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Posts Tagged ‘Money Laundering’

I’m not a big fan of so-called anti-money laundering (AML) requirements.

And things are getting worse because these laws and rules increasingly are part of a Byzantine web of extraterritorial mandates – meaning nations trying to impose their laws on things that happen outside their borders.

Bruce Zagaris, a lawyer with special expertise in international legal issues, just wrote a study on this issue for the Center for Freedom and Prosperity Foundation.

Here’s how he frames the issue.

From the introduction of anti-money laundering laws in 1986, the United States government has led international efforts to prevent and prosecute money laundering…the U.S.’s unilateralism in the financial enforcement arena has alienated smaller jurisdictions and led to a substantial increase of costs for cross-border transactions. This article examines the trade-offs of the U.S.’s unilateral approach and argues for a rebalancing of the expanding financial enforcement regime. …under the “territorial” theory of extraterritorial jurisdiction, the U.S. has proactively asserted that it has the right to regulate criminal acts occurring outside the U.S. as long as they produce effects within the United States. …A criminal statute which Congress intends to have extraterritorial application may reach a defendant who has never even entered the U.S. if s/he participated in a conspiracy in which a co-conspirator’s activities occurred within the U.S.

In part, this is a problem of the United States trying to dictate policy in other nations.

But what goes around, comes around. As Bruce explains,the European Commission is trying to coerce American territories into changing their policies.

On February 13, 2019, the European Commission blacklisted 23 jurisdictions for their weak regulation of AML/CTF policy, increasing the level of oversight that European banks would have to overcome in conducting business with said jurisdictions. The list included four U.S. territories – Puerto Rico, Guam, American Samoa, and the Virgin Islands… The U.S. Treasury Department immediately and swiftly condemned the blacklist, noting that it had “significant concerns about the substance of the list and the flawed process by which it was developed.” The Treasury further stated that it did not expect U.S. financial firms to pay any heed to the blacklist.

All this cross-border bullying would be bad news even if the underlying laws were reasonable.

But Bruce concludes by explaining that this is not the case.

The result of over-aggressive application of extraterritorial jurisdiction by the U.S. and the EU for anti-money laundering and prosecution of financial institutions and officials, together with the use of informal organizations, such as FATF, to establish new AML/CFT standards, has led to increasing exclusion of countries (called de-risking) and other depositors, especially in small jurisdictions. It has also led to substantial increase of costs for cross-border transactions, as financial institutions must increase AML due diligence, including Know Your Customer, Customer Due Diligence, and the requirement to report suspicious transactions, as well as be subject to prosecution and regulatory enforcement actions. National laws and international standards should have a cost-effect requirement, especially as they continually impose new requirements on the private sector and impede normal commerce and privacy.

All this extraterritoriality has economic implications.

Richard Rahn, in a column for the Washington Times, opines about the CF&P report.

…rarely do government leaders fully think through the effects of their actions — extraterritorial application of law being a prime example. …Noted legal scholar Bruce Zagaris, who specializes in international financial crime, has written a new paper for the Center for Freedom and Prosperity Foundation… the United States has proactively asserted it “has the right to regulate criminal acts by non-U.S. citizens occurring outside the U.S., as long as they produce effects in the U.S.” As can easily be seen, such a definition is a never-ending slippery-slope, which is causing great conflicts among governments. As a result of the increasingly expansive view of U.S. courts to take cases and enforce judgments extraterritorially, courts and legislatures in other countries are also asserting extraterritorial enforcement authority.

Richard explains why this is bad news for those who care about economic growth.

…It is difficult enough for businesses and individuals in any one jurisdiction to understand all the laws and regulations that apply to them, but once governments begin to extend their laws and regulations to foreign jurisdictions, the global financial and legal system begins to melt down. Laws and regulations are often in conflict, so those who are engaged in multiple legal jurisdictions are increasingly at risk — which causes them to rationally de-risk by withdrawing investment from those entities least able to defend themselves. The result is slower world growth and job creation. …Clear global rules need to be established as to when extraterritorial application of laws is justified and not justified. Issues like dual criminality in tax, anti-money laundering and terrorist finance need to be addressed to bring some rationality and fairness to the system. And finally, procedures need to be established so that any jurisdiction can challenge a rule that does not meet a reasonable cost-benefit test.

