Financial Regulation, the Red-Tape Nightmare, and Anti-Money Laundering Laws

I’ve periodically written about the overall cost of regulation, and I’ve also highlighted the onerous costs of proposals such as the Dodd-Frank bailout bill.

This blurb from the IFC Review may give readers a sense of the regulatory onslaught facing financial institutions.

Banks and other financial services firms had to deal with 60 regulatory changes each working day during 2011, according to a report from Thomson Reuters Governance, Risk & Compliance, reports City AM. Regulators around the world announced 14,215 changes in 2011, a 16 per cent increase from the 12,179 announcements in 2010. The report shows that the majority of regulatory activity, 57 per cent, came from the US… Scott McCleskey, head of financial services regulation at the GRC unit, said: “This growth in activity also has an effect on the level of compliance spending leaving less to lend, invest, and do the other core activities which will be necessary to revive the global economy.”

Wow, an average of 60 regulations every single day. Great for lobbyists and politicians. Not so good for competitiveness and prosperity.

Now let’s touch on just one specific part of the regulatory burden. Banks and other financial firms must deal with a costly array of laws and regulations as part of the government’s war on money laundering. This video explains the issue.

Now let’s consider whether we’re getting any bang for the buck. We know anti-money laundering (AML) laws impose very high costs and make it difficult for many poor people to get banking services.

But are there some offsetting benefits? Unfortunately, the answer seems to be no. Professor Jason Sharman explains, starting with an explanation of the scope and cost of AML policies.

It is now just over 20 years since the first international anti-money agreements were concluded….Since then, the monitoring and implementation of AML standards have morphed into a global industry. …A vast array of financial institutions, from banks to brokers, insurance firms to casinos, money remitters to hedge funds, have now been conscripted into monitoring their clients for signs of suspicious financial activity. All this has imposed substantial costs on governments, private financial firms, and, indirectly, consumers, with the burden being especially significant for International Financial Centres.

He then raises a very important question, but one that everyone else seems to ignore.

…it is disconcerting how seldom the most obvious questions about this system are asked. First amongst these is whether AML standards actually work. That is to say, is there any less money laundered now than there was 20 years ago?  Is there any less predicate crime that gives rise to these dirty funds in the first place? Despite all the evaluations performed by the FATF, other international organisations, national governments and the army of private AML experts that has grown up, it is striking that these sort of first-order questions are almost never asked, let alone answered.

Given the incompetence of government, you won’t be shocked to learn that the bureaucrats view the laws as an excuse for empire building and bloat.

Surprisingly, however, one can read through thousands of pages of FATF reports, covering everything from football to free-trade zones, without finding much, if any, attention devoted to these measures. Instead, the international surveillance and monitoring system that judges almost every country to see whether they have ‘the right stuff’ in AML terms has tended to foster a bureaucratic game of goal displacement: means to an end have become ends in themselves.

And what about stopping crime?

The most careful studies of effectiveness (both in absolute terms and relative to the cost) have been done by those outside the system, for example scholars like Peter Reuter, Edwin Truman, Jackie Harvey and Michael Levi. Each of these observers notes the mismatch whereby we have an incredibly extensive and intrusive policy apparatus, but very little knowledge about the results produced. On the basis of the fragmentary evidence that is available, however, it is hard to see any impact that AML rules have made on the incidence of crime.  The general conclusion is that the expansion of the AML regime owes more to a political imperative to ‘do something’ in response to hot-button issues like crime or terrorism, rather than any track record of success.

Remarkable. Billions upon billions of regulatory costs. The immeasurable loss of privacy because of government-mandated snooping and spying. Yet all for naught.

And now the statists are even talking about getting rid of the $100 bill, making life even more inconvenient.

Maybe the answer is less regulation? Maybe the answer is that politicians and bureaucrats should do cost-benefit tests? But those types of rules would mean less government and more freedom, so don’t hold your breath.

P.S. This map shows you the countries considered most at risk of dirty money, which should make you wonder why anyone is foolish enough to think that higher costs on American banks will make a difference.

P.P.S. You probably didn’t realize there was such a thing as money laundering humor, but you’ll enjoy this joke featuring President Obama.