October 29, 2005

The Economist on the FATF - a net 'bad'

I haven't time to write a proper blog entry on the net 'bad' that is the FATF and the anti-money laundering people. Economists know that anti-money laundering is unlikely to work just from common sense - the procedures proposed and implemented will probably cause more costs than benefits.

But nobody wants to be the messenger writing against one of the world's most powerful, entrenched - and now damaging - bureaucracies. Which makes the Economist's recent article all the more welcome. Read it and spread it:

For now the burden of implementation appears likely to rest with the private sector. “Banks are going to have to start behaving like the FBI and CIA,” contends David Porter of Detica, a Britain-based consultancy with expertise in financial crime. “They need to start connecting the dots.” This “risk-based” approach—concentrating time and energy on checking a smaller number of individuals or businesses based upon their transaction histories, sources of funding and other factors—is gaining wider acceptance.

For KPMG's Mr Dillon, the resources already spent on the effort have handed a victory to the terrorists. “The cost to our global economy is so large, they've already had the effect they wanted,” he says. “The increasing costs of compliance and technology are a form of terrorism. We're damaging ourselves.”

The championing of terrorism is an easy soundbite - it can't possibly be wrong can it? Unfortunately, it's dead wrong and in time people will come to think about terrorism in an common sense way. Anyone who is familiar with finance, war or expatriatism can tell you that trying to control flows that small is futile, and all you are doing is adding costs to your own people while arguably providing cover to the people you are trying to catch.

The Economist pulls its punches - but that's because no economist wants to sit down and take the risky job of documenting how the FATF and the OECD are damaging the economy and life in general. As Financial Cryptographers we know how this is the case because we see the rules and regulations, and we see real crooks. There is little connection! But sometimes we can also spot where the anti-money laundering agencies have done palpable and painful damage. Here's such a case:

The gang reportedly stole customer login ids and passwords using keylogging software and then used the information to steal cash from Web banking accounts. The stolen funds were then transferred into the accounts of "mules" who were offered cash in exchange for the use of their bank accounts.

I first spotted this new money laundering technique a year or so back, and no doubt it has been used more extensively before that. What happens is that innocent people are approached with a business deal that just happens to launder funds. The deal is dressed up in such a fashion that the innocent can't tell what the real purpose is, so they go for it. Everyone needs a job, and maybe your lucky break just turned up?

The damage done by the FATF has been to move money laundering out of the domain of the banks - where it can be watched - into the domain of the people. Goodhart's Law, in other words. People who have no clue what is happening are now being used as 'mules' in a crime which when uncovered - and of course that's a very high probability - will do immense damage to their lives and livelihoods.

I've seen it used on students, on expats and others. If you asked those people whether they'd preferred not to have to deal with such a complex fraud, then I'm sure they'd have begged for the chance.

Our thanks go to the FATF and OECD for making business unsafe for all of us. Is asking us all to behave like the FBI and the CIA really worth it? When you do get around to doing the benefit analysis, don't forget the costs that we have to pick up.

Posted by iang at October 29, 2005 09:08 AM | TrackBack

If done properly then there is less cost, and more benefit. The US and UK are shocking examples of how not to do it - Law Enforcement in general is too fragmented to get any real gain from gathering strategic level intelligence. Its far better to look at somewhere like Australia.
Having done considerable analysis for our FIU (for a new IT system) I would be the first to agree that a lot of what the FATF/IMF/APG/etc puts forward is crap, but its a standardised crap that everybody does. It aims to regulate what is now a global industry in such a way as to protect the 'good guys' from the 'bad guys' in a world where neither can be accurately identified.
The biggest issue really is the accurate identification of customers - which they should always have been doing, but terrorism and identity theft have brought to public/political view. The old argument that cash transactions should be anonomous is rubbish - if you have acquired the value legitimately and payed your tax(es) then there is no need to hide anything. If either of these is untrue then you're a criminal and there are several government agencies dedicated to catching you. The banks, being law abiding entities, will obviously assist in this. :)

And using mules is nothing new, its just easier to do (and easy to recognise) with electronic banking.

