles can be viewed as trade-offs in the financial system that limit criminal activity. But the shocking truth is that we have very little insight into exactly what we’re getting in return. “The idea that combating money laundering and tax evasion must remove the incentive to commit predicate crimes is a fundamental pillar of the system,” says Matt Colin. “And that’s the untested part of the theory of change behind the whole apparatus.”

In other words, there is little hard evidence that stricter anti-money laundering regulations reduce the amount of drug trafficking and other serious crimes.Collin clearly showed that crimes fell under the new AML rules He says he doesn’t know a single economic study (although he admits that drafting such a study can be difficult).

A precise case of uncertain outcomes is the FinCEN geographic targeting mandate for residential real estate. The rule requires sellers to identify the individuals behind cash real estate purchases, which are often used for money laundering, tax evasion, and capital flight.

“They expect these transactions to decrease after more transparency,” he said. “And we found no evidence that it changed.”

It has some kind of silver lining. Old-fashioned crime may or may not have an impact, but recent efforts to make former tax havens more transparent have lowered levels of tax evasion around the world, Colin says. “People are reacting to that because deposits are so much lower in tax havens.”

Money laundering to successful bidders?
But don’t shed too many tears on the rich. With tax evasion on the rise, money still matters when it comes to AML surveillance.

The influence of the rich and powerful on the system can be subtle and indirect. For example, Colin believes that the poor performance of recent anti-money laundering efforts is not a matter of policy per se, but of lazy and underfunded implementation by both governments and banks. The various types of information that banks and real estate companies provide to law enforcement agencies are often simply fraudulent, and according to Collin, “FinCEN [and other agencies] have [reports ”These deceptions are not even ingenious: “Many companies [in the report] are owned by Jesus Christ, and as a joke Other things that look like they’ve been put in,” Colin says.

Underfunding of financial regulators is chronic in the United States, and it tends to benefit those with big pockets. For years before the Biden administration’s latest cash injection, the Internal Revenue Service It warned of a serious shortage of funds. Among other things, this lack of funds has led to fewer tax audits of the very wealthy. The wealthy often undertake complex operations to reduce their tax burden. Similarly, a new land registry that expands on FinCEN’s existing mandate has passed its submission deadline after Congress failed to provide sufficient funding for the project.

The truly skeptical may wonder who benefits from defunding the fight against financial crime. Finally, US lawmakers still rely heavily on financial support from large corporations and wealthy individuals. Some senior government officials, including former Trump administration secretary of commerce Wilbur Ross, have been directly harmed by the leak of financial information.

Money is privileged in other ways too. According to Collin, recent research indicates that the impact of AML actions on correspondent banking relationships may be less than a decline in the profitability of a particular relationship. Money plays an even bigger role in how closely banks screen individual customers. “If it’s a Russian oligarch making millions of dollars, it’s easier to turn away,” Colin says. “For a small business that doesn’t do so much, it’s hard to look the other way.

Can it be fixed?
In some ways this is not news. Financial privacy of all kinds was much more accessible to wealthy people than to average people. But especially bitterly, AML measures have made profitability and wealth a more important factor in who has access to global banking, even in the presence of genuinely questionable activity.

As mentioned earlier, lawmakers’ wealthy supporters may not necessarily want the AML system to work perfectly. It is very ambitious to make it look like a serious execution.

At the same moment, according to AEI’s Harper, reforms that could weaken financial supervision and control are largely prohibited among politicians. He takes particular note of the current $10,000 threshold for reporting cash transactions to the IRS. As it stands, the requirements are incredibly broad, specifically a landlord who received his cash payments from renters over $10,000 in a year, or in cash sold he sold a car for over $10,000 Includes car dealers.

But this condition has only become so cumbersome and ridiculous over decades of no legislation. “In 1972 he was set at $10,000,” Harper said. “The equivalent of this is now about $70,000 or $80,000 [due to inflation].

Maybe it’s inherently suspicious of people who moved so much cash a long time ago…I disagree, but at least I understand the argument.

“But $10,000? Unfortunately, I have to keep passing it on to the contractor.”

Correcting that disparity is politically impossible, Harper said, because it threatens the entire premise of increased financial oversight. “If you open this discussion, you have to open the rest of the discussion.” Despite the extra cost, banks have no leverage to push red tape because it would make them appear weaker to money launderers than they (obviously) already have.

Under the heading of “effective AML,” there are attempts underway to investigate the true effectiveness of AML measures. Technological innovation might possibly help break the impasse: Consilient, a company, is creating machine learning-based AML solutions for banks, similar to those used by credit card firms to detect fraud. Importantly, their “federated” data approach would limit the sharing of client information outside of banks, perhaps making it more private and effective than the current, out-of-date SAR method.

Finally, there is a technical opportunity to abandon the existing banking system via cryptocurrencies or comparable platforms. As FinCEN’s recent action against mixer Tornado Cash demonstrated, that window of opportunity is closing, and the practical need for true decentralization is mounting.

It’s very uncertain if crypto will get there before anti-money laundering efforts with ambiguous advantages develop into a search for total authoritarian control. Harper is concerned that a tightly controlled system will cause considerable societal harm.

“Complete financial surveillance would result in a really regulated society that is very law compliant,” Harper claims.

“However, it would not be a moral society.”

Natasha Dean

With an eye for detail and understanding of this exciting industry. My experience has given me an understanding of crypto trends and how to effectively break them down. I have a soft spot for NFTs and the Metaverse.