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Assessing the AML system

Assessing the AML system. Peter Reuter University of Maryland. Many activities subject to anti-money laundering (AML) controls. U.S. Banks required to conduct prevention activities since 1986 “Know your customer” Also aid investigations File Suspicious Activity Reports (SARs)

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Assessing the AML system

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  1. Assessing the AML system Peter ReuterUniversity of Maryland RAND

  2. Many activities subject to anti-money laundering (AML) controls • U.S. Banks required to conduct prevention activities since 1986 • “Know your customer” • Also aid investigations • File Suspicious Activity Reports (SARs) • Check account names against target list • More recently financial services firms, casinos also regulated • Financial Action Task Force has created global regime RAND

  3. Money laundering control regime still expanding • Initially generated by drug trafficking concerns • Vienna conventions • Broadened in the 1990s • Capital flight, kleptocracts • Focus on terrorism post 9/11 • FATF 2004 recommends covering lawyers, accountants, other gatekeeper professions • US Treasury considering insurance regulations • Growing private sector pressure for accountability RAND

  4. fromcrime $ …launderedin thelegitimatefinancial system… …for use inlegitimateactivities $ $ $ $ $ $ $ $ $ $ $ $ from legal sources $ …launderedin thelegitimatefinancial system… …for use interrorist activity Laundered Money May Be a Point of Vulnerability for Both Crime and Terrorism RAND

  5. Anti-Money Laundering ControlsAre a Means to Diverse Ends • Primary Goals • Reduce predicate crimes • Protect the integrity of the core financial system • Combat global “public bads” • Terrorism • Kleptocracy/corruption • Secondary Goals • Sanction major felons • Administer “just desserts” • Inconvenience felons RAND

  6. But AML Controls Also Impose aSubstantial Burden • AML controls affect business, the public, and government • A rough estimate places the costs of AML controls in the United States in 2003 at $7 billion • AML controls are also onerous and intrusive RAND

  7. Summary Conclusions • Some progress in the area of prevention • Little impact on the activity or incidence or underlying crimes • Regime must strengthen intellectual underpinnings before any further expansion RAND

  8. Outline • Overview • Assessment • Conclusions and Recommendations RAND

  9. Current Estimates of Money Laundering Are Not Credible • Current estimates range from $100 billion to $1 trillion • Both traditional approaches are problematic Macro approach Produces implausibly high estimates Builds on estimates of the underground economy Micro approach Builds on estimates of income from criminal activity Produces estimates that lack a systematic empirical base • There is little prospect for strengthening these estimates RAND

  10. Money Laundering is a highly differentiated activity RAND

  11. FATF Typologies Reports indicate many methods used by all offender groups

  12. Two Pillars of the Anti-money Laundering Regime

  13. Prevention Pillar of the U.S.regime differentiates among regulated entities RAND

  14. Outline • Overview • Assessment • Conclusions and Recommendations RAND

  15. Costs of U.S. 2003 AML Regime • Government: $3 billion • Private institutions: $3 billion • General public: $1 billion • Total: $ 7 billion or $25 per capita RAND

  16. Predicate Crime Reductions Indeterminate • Volume estimates very rough • Price measures largely absent • Stand alone professional launderers are scarce • Simple market model is an inapplicable premise RAND

  17. Defendants Charged with Money Laundering, 1994-2001 RAND

  18. U.S. Risk of Conviction • Half of 2,000 annual convictions = 1,000 launderers • $200 billion laundered at $10 million per launderer • 20,000 launderers • 5% annual conviction risk • Compare 20% for cocaine dealers RAND

  19. U.S. much more aggressive than other nations • Regimes differ across countries • Reflect differences in legal culture • British cast very broad net • “high value goods” reporting requirements • Swiss highly discretionary • Germany minimal number of criminal cases RAND

  20. Cocaine Price Structure Suggests that AML Controls Have Limited Potential Leaf (Bolivia) $300 Export (Colombia) 1,000 Import (Miami) 15,000 Wholesale-Kilo (Chicago) 20,000 Wholesale-Ounce (Chicago) 25,000 Retail (Chicago) 110,000 ML controls target import, wholesale RAND