Posted by: SG at November 1, 2005 10:00 PM

Stuart, thanks for the response! It's a change to have some real response to this growing nightmare.

There are several issues with what you propose. Firstly, your claim that "If done properly then there is less cost, and more benefit" is simply not rubust. The same applies to "world peace" and "long life" - saying that "if it works, it works" is quite meaningless.

Instead, the onus is on the FATF and others to show that they have in fact implemented something with lower costs than benefits. To date, I don't believe they've even tried to measure the costs and benefits in any fair and reputable way. Further, as any economist will tell them if they bothered to ask, what they are trying to do is to turn off some very robust properties of money so they are starting off with the theory against them. That isn't to say that it can't be done, or that we should just wash our hands of crime, but it does really raise the bar and it really does indicate that they should be far more professional and responsible about anti-money-laundering.

I'll leave aside the "identification of customers" issue as that is being widely debated right now elsewhere.

Then this: "if you have acquired the value legitimately and payed your tax(es) then there is no need to hide anything."

That is unfortunately just not true. Possibly you are referring to some ideal world or possibly you are referring to A+NZ where the police, banks, politicians and other powerful agencies are relatively uncorrupt. If so, A+NZ would be rather unique in that respect, although I'd also include Switzerland and Liechtenstein in that rare basket, and perhaps Scandanavia.

In contrast, the vast majority of the peoples in the world - in my opinion and experience - live in places where the agencies that might have access to your information are quite corrupt or corruptable. I'm not sure how to put this in context without writing a long list of scandals and pointing out the flaws in the system that lead to this sorry state of affairs, but if you are relying on that premise, then anti-money-laundering dies on that alone. It is simply outrageous to go to a country and suggest that the people expose their money to their banks, politicians, police and anyone else, when these latter groups are likely the crooks you assumed were the wider populace.

One example: the USA did not really get serious about AML until post 911. In fact, it is hard to say that they did anything about it at all internally, and I still think it is the case that you can open bank accounts there without substantial documentation. In contrast, try opening a bank account in the Caribbean - where I used to live - and you will discover a nightmare. It once took me FOUR MONTHS to open an account, and this when the banker concerned was a very good friend of mine. (Did this stop money laundering? Of course not! In fact it buried it deeper.)

Why is this? Simply because AML is selectively forced on countries according to taxation agendas. The USA and Europe both selectively apply AML according to taxation. Having seen both sides of this, there is no doubt that this is what the OECD is doing, and you may recall that when Pres. Bush first came in this was precisely what was on the table - why should the USA support the European's trade policies on taxation?

The question for countries like A+NZ then is why are you participating in a cartel to impose what are essentially trade barriers in order to keep and raise taxes in your own countries? Especially when most of the countries bend over backwards to let tax evading funds reside in their own countries? (e.g., the US and UK are implementing AML in a shocking fashion for a *reason*.)

Obviously you can't agree with this reading of events - but we can solve this quite easily - where's the cost-benefit analysis of AML? It's been 20 years now - how much money laundering has been stopped versus how much has it cost us?

Posted by: Iang at November 2, 2005 02:36 PM

Agreed - its a complicated nightmare, unfortunately its been my nightmare for a while now! World Peace would probably be easier than what FATF are aiming for, and you'd definately have fewer opponents.
I should make it clear that I look at it all from a law enforcement angle; where the value (in intelligence) is obvious. From a banking/finance point of view the value is probably less clear and the costs no doubt higher.
The issue is less directly corruption and more the conflict between beuracracy. NZ has 1 Police force but the US has hundreds, all stepping on each others toes and competing for glory (and the resources (money) that goes with it). Of course, once you've got the beuracracy the corruption is easy.

The reasons for being involved are many and varied, and not all are good reasons...but far more money laundering is detected now than 20 years ago(whether anything gets done about it is a whole other sad tale).

