Tuesday, October 24, 2006

A lot of fuss about nothing?

For all you bankers out there losing sleep at night over whether your anti-money laundering (AML) measures comply with regulatory requirements, according to a noteworthy academic, Dr Jackie Harvey, a principal lecturer in Accounting and Financial Management at Newcastle Business School, Northumbria University in the UK, who has been researching the costs and benefits of AML regulatory compliance since 2001, it appears the threat of AML has been somewhat overstated.

Interestingly, according to the PR blurb accompanying the publication of Dr Harvey's research, as long as compliance officers are personally liable under AML legislation, they "will continue to report everything to cover their backs," which makes it even more difficult to assess the real threat of AML, as opposed to the perceived threat.

According to Harvey, there is "absolutely no evidence" to back up the data on the volume of money being laundered – but it suits the authorities to keep it as high as possible, she suggests. Surely not, the authorities talking up the threat of AML? Is it a classic example of banks being held to ransom by the regulators applying pressure on financial service providers to address a threat, which is non-existent or at best, a relatively low-scale threat?

The over-inflated importance given to AML monitoring software smacks of President George Bush and his fight against terror, which we have all seen takes on strange and varied forms; are the banks essentially doing the work of the CIA and other intelligence agencies in Bush's never ending 'war against terror'?

Well if Bush can get Iraq wrong; as we all know there were no weapons of mass destruction; it is not too much of a stretch of the imagination to suggest that perhaps he and the authors of the Patriot Act, which first thrust AML into the spotlight, may have also got it wrong in terms of overstating the threat of money laundering?

You may laugh, but having spoken with a software vendor recently who specialised in AML, I am convinced that AML monitoring is a lot of work and expense for what? Financial service firms have grappled with the high fail rates of AML monitoring software, which often throws up names that are similar to those on OFAC wanted lists, but are not the actual person wanted.

Dr Harvey more or less says as much by concluding from her research that, regulators unable to quantify the effectiveness of legislation in deterring money laundering, have adopted what she terms a 'second best' approach, with emphasis on the demonstration of compliance with systems and procedures (the 'tick-box' culture).

She goes on to say that the benefits of AML (taken from Government impact assessment reports of legislation) are non quantifiable and generally 'fudged'. Meanwhile the financial services sector is bearing the brunt of the cost of compliance with AML, whilst reaping very little if at all any quantifiable benefit.


Anonymous said...

To see false positive examples of OFAC searching, check out Instant OFAC and search for a common Spanish Name, like "Jose Rodriguez". A few hits there. There really is no good way to eliminate flase positives while allowing for "fuzzy" matching of names.

David Nordell said...

I would have to agree with most of your criticisms of the current AML regime, Anita, although not necessarily for the reasons you've mentioned. My own experience in the AML field, and especially in terror finance, is that the sums of money being laundered or used to promote and finance terrorism are indeed large. However, the whole use of government black-lists is largely counterproductive and designed to make the regulators look as if they are doing something (to quote one very senior compliance official at a European Tier-1 bank, the black-lists are 'lousy'). And the whole regulatory regime is designed more to give the appearance of action than to identify or catch criminals and terrorists, both because it forces compliance officers to file huge numbers of useless STRs, and because it leaves the national FIUs swamped with so much paper that they can't even prioritise what to investigate (look at the KPMG audit report on NCIS for proof of this). Add to this the fact that large sums of money, both criminal and terrorist, are channeled through non-bank transfer, whether money transfer networks, hawala, or now the mobile phone system, and we're left with a mainly dysfunctional AML system.

In short, it's not a lot of fuss about nothing -- there really is a problem -- but so long as the regulatory system is built by politicians and lawyers instead of intelligence professionals, it won't significantly raise the entry barriers for the criminals and terrorists who want to hide or transfer funds, nor will it make it easier to catch them.

For more comment, see the Terror Finance Blog at http://www.terrorfinance.org .