I’ll close by making two points.

First, politicians and bureaucrats claim that laws and regulations against money laundering are designed to fight crime. Don’t believe them. Money laundering is mostly a problem in “onshore” nations. The real motive is to undermine financial privacy so governments can track – and tax – capital around the world.

Second, American politicians and bureaucrats are playing with fire. The more we try to bully other nations to enforce our bad tax laws, the greater the risk that other governments no longer will use the dollar as a reserve currency. That would be costly to the U.S. economy.

P.S. Senator Rand Paul is one of the few heroes on this issue.

P.P.S. Click here for a good summary article on why laws should be limited by borders.

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I’ve written repeatedly about how anti-money laundering (AML) laws are pointless, expensive, intrusive, discriminatory, and ineffective.

And they especially hurt poor people according to the World Bank.

That’s a miserable track record, even by government standards.

Now it’s time to share two personal stories to illustrate how AML laws work in practice.

Episode 1

Last decade, I wrote an article for a U.K.-based publication that focused on the insurance industry. I didn’t even realize they paid, so I was obviously happy when a check arrived in the mail.

The only catch was that the check was in British pounds and various charges and conversion fees would have consumed almost all the money if I tried to deposit the money in my local bank.

But that wasn’t too much of a problem since I had an upcoming trip to give a speech in England.

I figured I would swing by the British bank where the magazine had an account, show them my passport, and get my cash.

Oh, such youthful naiveté.

Here’s what actually happened. I stopped by a branch and was told that I couldn’t cash the check because anti-money laundering rules required that I have an address in the U.K. (my hotel didn’t count).

Needless to say, I was a bit irritated. Though I didn’t give up. In hopes that my experience was an anomaly (i.e., a particularly silly teller with a bureaucratic mindset), I stopped at another branch of the bank.

But that didn’t work. I got the same excuse about AML requirements.

And I was similarly thwarted at a third branch. By the way, the tellers sympathized with my plight, but they said the government was being very strict.

So I figured the way to get around this regulatory barrier would be to sign the check and have a friend deposit the money in her account and then give me some cash.

But her bank said this was also against the AML rules.

Fortunately, we got lucky when we went to another branch of her bank. A teller basically acknowledged that government’s rules made it impossible for me to get my money and she decided to engage in a much-appreciated act of civil disobedience.

This episode was annoying, but the silver lining is that I was in the U.K. to speak at an international economic crime conference in Cambridge on the topic of money laundering.

So I began my speech a day or two later by pseudo-confessing that I had just violated the nation’s silly and counterproductive laws on money laundering (I said “this may have happened to me” to give me some legal wiggle room since the audience was dominated by government officials, and I didn’t want to take any risks).

Episode 2

Today, I had my second incident with anti-money laundering laws.

I have a friend from the Caribbean who now operates a small Dubai-based business and he asked me if I could use Western Union to wire some money to an employee in the Dominican Republic.

I’ve done this for him a couple of times in the past (it is far cheaper to send money from the U.S.), so I stopped by a branch this morning, filled out the paperwork and sent the money.

Or, to be more accurate, I thought I sent the money.

As I was walking out, I got a text from Western Union saying that they put a hold on the transfer and that I needed to call a 1-800 number to answer some questions.

So I made the call and was told that they blocked the transfer because they were trying to “protect me” from potential consumer fraud.

It’s possible that this was a potential reason, but I immediately suspected that Western Union was actually trying to comply with the various inane and counter-productive AML laws and regulations imposed by Washington.

My suspicions were warranted. Even though I explained that I wasn’t a victim of fraud and answered 10 minutes of pointless questions (how long did I know my friend in Dubai? when did I last see him? what would the employee use the money for?), Western Union ultimately decided to reject the transfer.

Why? I assume because AML laws and regulations require companies to flag “unusual transactions,” and financial institutions would rather turn away business rather than risk getting some bureaucrat upset.

So my unblemished track record of being a successful “money launderer” came to an end.

But here’s the real bottom line.

Other than wasting about 30 minutes, I didn’t lose anything. But a small business owner will now have to pay $150 more for a transaction, and an employee from a poor country will have to wait longer to get money.

