It was only a few decades ago that there was no such thing as money-laundering laws. Instead, the focus of law enforcement was on the underlying criminal behavior (such as robbery) that generated ill-gotten gains. In recent decades, however, politicians around the world have passed hundreds of laws, created hundreds of agencies, and spawned several international bureaucracies and treaties. The theory is that crime could be discouraged by making it more difficult for bad guys to make use of any resulting loot.
In reality, though, money-laundering laws have been a huge failure. From a cost-benefit perspective, there is an overwhelming case that these laws should be radically revised if not totally repealed.
The current approach has significantly increased the expense of providing financial services, which is particularly burdensome for the poor and others at risk of not being able to utilize the financial system. These laws also have dramatically eroded privacy, forcing financial service providers and professional advisers to spy on customers and clients. To get a sense of what this means, here’s a blurb from a recent article in the U.K.’s Law Society Gazette.
…an official from the World Bank’s Financial Market Integrity Unit…described his research on the kind of large-scale money laundering that takes place globally. At the end of his presentation, which he admitted touched only tangentially on the role of lawyers, he said that his research showed that the overwhelming majority of lawyer participation in money laundering took place by deliberate action of the lawyer, and not through unwitting manipulation by the criminal. Then I intervened. If that was the case, if money laundering overwhelmingly involves crooked lawyers and not unwitting ones, then why do we have the gigantic and unwieldy money laundering legislation in place for lawyers, with its duty to report suspicious transactions without tipping off the client, which turns the lawyer into a police officer? Obviously, if a lawyer is deliberately involved in the laundering, there are existing laws and professional rules to deal with it. But why must the balance of the rule of law, which depends on a client being able to confide information to a lawyer, be upset for a problem that does not exist? That is when the audience applauded. …I think it is time to use more of our resources to push for exposure of the lie on which the money laundering legislation is based. There is no evidence that unwitting lawyers’ reports are making any difference. Give us the evidence or repeal the legislation.
From a utilitarian standpoint, these costs might be justifiable if they resulted in a substantial reduction in crimes against people and property. Unfortunately, there is no evidence that money-laundering laws have reduced criminal behavior (heck, they don’t even do a good job of intercepting criminal funds).
Yet politicians and bureaucrats every year seek more laws and more powers in hopes of somehow turning a sow’s ear into a silk purse. The latest example is from the Financial Action Task Force, a Paris-based bureaucracy filled with people who make very good salaries thanks to the existing plethora of laws and regulations. These bureaucrats now want to make tax matters a predicate offense for money laundering. And they want such laws to apply across borders, so a bank in New York could be held accountable if a French worker or investor didn’t fully comply with France’s oppressive tax laws. Or a bank in Miami could be guilty of an offense if it helps a Venezuelan family protect its assets from Hugo Chavez’s thugocracy.
So many costs, so few benefits. This video elaborates.