Posted by: SG at November 2, 2005 06:22 PM

The Economist Comes Rightly; But Late To The Game:
One observes with a certain horror how blithely SG opines on the imperatives of transparencies in banking matters; a horror lessened only by the more experienced, less wanton responses made by Iang above.

Perhaps I ought to say who I am - Gilbert NMO Morris - since a casual googling of my name will reveal that I have been a disproponent of both the legitimacy of the FATF or the effectiveness of its initiatives(http://www.kycnews.com/ message_board_detail.asp?id=1769&page=125) and so the Economist -though rightly - arrives late to a position on which I and others have warned, lectured and advised these many years now.

It was, for some, a surprise to discover that the FATF - and in the case of the Caribbean, the CFATF - has been willing to demonise those who questioned its methods as likely supporters of money-launderers; this when the very nations toward whom the FATF has been less strident are exactly the ones within which the largest money laundering scandals have emerged.

Its standing as an international organization having no actual legal basis in international law; its methods, a tissue of selective abominations against sovereign states; its programme, not nonsense, but barking nonsense, the FATF has demonstrated little of the very fairminded balance of application or institutional elegance that may have assured a thoughtful committment to its agenda.

Such has been the selectivity (http://www.amsbvi.com/AMSGrp/asp/fullstory.asp?storyname=21478) of its approach that the Caribbean nations ultimately pinned it back on its heels by annoucing a "Level Playing Field" (LPF) criteria; which speaks eloquently - though it is an unsustainable proposition, and was aimed mainly at tax competition initiatives - to the selectivity mentioned before. The LPF demanded, inherently, that the FATF remove the lumber from its eyes, before vilifying others to remove specks from their eyes.

Iang, you are very right to put SG in mind that these matters must be reflected upon responsibly, rather than with the glib indifference of FATF evangelism. Consider the millions of people who live in countries with unstable banking platforms; susceptible to curruption, and are themselves susceptible to kidnap and murder. What is compelling moreover, is it is in the very nations which have been spared the OECD/FATF's wrath that many officials from known-to-be currupt nations launder their monies.

It was this very proposition that I and others put to then US Secratry of the Treasury, the Hon. Paul O'Neill, when he declared his rejection of the OECD/FATF initiatives. (http://www.tax-news.com/ubb/Forum5/HTML/000006.html) It was this that lead Lichtenstein to conclude that if it follwed the FATF/OECD programme it could not remain a democracy; and that which lead Paul O'Neill to express support for Lichtenstein publicly whilst they were "blacklisted".

The above said, the real issue is the rule of law. Nothing in the OECD/FATF's approach demonstrated a regard for lawfulness. An Editorial comment by Anton Keller in The Wall Street Journal enlarges this point: "Under a new "non-binding" guise, i.e. the 40 FATF recommendations, they reassembled their nowhere democratically approved objectives which were thus temporarily blocked. They did that on their own, without anybody initially paying any attention, and without any duly approved mandate. Initially they had fed on the UN Vienna Convention's deliberately blown-up "drug" problems. Already in their first attempt, in the above art.4 of the 40 recommendations, they saw profit and a chance by venturing beyond the Vienna Convention, extending "the offence of drug money laundering to one based on serious offences." And when, to their own surprise, that didn't draw any serious opposition, they soon followed up with what they call an "Iinterpretative Note", shedding even the pretense that they are talking about the fruits of genuine crimes, and seeking to impose their preposterous Orwellian designs on an ever more bureaucrat-ically steam-rolled world even on mere civil offences that generate a significant amount of proceeds!"

Everything about the FATF's programme hinted "misson creep" as Keller describes. Their anti-terrorist financing initiative, was not only, to quote the Economist: "...as vast as the benefits are negligible", but they often displayed a disregard for the rule of law, alike to giddy children discovering they can make adults jump. No effort was made to engage scholars of the law in various nations who had been working to get their government to adhere to due processes. Excited by the reaction of entire governments - because of their percieved connection with G-7 nations, the FATF brought a narrowminded autocractic attitude to the question of terrorist financing - about which they know nothing - and general issues around money laundering. They acted with contempt for law, compelling - mostly small nation - governments to ignore the constitutional contraints in their legal regimes to adopt FATF initiatives.