In some sense, even Western Union is a victim. The company lost the $20 fee for my transaction. But that’s probably trivial compared to the money that they pay for staffers who have the job of investigating whether various transfers satisfy Uncle Sam’s onerous rules.

Even my “successful” example of money laundering in Episode 1 was costly. I lost about two hours of my day.

And if I wasn’t for the nice teller who decided to break the law, I probably would have lost out on about $100. Perhaps not worst outcome in the world, but now think about how poor people suffer when they suffer similar losses thanks to these policies.

Remember, by the way, all these costs aren’t offset by any benefits. There is zero evidence that AML laws reduce underlying crime rates (which was the rationale for these laws being imposed in the first place!).

P.S. You may not think AML policy lends itself to humor, but here’s an amusing anecdote involving our former President.

P.P.S. Some folks on the left use AML arguments to justify their “war on cash,” and they’re pushing to restrict cash as an interim measure.

P.P.P.S. Leftist politicians frequently accuse so-called tax havens of being sanctuaries for dirty money, but those low-tax jurisdictions have much better track records than onshore nations.

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On several occasions, I’ve shared horror stories of government brutality and asserted that all decent people should be libertarians.

If you still are not convinced, today we’re going to look at seven stories about so-called civil asset forfeiture, which is a sanitized term. Most people call it stealing.

Or “policing for profit.”

Let’s look at how this third-world scam operates, starting with a disgusting example of asset forfeiture from Reason.

Rustem Kazazi, an American citizen, was just trying to get on a plane to return to his native Albania last October, from Cleveland Hopkins International Airport. He was initially flying to Newark where he’d catch a connection to Albania. …Given facts about the Albanian banking and finance system and the advantages of cash there, he chose to turn his life savings into U.S. dollars and bring them with him to cover expenses related to the above house needs and his long stay rather than deal with bank transfers… Kazazi ran his carry-on luggage through the x-ray machine, like we all must. In that luggage was his life savings in cash, $58,100. There was zero attempt to be clandestine or smuggle-y about it. It was divided into three labeled and marked stacks of $100 bills, all in one envelope with $58,100 written on the outside.

Here’s how despicable bureaucrats reacted.

TSA agents noticed the money. …They called Customs and Border Patrol (CBP) on Kazazi, who took him off to a private room to grill him, as well as strip him naked… They kept his money, without telling him why, then tried to get him to just get on his flight without it. The receipt they handed him made no reference to the specific amount they’d confiscated. When he refused initially to just go on with his day as if he hadn’t just suffered a horrible crime, they escorted him out of the airport. …In December CBP finally formally informed him via a “Notice of Seizure” that they’d taken $57,330 from him, $770 less than he insists was actually taken. The Kazazis filed all the officially required forms and notices to proceed with trying to get their money back… CBP agents tried to finagle the Kazazis into withdrawing their demand for federal court action, but failed.

The good news is that the invaluable Institute for Justice has intervened.

Kazazi and his family today filed a formal motion for return of property…with the assistance of consistent civil-forfeiture-justice fighters from the Institute for Justice… Let’s hope the courts do the right, and legal, thing, demand CBP obey the law and return the stolen money.

And here’s a nauseating example of theft-by-government from Texas.

For nearly a decade, Anthonia Nwaorie dreamed of starting a medical clinic in her hometown in Southern Nigeria. Last October, the 59-year-old nurse was boarding a plane in Houston with medical equipment, supplies, and about $41,000 in cash — which had taken her years to save — when Customs and Border Protection officials stopped her. …Nwaorie said she was detained for hours. She missed her flight to Nigeria and the customs officers seized all her money. …CBP took the money because Nwaorie, a U.S. citizen since 1994 who lives in Katy, had not declared that she was taking more than $10,000 out of the country — a technical requirement that her lawyers say is not well-publicized…six months after her money was taken, Nwaorie has not been charged with a crime.

Once again, the great people at IJ are involved.

Lawyers at the Institute for Justice, an Arlington, Virginia-based public interest law firm, say her case demonstrates just how abusive the practice of civil forfeiture — which allows the government to take property that is believed to be tied to a crime — can be. ….the Institute for Justice filed a class-action lawsuit against the agency on Nwaorie’s behalf, demanding that CBP return her money without forcing her to sign any written agreement. They’re also asking a federal court in Houston to void all such agreements that might have been signed by others trying to get seized property back.

