Wednesday, December 06, 2006

Are money laundering solutions really working?

A few weeks back I commented on the research of a Dr Jackie Harvey at Newcastle Business School who concluded that there was not enough evidence to back up data about the volumes of money being laundered. Click here to read the post.

She was basically saying that it suited the authorities to inflate the figures pertaining to the incidence of money laundering for their own political ends, and we mustn't forget the 'war on terror'.

I am currently reading a fascinating book, "The Washing Machine," by Nick Kochan,an investigative journalist who has written for the likes of The Economist and The Financial Times. His book is on money laundering and it makes a very strong argument about the self perpetuating cycle of money laundering, encouraged by corrupt governments and politicians, as well as the forces of globalisation itself exposing developing countries to the forces of black money.

More importantly, though the book reinforces some of the points I was trying to make in my earlier post about some of the hype around money laundering and how the banks are bearing the brunt of the cost of having to comply with anti-money laundering legislation, which arguably has been relatively unsuccessful in reducing the incidence of money laundering by terrorists or other dubious individuals.

Kochan's point in the book is that terrorist money being spent to buy arms, for example, is unlikely to be detected by conventional anti-money laundering solutions as the deals are often not done not through conventional financial or payment channels, but on the black market. Furthermore, he says the small amounts of money used to support terrorists while they may be preparing for an "illegal act," are unlikely to raise alarm bells.

Effectively, he says, today's anti-money laundering policies are "convenient and cheap for governments as they place most of the burden on the legitimate banking and financial system." He argues that intelligence agencies working with police are likely to be more effective in stopping terrorist trade than banks.

Whey then did we have intelligent agencies monitoring SWIFT network traffic in the hope that they were going to find some unusual financing activity which may lead them to the nearest terrorist cell? Let's face it most of the payments on SWIFT are high value anyway, how are you going to distinguish what is an unusually high payment, let alone one that in most cases is more likely to occur on the black market than through conventional payment channels?

We know why banks are spending money on AML software. Their hand is being forced by the regulators. But is it money well spent? Are the banks getting value for money from these solutions? Are their AML compliance solutions helping detect and reduce the incidence of fraud; is it assisting George Bush and Tony Blair in their dubious 'war on terror'?

AML solultions may help banks demonstrate compliance, but no matter how sophisticated or intelligent they become, are they going to be able to detect Al Qaida money raised in Africa's diamond markets or money paid for arms or explosives, when these transactions are not financed by conventional means?

1 comment:

Anonymous said...

I agree. Im with a software company which makes such software (AML) and as much as Im confident that apart from being a great MIS and a decent DSS, its just that. How much is it helping curb/reduce/identify deliberate money-laundering acts, we cant tell.

My problem is that, when I try and sell the software, and the client - the Bank that is, asks the question which I asked above, I have no answer.