Anti-Money Laundering Laws Don’t Work
A new study by criminologists Mirko Nazzari and Peter Reuter in the journal Crime and Justice concludes that despite the growing number of anti-money laundering (AML) laws, “there is no evidence that money laundering is declining or becoming more difficult or expensive.”
It is hard for anyone to defend the current system with enthusiasm. Its failure to reduce either the predicate crimes that generate large criminal revenues or the volume of money laundering is uncontested. Even though specific estimates of costs are lacking, no one doubts that those costs are in the hundreds of billions of dollars globally. The recurring money laundering scandals involving major banks further undermine claims that the system is effective. Beyond government officials and agencies, there is little positive feedback about the system’s performance. Government claims of success often appear ritualistic and are seldom scrutinized in detail. …
It is also useful to note that the AML regime, whatever its weaknesses as a crime control system, has benefits for powerful groups. For the major banks it provides a barrier to entry for new competitors. There are thought to be large economies of scale to AML, since it includes high fixed costs, such as setting up the SARs1 and monitoring systems. That it increases costs of existing major banks is a secondary consideration, since it affects all of them in the same way. For the United States government, it has proved a useful addition to its arsenal of tools for taking actions against its enemies, such as Iran and North Korea, permanently on the FATF2 blacklist. The activist NGOs, such as Transparency International and Global Witness, lend their moral prestige by advocating for aggressive use of the system to punish human rights violators and other transgressors.
There is no powerful interest contesting the system. Most consumers are unaware that it has raised the prices of banking services; no customer receives a bill in which the bank’s cost of AML compliance is listed as a cost item. Those who are most adversely affected by AML are often poor and almost always poorly organized. If banks start to reject customers with some financial connection to Russia because of political concerns, no member of Congress is likely to want to rally to protect them. It is likely that a long period will elapse before Russian-connected customers are even aware that their problem lies in that connection since the bank is not allowed to inform them of the reason for rejection.