George Will opined about another reprehensible example from Texas.

On Sept. 21, 2015, Serrano drove to the Eagle Pass, Tex., border crossing, intending to try to interest a Mexican cousin in expanding his solar panel installation business in the United States. …they searched his truck — this was unusual for a vehicle leaving the country — and one agent said, “We got him!” …Having found five .380-caliber bullets in the truck’s center console — he has a concealed-carry permit but had no weapon with him — they handcuffed him and seized his truck under civil forfeiture, saying it had been used to transport “munitions of war.”

The heroes at IJ are on the case.

Assisted by litigators from the Institute for Justice (IJ), whose appearance on the West Texas horizon probably panicked the government into pretending to be law-abiding, Serrano wants to make the government less larcenous and more constitutional when it is enriching itself through civil forfeiture. …Serrano is suing for restitution but also seeking a class-action judgment on behalf of others who have been similarly mistreated. …Robert Everett Johnson is one of the IJ lawyers… Johnson says: “Imagine being detained at an airport checkpoint because you innocently forgot to take a tube of toothpaste out of your luggage. But rather than asking you to throw it out or put it in a plastic bag, the TSA agents told you they were seizing all of your luggage, including the toothpaste tube.” That happened to Serrano at the hands of a government — the one north of the border — that felt free to say, “You have no rights here.”

Here’s an example of this despicable practice from Wyoming.

Phil Parhamovich…had spent years restoring and selling houses, cars, and musical instruments, often clocking 12-hour workdays, to save up more than $91,000. And now it was all going to pay off: He would buy a music studio in Madison, Wisconsin… Then came the police stop… By the time it was over, police in Wyoming would take all of Parhamovich’s money — the full $91,800. Parhamovich, who has no criminal record, was not accused of or charged with a serious crime; he only got a $25 ticket for improperly wearing his seat belt and a warning for “lane use.” …state officials said they consider the cash “abandoned.” The state has even moved to forfeiture the money without notifying Parhamovich of the relevant court hearing until after it happened.

You won’t be surprised to learn who got involved to protect Parhamovich’s rights.

According to Parhamovich and his attorneys with the advocacy group, the Institute for Justice, this is another classic example of policing for profit and the problems it causes. Police initiated the stop for a minor traffic violation, but quickly escalated it further and further until they took a man’s life savings — all to use that money for their own law enforcement purposes.

This story has a happy ending (except for the fact that the cop isn’t in jail for stealing).

Wyoming lawmakers, citing this story, have now banned the roadside waivers that police used to wrongly take Phil Parhamovich’s $91,800. Previously, Parhamovich…got…his money back during a court hearing.

The IRS also participates in this thuggish racket, as reported by the Washington Post.

Oh Suk Kwon, who left South Korea for America in 1976, served as a fleet mechanic in the U.S. Army. After four years in the military, decades of working in an electrical plant and as an auto mechanic, after raising the kids and seeing them off to their adult lives, Kwon finally bought a gas station in Ellicott City in 2007. It meant everything to him. Just a few years after he opened it, zealous government investigators…seized all of the station’s money on a hunch — and wiped the family out. No, they weren’t money launderers or terrorists or mobsters or tax evaders. The government found no evidence of criminal activity. …the gas station went under, and Kwon’s wife died amid the stress of it all…the agency won’t give Kwon his money back. …He’s heartbroken that the country he loves is treating him this way.

The story has additional examples.

…fervent investigations targeted scores of small businesses in Maryland. The best known of these was South Mountain Creamery… the creamery was accused of structuring — farmer Randy Sowers also said his bank teller told him to keep the deposits under $10,000 to cut paperwork — the farm’s entire operating budget was seized. …The government eventually found out that the cows weren’t drug mules and the chickens weren’t gangsters and allowed Sowers to sign a settlement agreement to get back half of about $60,000 that the IRS took. Sowers did it because he needed that money to keep the farm going. Another Maryland farmer, Calvin Taylor, had about $90,000 seized in 2011 after the government snagged him in a similar investigation. He couldn’t take the time to fight the charge, either, and agreed to a settlement where the government returned about $41,000.

Once again, the IJ people are fighting to protect people from rapacious government.

