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The fight against money laundering has involved civil servants drafting reams of highly technical but ineffective regulations
You could hear a pin drop after Britain’s top anti-money laundering cop finished his speech at a conference organised in 2008 by the Financial Action Task Force (FATF), an international body set up to wage war on dirty money.
David Thomas, then the head of Britain’s Financial Intelligence Unit, had just described how FATF’s anti-money laundering regulations actually affected criminals.
“I thought I had upset everybody because there was complete and utter silence, then there was a round of applause and I was told that it was the first time anybody had been to FATF and talked about crime or criminals,” he recalled. “I was shocked. This was a depressing thing to hear.”
Five years later, civil society groups agree with judicial investigators that the international community is losing the war against money laundering and a new approach is needed.
Heading up this losing side is FATF, an organization established in 1989 at a Group of Eight summit of the world's wealthiest countries, who were concerned that money laundering was a threat to international financial stability.
Representatives from the 38 member countries soon drew up a set of 40 policy recommendations to act as a comprehensive plan to fight money laundering.
But according to Thomas and other law enforcement officials, the initial failure to analyse the criminal causes of money laundering has resulted in civil servants drafting reams of highly technical but ineffective regulations rather than focusing on how to actually solve the problem.
A senior official working with Europol, the European Union's law enforcement agency, agreed that police investigations are being undermined by an overly bureaucratic approach to drafting anti-money laundering rules.
It is difficult to objectively judge how successful FATF has been as criminals still seem to be able to integrate vast sums into the mainstream financial system. A report by the United Nations Office on Drugs and Crime estimated that criminals made $2.1 trillion in 2009, equivalent to 3.6 per cent of that year’s global gross domestic product.
“There is a general sense that the system is failing,” said Robert Barrington, executive director of Transparency International UK. “A major problem is that there is no way to measure success of the anti-money laundering system. Work needs to be done to establish what success looks like as it’s difficult to pin down how it is failing without any metric.”
Barrington, who previously worked as director of governance at investment firm F&C Asset Management, said this obsession with technical compliance rather than the effectiveness of anti-money laundering controls is mirrored in the private sector.
“I have been in the City and talked to many bankers and I don’t sense any leadership in the financial sector on this issue,” he said. “They have by and large put the resources in place, but are motivated by the need to stay compliant with the regulations rather than trying to tackle the issue.”
British Prime Minister David Cameron has led a high profile campaign in the run-up to next week’s G8 summit to crack down on the tax avoidance industry, saving some of his strongest words for those who hide behind anonymous “shell” companies to evade paying tax.
As these same corporate vehicles are also the most popular way for money launderers to disguise the source of their ill-gotten gains, the fight for financial transparency is closely related to the fight against money laundering.
New rules forcing G8 member countries to publish the ultimate, beneficial owners of companies registered in their jurisdictions would be a “revolutionary” improvement, according to Thomas. But he also warned they would not be a panacea for the many structural obstacles to a truly effective global anti-money laundering system.
In March this year, FATF President Bjørn S. Aamo said the body’s past work had focused “more on technical compliance” than how well regulations actually worked. Now he promises that analysing the effectiveness of anti-money laundering controls is “top of the FATF agenda”.
But Thomas insists that any reforms of FATF’s assessments of countries should be coupled with more input from law enforcement and civil society on how success is measured.
“If you’re talking about change, the biggest shake up would be to restructure the terms of reference and make-up of FATF,” he said. “That is a worthwhile mission that is overdue.”
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