Money laundering is the process of concealing the source of funds derived from illicit activities to present a veneer of legitimacy. According to the UN Department of Economic and Social Affairs, yearly money laundering flows account for 2.7% of global GDP. Therefore, countries are investing in anti-money laundering regulations to strip criminals of opportunities to profit from illegal activities. Some respond that regulations make it easier for officials to trail the spoils of crime and prosecute offenders.
For instance, the importance of effective data management and active exchange of information between institutions was underlined by the representatives of the Bank of Lithuania at the international AML conference: “On the Front Line of the New Reality”.
“With the rapid growth in the number of payment service users and their geographical spread, data management and exchange of information between institutions both within and beyond the borders of the country are becoming particularly important, especially since financial services have already become global. Moreover, we aim to promote the responsibility of financial institutions and the financial literacy of their clients” says Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania.
Financial institutions are obliged to know their customers, as well as collect and update data. These are used to enforce internal processes and customer risk assessment and are submitted to the supervisory authority. The Bank of Lithuania assesses the key stages of the data value chain – data collection, analysis, and dissemination – and aims to ensure that all processes are effective and contribute to reducing the administrative burden.
The Bank of Lithuania is taking the initiative to enable financial market participants to exchange information about clients, especially in case of suspected cases of fraud. Lithuania is constantly strengthening its competencies in the prevention of money laundering and terrorist financing, allocating more resources, and expanding its expertise, all of which reflect Lithuania’s desire for the European Anti-Money Laundering Authority (AMLA) to be established in Vilnius.
The Bank of Lithuania aims to make the prevention of money laundering and terrorist financing an integral part of financial services, while financial institutions consider it an integral part of business and reputation. The central bank notes that non-compliance of a financial market participant with anti-money laundering and terrorist financing requirements can come at a price. This year alone, one institution’s license was revoked and fines were imposed for half a million euros.
Are such regulations effective at curbing the flow of illicit transactions? Governments might think so, but research says otherwise.
Anti-money laundering regulations have diverted banks from their core activities to policing their clients to uncover criminal activities. For instance, in 2014 HSBC informed the financial world that it spends $750 million to $800 million annually to combat money laundering. Banks are forking out hefty sums to prevent money laundering, and yet they are barely able to clamp down on unscrupulous actors.
A review by Reuters shows that despite billions in industry investment, more than 95% of system-generated alerts are written off as “false positives” in the first phase of the review, whereas 98% of alerts never result in a suspicious activity report. As such, AML controls are failing to deter terrorists, cartels, and rogue states from exploiting the benefits of criminal enterprises.
Proponents of anti-money laundering laws contend that banks require sophisticated technology to identify criminal activity. Upgrading technology to track criminal activity is not only costly, but it also should not be the duty of banks. The evidence argues that AML laws are defective at curtailing money laundering and impose a cost on consumers in poor countries.
Besides limiting services available to consumers, anti-money laundering regulations make it difficult for consumers to do business. Research gathered by the World Bank posits that these regulations require poor customers to present documentation that they often lack. For example, self-employed people could be required to provide proof of income, and this is burdensome for those whose services are not formalized.
Few people engage in illicit activities like terrorism and fraud, yet the costs of AML rules are diffused throughout the economy. In America alone, complying with anti-money laundering rules is costing the economy $8 billion a year.
A better alternative to combat fraud and other illicit activities would be for companies to innovate in technology at their expense, whereas the state should focus on prosecution. Aiming to do so by viciously pursuing intrusive anti-money laundering regulations will only make businesses and consumers worse off.