The farmers didn’t walk away from the fight. Backed by the libertarian Institute for Justice, Sowers, Taylor and others testified before Congress, petitioned and fought for three years to get their cash back.

The awful thugs at the IRS also stole money in Connecticut.

David Vocatura watched $68,000 disappear. He was at his family’s bakery in Norwich, Connecticut, when a squad of armed IRS agents filed into the store. The agents wanted to know if Vocatura and his brother Larry were trafficking drugs or running a prostitution ring. The brothers had no idea what they were talking about. …the IRS refused to believe Vocatura’s Bakery was operating on the up and up. Agents said the business raised red flags because of a series of cash deposits in sums under $10,000, the amount at which banks are required to report transactions to the federal government. …The agents had no evidence of other wrongdoing, but thanks to a controversial law enforcement tool known as civil asset forfeiture, they didn’t need any to seize every penny in the Vocaturas’ bank account… The IRS has…[been] subjecting David, 53, and his brother Larry, 69, to a series of increasingly aggressive legal maneuvers — including threats of significant prison time and additional fines — in an attempt to strong-arm them into permanently forfeiting their assets.

Naturally, IJ is riding to the rescue.

…the Institute for Justice, a libertarian public interest law firm, filed a lawsuit in U.S. District Court for the District of Connecticut on behalf of Vocatura’s Bakery, demanding that the IRS promptly return their money. …Hours after the suit was filed, the IRS said it would finally give the Vocaturas their money back.

But the jackboots in government are vindictively going after the family.

Peter S. Jongbloed, assistant U.S. attorney for the District of Connecticut, served the Vocaturas a grand jury subpoena calling for them to turn over every financial record from the six years between March 2007 and April 2013, so the agency could finally begin investigating the business’s tax and regulatory compliance. …“At this point, the government is in so deep, they’ve put these guys through three years of hell — and held onto their money for three years — and so they feel like they need to justify it,” said Robert Everett Johnson, an attorney for the Institute for Justice who is representing the Vocaturas. “So now they’re going to conduct this investigation into the bakery in some effort to try to find something that will make it look like they were doing the right thing all along.”

Let’s review one final example of banana-republic law enforcement, this time from Alabama.

The morning of June 29, 2010, began much like any other at FAR Computers in Ensley. Frank Ranelli, who has owned the computer repair business for more than two decades, was doing some paperwork in his windowless office when he heard loud banging on the front door. When he answered it, he was unaware that about 20 officers with the Homewood and Mountain Brook police departments were surrounding his store, some wearing flak jackets and carrying assault rifles. Within moments, a Homewood police sergeant had declared a room full of customers’ computers, merchandise and other items “stolen goods,” Ranelli recalled. …The police proceeded to confiscate more than 130 computers – most of which were customers’ units waiting to be repaired, though some were for sale – as well as the company’s business servers and workstations and even receipts and checkbooks. …Nothing ever came of the case. The single charge of receiving stolen goods was dismissed after Ranelli demonstrated that he had followed proper protocol in purchasing the sole laptop computer he was accused of receiving illegally. Yet none of the property seized by police that summer morning more than seven years ago has been returned to him.

The article references the stellar work of IJ.

Alabama’s laws, however, still provide the state’s citizens with few protections from the practices, earning the state a “D- for its civil asset forfeiture laws” in a November 2015 report by the Institute for Justice, a Virginia nonprofit advocacy law firm. Alabama laws stack the deck against victims of asset forfeiture by establishing a “low bar to forfeit” and not requiring a conviction to do so; offering “limited protections for innocent third-party property owners”; and letting “100% of forfeiture proceeds go to law enforcement,” the report stated. …In a time of increasingly tight budgets for many law enforcement agencies, seizing property offers an opportunity for them to increase revenue without politicians having to raise taxes.

The good news (relatively speaking) is that some states are trying to curtail this evil practice.

The bad news is that cops in some states have figured out how to steal regardless.

