We Can’t Stop It, So We Need to Manage It—The Only True Way to Get a Handle on Global Money Laundering

Money laundering, the activity of covering up or disguising a monetary transaction so to give it the appearance of legitimacy, dates back to as early as 1139. Methods of disguise were used by wealthy cash lenders to avoid being detected for the practice or usury.1

Alfonse Gabriel "Al" Capone in the 1930s was suspected of laundering money through his legitimate laundromat businesses. Money laundering was not a crime in 1930, thus Capone was eventually convicted of tax evasion.

The practice of disguising ill-gotten money through a maze of transaction layers may be as old as the hills, but its legal persona as a crime is as recent as 1986,2 although it was mentioned in a legal case in 1982 for the first time.3 The criminalization of money laundering has since spread all around the world and is now endorsed and actively promoted by bodies such as the Financial Action Task Force (FATF), Financial Crimes Enforcement Network (FinCEN), European Union Directives on Money Laundering (EU), Basel Group, Wolfsburg Principles, EGMONT Group and a number of regional FATF style bodies.

Despite the notable efforts of the aforementioned bodies, money is laundered on an astronomical scale around the world, but in reality, how big is the problem of money laundering?

The Illusive Data!

While there is no doubt that money is laundered on a daily basis around the world, just how much money is laundered remains an unanswered question. Estimations by the United Nations, International Monetary Fund, Dow Jones and the like estimate in the region of $500 billion to $3 trillion dollars are laundered annually. The Australian John Walker published a report which put the global figure at $2.85 trillion,4 however Walker rightfully admits that his model does not produce accurate estimates.

In his paper "The Case of the Tentative Trillion,"5 Daved Muttart notes that in 1996 FATF attempted to estimate the extent of global money laundering but failed to do so, citing that FATF member countries lacked "sufficient data to support credible estimates."

So with all the resources available to governments today, why is it that we cannot make a definitive determination of the extent of money laundering? Why is it, countries "lack sufficient data?" Why can only estimates, and un-reliable estimates at that, be calculated? Is it possibly because the data we need is not there?

Money launderers themselves hold the data we (the anti-money laundering champions) need. However, what we have done is to criminalize the act of laundering money. The notion behind the criminalization of laundering money is to punish the money launderer by depriving him or her of their proceeds gained from the predicated crime which precedes the act of laundering money.

The current way of treating money laundering (criminalizing) is flawed because there is no way of off-setting the "success" stories (i.e., illicit money seized, arrests and convictions achieved), against the actual problem – because the extent of the actual problem is undeterminable.

Further, given the "suspected" magnitude of global money laundering, the level of current "success stories" would need to be questioned. Muttart cited6 that over a nine year period (1987–1996), banks in the United States filed 77 million currency transaction reports – these resulted in 3,000 cases, 7,300 defendants and a mere 580 convictions. The conviction rate is low and thus unimpressive, and if global money laundering is on a scale of the estimates, then these conviction rates are disproportionate to the problem.

The current treatment of money laundering has effectively driven money launderers away from the formal and primary financial system and into an informal and secondary financial system. Money launderers constantly find new ways to "clean" their proceeds and many of these new methods involve entities outside of the financial system such as charities, churches, schools and the like. The use of these types of entities effectively create a secondary financial system (or third tier financial system if one is to consider Hawala as the official secondary financial system).

So with money launderers forever seeking new vehicles and systems in which to process their illicit proceeds, low and insignificant conviction rates, high anti- money laundering costs and no way to bench mark these, the question must be asked—why criminalize money laundering?

Why criminalize?

As AML professionals we have all been trained to treat money laundering as a crime, and thus do everything in our efforts to detect it and report it in the hope of stopping it. However, money laundering is a by-product of a crime that has already been committed. For example, the drugs have already been sold and payment received, the victims in a human trafficking exchange have already been delivered, the arms shipment has already been shipped off to fuel a civil war in some African country and so on. Unlike terrorist financing, which is followed by a devastating loss of life, when the act of money laundering takes place, the crime and injustice to people has already occurred, thus the only "victim" that remains is the financial institutions themselves who stand to be penalized for failing to implement proper AML procedures and suffer reputational damage in the process. This raises the question why criminalize ML and bring this risk upon financial institutions?

