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Posts Tagged ‘AML’

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.

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Feel free, of course, to insert the name of another politician if you’re an Obama fan.

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President Obama walks into the Bank of America on Martha’s Vineyard to cash a check. As he approaches the cashier he says “Good morning Ma’am, could you please cash this check for me”?

Cashier: “It would be my pleasure sir. Could you please show me your ID”?

Obama: “Truthfully, I did not bring my ID with me as I didn’t think there was any need to. I am President Barrack Obama, the president of the United States of America!!!!”

Cashier: “Yes sir, I know who you are, but with all the regulations and monitoring of the banks because of know-your-customer rules and anti-money laundering laws, etc, I must insist on seeing ID”

Obama: “Just ask anyone here at the bank who I am and they will tell you. Everybody knows who I am”

Cashier: “I am sorry Mr. President but these are government rules and I must follow them.”

Obama: “I am urging you please to cash this check.”

Cashier: “Look Mr. President this is what we can do: One day Tiger Woods came into the bank without ID. To prove he was Tiger Woods he pulled out his putting iron and made a beautiful shot across the bank into a cup. With that shot we knew him to be Tiger Woods and cashed his check. Another time, Andre Agassi came in without ID. He pulled out his tennis racquet and made a fabulous shot whereas the tennis ball landed in my cup. With that spectacular shot we cashed his check. So, Mr. President, what can you do to prove that it is you, and only you, as the President of the United States?”

Obama stood there thinking, and thinking and finally says: “Honestly, there is nothing that comes to my mind. I can’t think of a single qualification I’m really good at”

Cashier: “Will that be large or small bills, Mr. President?”

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P.S. To be serious for a moment, click here to see why anti-money laundering rules are misguided.

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As a grumpy libertarian, I routinely get agitated about taxes, spending, and regulation. As far as I’m concerned, much of government is a racket that uses coercion to reward interest groups with unearned wealth.

But there are degrees of evil. So if you asked me to pick the most reprehensible thing that government does,  “asset forfeiture” might be in second place (hurting poor people to benefit rich people is at the top of my list).

Asset forfeiture occurs when government seizes property that is associated with a crime. That sounds reasonable – and it is reasonable if someone is convicted of, say, bank robbery and the government confiscates the stolen cash and any loot purchased with that money.

But it is not reasonable (or moral, or just, or appropriate) when government seizes assets without a conviction. And it is downright disgusting when the government steals (and I use that word deliberately) the assets of innocent parties.

I’ve already written about this issue (including an example from my county) and highlighted how asset forfeiture gives government bureaucracies a perverse incentive to steal.

Now we have a story from the Wall Street Journal that confirms our worst fears.

New York businessman James Lieto was an innocent bystander in a fraud investigation last year. Federal agents seized $392,000 of his cash anyway. An armored-car firm hired by Mr. Lieto to carry money for his check-cashing company got ensnared in the FBI probe. Agents seized about $19 million—including Mr. Lieto’s money—from vaults belonging to the armored-car firm’s parent company. He is one among thousands of Americans in recent decades who have had a jarring introduction to the federal system of asset seizure. Some 400 federal statutes—a near-doubling, by one count, since the 1990s—empower the government to take assets from convicted criminals as well as people never charged with a crime. …The forfeiture system has opponents across the political spectrum, including representatives of groups such as the American Civil Liberties Union on the left and the Heritage Foundation on the right. They argue it represents a widening threat to innocent people. “We are paying assistant U.S. attorneys to carry out the theft of property from often the most defenseless citizens,” given that people sometimes have limited resources to fight a seizure after their assets are taken, says David Smith, a former Justice Department forfeiture official and now a forfeiture lawyer in Alexandria, Va.

What’s really amazing is that government officials want to expand this reprehensible practice. The use of “civil forfeiture” is particularly worrisome, as illustrated by this passage.

Top federal officials are also pushing for greater use of civil-forfeiture proceedings, in which assets can be taken without criminal charges being filed against the owner. In a civil forfeiture, the asset itself—not the owner of the asset—is technically the defendant. In such a case, the government must show by a preponderance of evidence that the property was connected to illegal activity. In a criminal forfeiture, the government must first win a conviction against an individual, where the burden of proof is higher.

Here’s a really disgusting example.

Raul Stio, a New Jersey businessman, is caught up in the civil-forfeiture world. Last October, the Internal Revenue Service, suspicious of Mr. Stio’s bank deposits, seized more than $157,000 from his account. Mr. Stio hasn’t been charged with a crime. In a court filing in his pending civil case, the Justice Department alleges that Mr. Stio’s deposits were structured to illegally avoid an anti-money-laundering rule that requires a cash transaction of more than $10,000 to be reported to federal authorities. Mr. Stio made 21 deposits over a four-month period, each $10,000 or less, the filing said. Steven L. Kessler, Mr. Stio’s attorney, says there was no attempt to evade the law and that the deposits merely reflected the amount of cash his client’s businesses, a security firm and bar, had produced. Mr. Stio was saving to buy a house, he says.

I have no idea whether Mr. Stio is a good guy or a crook. But I know that the government shouldn’t be allowed to grab his money without convicting him of a crime. Especially for a supposed offense against absurdly foolish and ill-conceived anti-money laundering laws.

Our Founding Fathers gave us a presumption of innocence and no bureaucrat or politician should be allowed to cancel our constitutional rights.

Asset forfeiture should apply to people like Bernie Madoff. He’s been convicted of operating a Ponzi scheme, so by all means grab every penny he accumulated. But government should follow a simple rule: Convict first, seize second.

And here’s one final section from the story, highlighting how bureaucracies “earn” a profit by abusing forfeiture laws.

Part of the debate over seizures involves a potential conflict of interest: Under a 1984 federal law, state and local law-enforcement agencies that work with Uncle Sam on seizures get to keep up to 80% of the proceeds. Last year, under this “equitable-sharing” program, the federal government paid out more than $500 million, up about 75% from a decade ago. The payments give authorities an “improper profit incentive” to seize assets, says Scott Bullock of the Institute for Justice, a libertarian public-interest law firm in Arlington, Va. It’s a particular concern amid current state and local government budget problems, he contends. …Seeming abuses occasionally emerge. In 2008, federal Judge Joseph Bataillon ordered the return of $20,000 taken from a man during a traffic stop in Douglas County, Neb. Judge Battaillon quoted from a recording of the seizure, in which a sheriff’s deputy complained about the man’s attitude and suggested “we take his money and, um, count it as a drug seizure.” The judge’s order said the case produced “overwhelming evidence” that the funds were clean.

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There’s a principled Fourth Amendment argument against anti-money laundering laws. In  this video, however, I mostly focus on the cost-benefit issue, explaining that the fight against crime will be more effective if law enforcement is not forced to look for a needle in a haystack.

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