In theory, New Hampshire has reformed its asset forfeiture laws. The state passed a bill in June 2016 to keep police from seizing and keeping people’s property unless those people have been convicted of a crime. And yet New Hampshire Public Radio reports this week that the state’s cops are still trying to keep stuff seized from people who have been accused but not actually convicting of criminal behavior. …when the reforms were passed…there was a big loophole. The U.S. Justice Department’s “Equitable Sharing” program allows local law enforcement agencies to partner with the feds for busts, then funnel the forfeiture through the looser federal program, which doesn’t require convictions, back into the local police budgets. Doing this allows them to skirt any state-level restrictions on asset forfeiture.

In other states, the establishment is going nuts trying to preserve their shady scam.

…a local prosecutor and police officer say the state will be welcoming violent drug cartels if a Republican lawmaker gets his way. State Sen. Kyle Loveless has been trying to muster support this year for a bill that would reform a controversial law enforcement tool known as civil asset forfeiture. …Loveless sees this as a fundamental violation of people’s rights to due process and property and says the lax standards have gotten innocent people in Oklahoma caught in the civil asset forfeiture net. On Thursday, he sparred with Tulsa County District Attorney Steve Kunzweiler and Eric Dalgleish, a major at the Tulsa Police Department, over the merits of his bill to require a criminal conviction to permanently take someone’s property. …Kunzweiler, the district attorney, said the extra level of protection was unnecessary and that raising the bar for forfeiture would effectively roll out a welcome mat to ruthless drug traffickers from Mexico. …Dalgleish later said that cartels were keeping a close eye on Loveless’ legislation and even lobbying for its passage.

Shame on Kunzweiler and Dagleish. What reckless and dishonest demagoguery.

And three cheers for Sen. Loveless, who deserves a lot of love for putting the principles of the Constitution first.

Sadly, the Trump Administration is on the side of theft-by-government, which is especially disappointing since there was a small move in the right direction during the Obama years.

P.S. Just like intrusive and ineffective money-laundering laws, wretched asset forfeiture laws are largely the result of the foolish War on Drugs. One bad policy generates another bad policy. Lather, rinse, repeat.

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Beginning in the 1980s, money-laundering laws were enacted in hopes of discouraging criminal activity by making it harder for crooks to use the banking system. Unfortunately, this approach has been an expensive failure.

Amazingly, some politicians actually want to make these laws even worse. I wrote last year about some intrusive, expensive, and pointless legislation proposed by Senators Grassley, Feinstein, Cornyn, and Whitehouse.

Now there’s another equally misguided set of proposals from Senators Rubio and Wyden, along with Representatives Pearce, Luetkemeyer, and Maloney. They want to require complicated and needless ownership data from millions of small businesses and organizations.

David Burton of the Heritage Foundation has a comprehensive report on the legislation. Here’s some of what he wrote.

Congress is seriously considering imposing a beneficial ownership reporting regime on American businesses and other entities, including charities and churches. …the House and Senate bills…share three salient characteristics. First, they would impose a large compliance burden on the private sector, primarily on small businesses, charities, and religious organizations. Second, they create hundreds of thousands—potentially more than one million—inadvertent felons out of otherwise law-abiding citizens. Third, they do virtually nothing to achieve their stated aim of protecting society from terrorism or other forms of illicit finance. …Furthermore, the creation of this expensive and socially damaging reporting edifice is unnecessary. The vast majority of the information that the proposed beneficial ownership reporting regime would obtain is already provided to the Internal Revenue Service.

Richard Rahn criticizes this new proposal in his weekly column.

…what would you think of a member of Congress who proposes to put a new regulation on the smallest of businesses that does not meet a cost-benefit test, denies basic privacy protections and, because of its vagueness and ambiguity, is likely to cause very high numbers of otherwise law-abiding Americans to be felons? …Some bureaucrats and elected officials argue that the government needs to know who the “beneficial owners” are of even the tiniest of businesses in order to combat “money-laundering,” tax evasion or terrorism. …Should the church ladies who run the local non-profit food bank be put in jail for their failure to submit the form to the Feds that would give them the exemption from the beneficial ownership requirement? …Given how few people are actually convicted of money-laundering, the overwhelming evidence is that 99 percent of the people being forced to submit to these costly and time-consuming proposed regulations will not be guilty of money-laundering, terrorism or whatever, and thus should not be harassed by government.

Writing for the Hill, J.W. Verret, an expert in business law from George Mason University Law School, highlights some of the serious problems with this new regulatory scheme.