While conventional wisdom would say it is sickening to propose the notion of a drug kingpin getting the proceeds from his illegal business without fear of prosecution for it, it is the criminalization of money laundering that is preventing the AML world from getting a true handle on the value of this never ending problem and indirectly allowing that drug kingpin to continue his illegal trade. We cannot fight an enemy we cannot see, we cannot surmise how many resources to throw in front of a problem when we do not know how big the problem is to start off with.

One of the biggest mistakes made by most people is to use the term money laundering and terrorist financing in the same sentence. The two are vastly different and thus should be treated differently. Criminalizing the act of financing terrorism works and makes perfect sense only because what it is attempting to do is stop a tragic and often devastating crime from occurring such as the attacks of September 11. The crime follows the act of financing. In the case of money laundering, nothing follows, the crime has already occurred, the flow of funds in and out of the financial system (increasingly alternative financial systems) is merely a by-product of a past crime and represents the end of the transaction.

There is an argument to suggest that laundered money is used to fuel further predicate crimes. By implication this would mean that all predicated money laundering crimes are financed by way of laundered money? While laundered money may well be used to finance crime, to think only laundered money is responsible for this is somewhat naive.

So what course of action is needed? First, we need to stop driving the dirty money away from the formal financial system because we need the money in the system in order to measure it. The only way to get that money into the system is to take away the element that makes money laundering illegal. We then need to redirect law enforcement resources to focus on the predicated crimes – this is consistent with law enforcement's efforts in relation to terrorist financing which focuses on intelligence and following the money to prevent the terrorist cell from carrying out their intended attack.

Thus if the components of this theory work, an increased focus on combating predicate money laundering crimes is likely to cause a reduction in the number of predicate crimes. This should in turn reduce the amount of "dirty money" entering the financial system. This way we will know and would be able to track because we have allowed the money into the system and thus can measure it on an ongoing basis.

There is no way to stop money laundering, thus a shift from combating money laundering to managing it is needed.

Negativity of such Action!

Such a radical policy shift will always beget negative sentiment. Criminalizing money laundering to most is considered proper and logical, it is also considered the second line of defense in that it affords law enforcement a second opportunity to punish criminals for a crime (predicated crime) law enforcement failed to stop in the first instance.

This methodology is appropriate if one is able to gauge just how effective and how big an impact such an approach is having on the global pandemic of money laundering. However, this measurability is not possible.

One will raise the notion that decriminalizing the act of laundering money would not be socially acceptable by any developed law adhering nation with an established judicial system. The criminal perception associated with laundering money was created by the AML world when the act itself was criminalized. So why then can the body that created such a perception not be responsible for re-branding the act in order to get a handle on its severity? Is it possibly because a lucrative industry has been created out of AML?

Should our laws afford a crime committing individual the luxury of enjoying the proceeds of his crime…probably not, but given the amount of suspected dirty money entering the system on a daily basis, and given that the volume of dirty money seized is probably way below even the suspected amount of dirty money, it is safe to say then that our financial system already makes use of a large portion of the dirty money for legitimate transactions, thereby aiding in the redistribution of dirty money. Surely it would amount to good fiscal governance to know exactly what portion of money in circulation is dirty, especially if we (the financial system) are using it.

Is rebranding possible?

Is it possible to take something previously labeled as a criminal offence and reengineer it to be "acceptable?" Perhaps history can provide an answer. Between 1920 and 1933 the United States imposed a prohibition on alcohol which was designed by the Federal Government to reduce the consumption of alcohol. This attempt ended on December 5, 1933 with the abolishment of prohibition.

The consumption of alcohol is now widely practiced and accepted in the U.S.

Several states in the U.S. decriminalized the possession of marijuana in the 1970's, citing that the possession of small amounts was considered "civil" and not "criminal."7 Boston decriminalized the substance in January 2009 where it was no longer considered a crime to possess 1 ounce or less.8 In April 2010 Philadelphia's District Attorney announced his intention to decriminalize possession up to 30g in an effort to lessen the criminal cases in court.9 Likewise, in June 2011, the Connecticut Senate approved the bill to decriminalize small amounts of the substance for personal use.10

Prostitution is legal in many countries and areas around the world such as Canada, Mexico, Colombia, Peru, Brazil, Argentina, Western Australia, Northern Territory (Australia), Queensland, New South Wales and Victoria to mention a few.11 More relevant to the case in point was the decriminalization of prostitution in New Zealand by way of the Prostitution Reform Act of 2003.