  21. Cocaine Price Structure Suggests Limited Potential of U.S. AML • Only high level dealers and smugglers earn enough to require laundering services • Retailers earn less than $25,000 per annum • Smugglers and high level dealers account for 20% of value added • Raising money laundering costs for them by 50 percent, from 10% to 15% would add only 1% to the retail price of cocaine RAND

  22. Protecting Integrity of Core Financial System • Social goal – principally major banks • Low prevention hurdle • No active solicitation • Few rogue employees • Unwitting accomplices – another matter • Negligence = deficient controls • Other RAND

  23. Evidence from Limited Databases • FATF / Egmont • 3% active solicitation • 3% rogue employees • 94% other • Press Reports • 11% active solicitation • 7% rogue employees • 11% negligence • 71% other RAND

  24. Qualified Success • Core financial institutions only in major financial centers • Occasional block-buster scandal • E.g. ABN-AMBRO admitted in 2005 laundering $1.2 billion • Riggs, JP Morgan (Beacon Hill) • Private banking – jury still out • Layering more complex • Unexploited potential of two-way street RAND

  25. Combating Global “Public Bads” • Three types • Terrorism • Corruption / Kleptocracy • Failed and failing states • Conclusion: AML regime constructive, but just one tool RAND

  26. Terrorism • Not new with September 11, 2001 • Unique difficulties: size and direction of flows • Minimal funding needed for most incidents (e.g. $10,000 for East African embassy bombings) • Success measures imprecise and indirect • $200-plus million frozen and seized • Object: disruption • Challenge of differing priorities and legal & institutional cultures • Example: New cash courier Special Recommendation (IX) RAND

  27. Outline • Overview • Assessment • Conclusions and Recommendations RAND

  28. Conclusions #1 AML Regime = Tool to achieve diverse ends #2 Law enforcement pillar underdeveloped #3 System needs careful examination before expanded further #4 Constraints on coverage and leverage in monitoring international compliance RAND

  29. Recommendations#1 Global Report on Money Laundering • Exercise in global governance & accountability • Build on INCSR • Assign to U.N. Office on Drugs and Crime with FATF, World Bank, IMF inputs RAND

  30. Recommendations#2 Financial as well as Technical Assistance • AML is “luxury public good” • Rich should pay • Crude estimate: $315 million per year to cover 90% of expenses of IDA governments • See also U.N. High-Level Panel on Threats, Challenges & Change RAND

  31. Recommendations#3 Corruption • Weak record on ratification of U.N. Convention (14 of 112) • Ratification only second step • Develop public database on kleptocrats • Cases • Results RAND

  32. Recommendations#4 Reciprocity on Major Predicate Crimes • FATF’s 20 principal categories of offenses • Make ML a crime when linked to any of them anywhere • U.S. covers only 13 • Foreign corruption added in USA Patriot Act • Excluded: Trafficking in human beings, counterfeiting, forgery, etc. RAND

  33. Recommendations#5 Add Tax Evasion to List • Controversial • Important to other countries • Quid pro quo RAND

  34. Research Agenda • Describe implementation of controls and enforcement • Improve understanding of the ML market • Develop evaluation framework • How does AML reduce crime etc.? • Who bears financial burden? • Other intangible costs RAND

  35. Create Data Base • Early terrorism research effort provides model • Prosecuted cases (public source) and investigative files (agency cooperation required) • Potential data elements: • Criminal activity • Mechanism for laundering • Participants • Financial institutions • Employment of money launderer • Price of services RAND

  36. Other Data Collection Activities • Utilization of SARs for case making and intelligence • How many convictions depended on ML statutes and/or mandated reports? • Interview convicted launderers & customers • How do customers and sellers connect? • Knowledge of prices • Response to regulations RAND

  37. Analytic Agenda • Estimating costs • Needs new data • Modeling effects of ML costs on crime • Interpreting quality in the ML market • What are limits of hawalahs and other Informal Value Transfer systems (IVTS) • Creating performance measures for regulatory and investigative agencies RAND

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