Legislation under consideration in Congress, the Counter Terrorism and Illicit Finance Act, risks tying entrepreneurs’ hands with even more red tape. In fact, it could destroy any benefit some small businesses stand to gain from the tax reform legislation passed last year. It would require corporations and limited liability companies with fewer than 20 employees to file a form with the Treasury Department at the time of formation, and update it annually, listing the names of all beneficial owners and individuals exercising control. …Given the substantial penalties, this will impose a massive regulatory tax on small businesses as they spend money on lawyers that should go toward workers’ pay. …It is unlikely someone on a terrorist watch list would provide their real name on the required form, and Treasury will probably never have sufficient resources to audit names in real time.

Professor Verret explains some of the practical problems and tradeoffs with these proposals.

…some individual money laundering investigations would be easier with a small business registry available. But IRS tax fraud investigations would be much easier with access to taxpayers’ bank account login information — would we tolerate the associated costs and privacy violations? …How is the term “beneficial owner” defined? How is “control” defined? As a professor of corporate law, I have given multiple lectures on those very questions. What if your company is owned, in part, by another company? Or there is a chain of ownership through multiple intermediary companies? What if a creditor of the company, though not currently a shareholder or beneficial owner, obtains the contractual right to convert their debt contract into ownership equity at some point in the future? …for the average small business owner, navigating those complexities against the backdrop of a potential three year prison sentence will often require legal counsel. Companies affected by this legislation should conservatively expect to spend at least $5,000 on a corporate lawyer to help navigate the complexities of the new filing requirements.

Needless to say, squandering $5,000 or more for some useless paperwork is not a recipe for more entrepreneurship.

So how do advocates for this type of legislation respond?

Clay Fuller of the American Enterprise Institute wants us to have faith that bad people will freely divulge their real identities and that bureaucrats will make effective use of the information.

It is time to weed out illicit financing and unfair competition from criminals and bad actors. …Passing the House Financial Services Committee’s Counter Terrorism and Illicit Finance Act should be a priority for the 115th Congress. …Dictators, terrorists and criminals have been freeriding on the prosperity and liberty of the American economy for too long. Officials at FinCEN are sure that beneficial ownership legislation will exponentially increase conviction rates. We should give law enforcement what they need to do their jobs.

Gee, all that sounds persuasive. I’m also against dictators, terrorists, and criminals.

But if you read his entire column, you’ll notice that he offers zero evidence that this costly new legislation actually would catch more bad guys.

And since we already know that anti-money laundering laws impose heavy costs and catch almost no bad guys, wouldn’t it be smart to figure out better ways of allocating law enforcement resources?

I don’t know if we should be distressed or comforted, but other parts of the world also are hamstringing their financial industries with similar policies.

Here’s some analysis from Europe.

…a new reportfrom Consult Hyperion, commissioned by Mitek, reveals that the average UK bank is currently wasting £5 million each year due to manual and inefficient Know Your Customer (KYC) processes, and this annual waste is expected to rise to £10 million in three years. …Key Findings…Inefficient KYC processes cost the average bank £47 million a year…Total costs for KYC processes range from £10 to £100 per check…In the UK, 25% of applications are abandoned due to KYC friction… The cost of KYC checks is much too high, placing too much reliance on inefficient and error-prone manual processes,” said Steve Pannifer, author of the report and COO at Consult Hyperion.

And here’s an update from Asia.

Anti-money laundering and know-your-customer compliance have become leading concerns at financial institutions in Asia today. … we estimate that AML compliance budgets across the six Asian markets in this study total an estimated US$1.5 billion annually for banks alone. …A majority of respondents (55%) indicated that AML compliance has a negative impact on their firms’ business productivity. …An additional 15% felt that AML compliance actually threatens their firms’ ability to do business. …Eighty-two per cent of survey respondents saw overall AML compliance costs increasing in 2016, with one third projecting that costs will rise by 20% or more.

The bottom line is that laws and regulations dealing with money laundering are introduced with high hopes of reducing crime.

And when there’s no effect on criminal activity, proponents urge ever-increasing levels of red tape. And when that doesn’t work, they propose new levels of regulation. And still nothing changes.

Lather, rinse, repeat.

Here’s the video I narrated on this topic. It’s now a bit dated, but everything I said is even more true today.