The danger is that once governments with already dubious habits of rule following begin acting in such a way, it becomes easy to assert that ends justify the means in ignoring the law for their own purposes too. We have not yet felt the full effect of this; though in Jamaica and other places, govenments are showing signs - because of their inexperience and their acceptance of the nation that "might is right" - that if OECD nations make demands they are willing to disregard their law in reponse to threats. (http://www.freedomandprosperity.org/Papers/morris3/morris3.shtml)

I leave it to you to determine whether or not that creates exactly the world which in substance the anti-terrorist financing initiatives were intended to frustrate.

Posted by: Dr. Gilbert NMO Morris at November 2, 2005 06:43 PM

Quoted from the article:


Rawlings said: "By arbitrary and discriminatory, we mean blacklists are not compiled in line with any objective and consistently applied set of rules or criteria. As such, they are in conflict with basic norms in the international trading system, such as non-discrimination and the most favoured
nation principle."

Sharman and Rawlings said evidence of the arbitrary way in which blacklists are drawn up is shown by off-the-record interviews with tax officials in onshore jurisdictions.

Posted by: "Arbitrary blacklisting for offshore centres" at November 3, 2005 06:48 AM

Why follow the FATF Piper of Hamlin?
just look at its self-fabricated "remit" (mandate?) of the "beautifully dressed" but in fact naked Emperor! (http://www.oecd.org/dataoecd/46/33/35065565.pdf)
courtesy by: Iconoclast (http://www.solami.com/iconoc.htm)

Essentially, we are faced with some clever-by-half flat-earth IRS taxmen who, in the secret and entirely unsupervised chambers in the shadow of the OECD, have learned to effectively scratch the back of gullible colleagues from foreign tax authorities. That reminds us of the evolution and metamorphosis of the hunters of bootleggers of the 1920ies to drug hunters, gold cops and taxmen.
After it had dawned on American lawmakers that puritanism, fundamentalism and flat earth believes are taking an unsustainable toll on the US society and economy, the Prohibition was thrown over bord as the aberration it was. Nevertheless, together with their allies in Congress and elsewhere, those who thus had lost their jobs, quickly regained legitimacy and securely paid employment by having other previously free civil activities criminalized - never mind its justification, or the ever more flimsy grounds invoked. Thus, possession of gold and drugs became new hunting grounds, eventually followed by the use of drugs and insider information, and now coming ever closer to the market economy's central pillar, i.e. tax avoidance. Initially, on the international scene, this was helped by the League of Nations Advisory Committee on Traffic in Opium and Other Dangerous Drugs. In many ways, this can be seen as the forerunner of the OECD's Fiscal Committee, its Working Group 8 on Tax Avoidance and Evasion, and the OECD's most notorious non-statutory anti-market outgrowth, i.e. the FATF.
In the fiscal field in particular, the OECD provided a fertile terrain for bureaucratic lawmaking particularly since its socialist counterpart, the COMECON, started to crumble and eventually vanished. No longer in need to stay in a competitive shape, it allowed itself to become a high-profile growth media for the phantasms of national bureaucrats pursuing often mere private agendas. Having early on and stealthily organized a formal, yet in effect anti-sovereignty, anti-enterprise and anti-market mandate for "combatting tax avoidance", the OECD's Fiscal Committee has in fact put the very reputation and future of the OECD at risk. It originated the OECD INTERFIPOL Convention on Mutual Administrative Assistance in Tax Matters. And when, in 1989, that outstanding symbol of bureaucratic lawmaking was roundly defeated by an international coalition of enterpreneurs, lawmakers, journalists and chambers of commerce, the loosers set out to come back with a vengence. Authored by self-appointed, out-of-control, and internationally marauding taxmen, the Financial Action Task Force's innocently-sounding "non-binding" 40 FATF recommendations on money-laundering thus came into being. Having deliberately looked for, identified and focussed on objectives, guises and methods which, like motherhood, are fundamentally unobjectionable, the INTERFIPOL loosers thus gradually overcame their resounding defeat. They did that on their own, without anybody initially paying any attention, and without any duly approved mandate.
Initially they had fed on the UN Vienna Convention's deliberately blown-up "drug" problems. Already in their first attempt, in the above art.4 of the 40 recommendations, they saw profit and a chance by venturing beyond the Vienna Convention, extending "the offence of drug money laundering to one based on serious offences." And when, to their own surprise, that didn't draw any serious opposition, they soon followed up with what they call an "Interpretative Note", shedding even the pretense that they are talking about the fruits of genuine crimes, and seeking to impose their preposterous Orwellian designs on an ever more bureaucratically steam-rolled world even on mere civil offences that generate a significant amount of proceeds!
Where are the minutemen capable & willing to rid the productive world of these self-feeding cancers? For it isn't enough to finally serve up a long-overdue analysis to sheepish bureaucrats in both the public and the private domain here and there, as The Economist commendably did (28 Oct. 05): "... to curb terrorism by stopping the flows of money that sustain it, must be judged a failure. Complex and unwieldy regulations have been imposed, but are not working, indeed arguably were always misguided. They should be scrapped and resources concentrated more productively elsewhere."