Despite protest from the United Nations, Christian movements and women's groups, prostitution is legal and regulated in New Zealand. Prostitution is the oldest profession in the world, having it taking place "underground" makes it very difficult if not impossible to regulate. The legality of this activity provides government with the data they need to render the necessary support, medical advice, protection and standards needed to those who choose this profession, thereby making this activity as controlled and safe as possible.

History shows us that something can be rebranded to become socially acceptable provided it can be shown to be of benefit and non-harmful to society. The tangible benefits emerging from knowing how much dirty money is in our system must be shown to outweigh the "illegal" stigma attached to the "crime" of money laundering for it to be socially acceptable.

What do we gain?

The decriminalizing of money laundering would open the doors of the financial system to accept money derived from predicate crimes. A radical concept, granted, but here is what we gain by doing this:

  • Accurate data reflecting the amount of "dirty money" in the world's financial systems

The data gathered would enable governments to determine more precisely the extent of global money laundering. Fiscal transparency would be strengthened because governments could document what portion of the world money being used for legitimate transactions is in fact dirty. Law enforcement would have an accurate benchmark with which to compare their efforts to stop the predicate money laundering crimes against.

  • Redirect AML, law enforcement and justice resources

With the criminal element of money laundering no longer a factor, AML, law enforcement and justice resources can be redirected to assist other law enforcement agencies in preventing the predicate crimes from occurring. It is the predicate crimes that are the real injustice to innocent victims that gives rise to money laundering and detracts law enforcement's attention.

  • Reputational damage minimized

One of the aims of most, if not all, AML programs is to protect the financial institutions reputation by ensuring the firm does not associate itself with a money launderer. By removing the criminal element linked to money laundering, institutions who engage with a less than desirable client would no longer be "guilty by association" and, as such, reputational damage in this regard would be virtually non-existent.

  • Money laundering vs. terrorist financing—a clear distinction

With money laundering decriminalized, a clear and definitive distinction can be established between money laundering and terrorist financing. The clear distinction can give rise to a set of clear and decisive actions, as well as counter measures institutions must take against the financing of terrorism.

In Summary

The proposed methodology is radical in nature, and one that would require a global shift in policy, as well as a fundamental change in mindset. While it is by no means advocated that this approach is flawless, like every system, it will present its own challenges. While certain schools of thought may deem this approach unethical, others may deem it implausible, it does however present a certain element of logic, and one which surely warrants further exploration and discussion.

Raymond Alderton, compliance director, Dubai, United Arab Emirates, ralderton@deloitte.com

  1. Ursury refers to interest rates that were charged on money lent. Interest rates varied between 4% and 48%. Ursury was prohibited in 1139 by the Second Lateran Council. Source: Sylla, R and Homer, S. A History of Interest Rates (2005). Sourced online.
  2. Money Laundering Control Act (1986)
  3. US v $4,255,625.39 (1982) 551 F Supp.314, sourced from www.laundryman.u-net.com
  4. Modeling Global Money Laundering Flows, found at http://www.johnwalkercrimetrendsanalysis.com.au/ML%20method.htm
  5. Muttart, Daved (n.d), The Case of the Tentative Trillion. http://home.interlog.com/~dmm/MoneyLaundering.htm
  6. Muttart, Daved, http://home.interlog.com/~dmm/MoneyLaundering.htm
  7. Alaska, Colorado, Nebraska, New York, North Carolina, Minnesota, Ohio and Oregon. Source: http://www.mapinc.org/drugnews/v01.n276.a05.html
  8. Staff, G. Marijuana decriminalization law goes into effect (2009). http://www.boston.com/news/local/breaking_news/2009/01/marijuana_decri_1.html
  9. McCoy, C, Phillips, N and Purcell, D. Philadelphia to ease marijuana penalty (2010). http://articles.philly.com/2010-04-05/news/24956838_1_marijuana-court-system-possession-of-small-amounts
  10. Haggerson, M. Connecticut Senate approves marijuana decriminalization bill (2011). http://jurist.org/paperchase/2011/06/connecticut-senate-approves-marijuana-decriminalization-bill.php
  11. http://chartsbin.com/view/snb

One comment

  1. Why am I not surprised that someone in Dubai is suggesting the decriminalization of money laundering? Perhaps we should decriminalize tax evasion as well? You know, to get a better idea of the problem.

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