Posted by: Iconoclast at November 4, 2005 09:23 AM


thanks again for your response, and it is good to know that there are thoughtful people working on the inside against the nightmare that is the FATF.

When you say that there is a benefit in intelligence to police, I'd agree. There is! The question is whether that benefit is worthwhile.

A wise policeman said once "A policeman's lot is not a happy one." I like to think he meant that the policeman's lot should not be a happy one, because by its very nature, if the job was easy it wouldn't exist. And that any policeman who tries to make his lot happier by the introduction of some rule or other has to be treated with suspicion, because he's missing the point of what policing is all about.

Money launderers are smarter than police. They have more resources than police. And they definately have more incentive. Worse, it's a perverse incentive - the harder you make his job, the more percentage he has to charge, and the more profit he makes! So, like banks, money launderers actually have incentives to raise barriers like AML.

The challenge is to construct some way to defeat these people, and the FATF has not done that. Instead, what they have done is created a massive information and spying machine that means that the dumb, ignorant and honest can be targetted. They have created a new catch-all crime that sticks because people - juries - don't understand it and assume that prosecutors must be right.

Real money launderers easily evade the FATF's web. You've probably heard reports or suggestions that real money launderers have been attending the AML conferences. Well, of course! We can expect them to be right on top of this little problem - it's their job.

So the question then arises - why do we support the FATF in constructing a happy intelligence system that is only going to be effective against our own people? In effect, AML can only work as intended for tax, for extortion by the insiders, and the occasional idiot who gets trapped through ignorance. But in its wake police and prosecutors and other interested insiders now have this failsafe weapon called a money laundering indictment that rarely fails - even when no underlying crime is committed.

Posted by: Iang at November 5, 2005 05:14 AM

Check out this week's Economist (click link below or here: http://www.economist.com/displaystory.cfm?story_id=5079324 ). Developing country are beset by corruption, bribery and state failure. And then the FATF offers this wonderful tool called anti-money-laundering to increase corruption, bribery and state failure!

Posted by: "The hidden wealth of the poor" at November 7, 2005 12:21 PM


Return of the Researcher: Regulation is the Mother of Invention

by Heather Hooper (JP Morgan London) and Steve Goldstein (Alacra Inc)

Has some funny cartoons .. may have asked some hard questions which were only hinted at in the text.

Posted by: "Return of the Researcher: Regulation is the Mother of Invention" at November 20, 2005 10:10 AM
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