Let’s close with a surreal column in the Washington Post from Dana Milbank. He was victimized by silly anti-money laundering policies, but seems to approve.

I did not expect that my wife and I would be flagged as possible financiers of international terrorism. …The teller told me my account had been blocked. My wife went to an ATM to take out $200. Denied. Soon I discovered that checks I had written to the au pair and my daughter’s volleyball instructor had bounced. …I began making calls to the bank and eventually got an explanation: The bank was looking into whether my wife and I were laundering money, as they are required to by the Bank Secrecy Act as amended by the Patriot Act. …the bank seemed particularly suspicious that my wife was the terrorist… The bank needed answers. Did she work for the government? How much money does she make? Is she a government contractor? …a week later they came back with a new threat to freeze the account and a more peculiar question: Is my wife politically influential?

Sounds like an awful example of a bank being forced by bad laws to harass a customer.

Heck, it is an awful example of that happening.

But in a remarkable display of left-wing masochism, Milbank approves.

The people who flagged us were right to do so. …Citibank, though perhaps clumsy, was doing what it should be doing. “Know your customer” regulations are important because they prevent organized-crime networks, terrorists and assorted bad guys from moving money. Banking regulations generally are a hassle, and expensive. But they protect us — not just from terrorists such as my wife and me but from financial institutions that would otherwise exploit their customers and jeopardize economic stability the way they did before the 2008 crash.

I guess we know which way Milbank would have responded to this poll question from 2013.

But he would be wrong because money-laundering laws don’t stop terrorism.

We’re giving up freedom and imposing high costs on our economy, yet we’re not getting any additional security in exchange.

And I can’t resist commenting on his absurd assertion that money laundering played a role in the 2008 crash. Does he think that mafia kingpins somehow controlled the Federal Reserve and insisted on easy-money policies and artificially low interest rates? Does he think ISIS operatives were somehow responsible for reckless Fannie Mae and Freddie Mac subsidies?

Wow, I thought the people who blamed “tax havens” for the financial crisis deserved the prize for silliest fantasies. But Milbank gives them a run for their money.

P.S. You probably didn’t realize you could make a joke involving money laundering, but here’s one featuring former President Obama.

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Trump has been President for more than 200 days and those of us who want more economic liberty don’t have many reasons to be happy.

Obamacare hasn’t been repealed, the tax code hasn’t been reformed, and wasteful spending hasn’t been cut.

The only glimmer of hope is that Trump has eased up on the regulatory burden. More should be happening, of course, but we are seeing some small steps in the right direction.

Let’s share one positive development.

Professor Tony Lima of California State University opined back in January in the Wall Street Journal that Trump could unilaterally boost growth by ending a reprehensible policy known as “Operation Choke Point.”

…the Trump administration could shut down Operation Choke Point. This program, enforced by the Federal Deposit Insurance Corp., targets “risky” banking customers and pressures banks to deny them credit. It’s unnecessary: If these industries are really risky, banks would not want their business. The real purpose of Operation Choke Point is to target industries that are out of favor…, among them: Coin dealers, money-transfer networks and payday lenders. Sales of ammunition and firearms (Second Amendment, anyone?) and fireworks (legal in some states). …Other legal goods and services such as surveillance equipment, telemarketing, tobacco and dating services. …Denying credit hampers an industry’s growth. Eliminating Operation Choke Point would encourage growth. It costs nothing. And someday it may reduce enforcement spending.

And Professor Charles Calomiris from Columbia University echoed those views a few weeks later.

Imagine you have a thriving business and one morning you get a call from your banker explaining that he can no longer service your accounts. …That’s what happened to many business owners as the result of an Obama administration policy called Operation Choke Point. In 2011 the Federal Deposit Insurance Corp. warned banks of heightened regulatory risks from doing business with certain merchants. A total of 30 undesirable merchant categories were affected…the FDIC explained that banks with such clients were putting themselves at risk of “unsatisfactory Community Reinvestment Act ratings, compliance rating downgrades, restitution to consumers, and the pursuit of civil money penalties.” Other FDIC regulatory guidelines pointed to difficulties banks with high “reputation risk” could have receiving approval for acquisitions.

Keep in mind, by the way, that Congress didn’t pass a law mandating discrimination against and harassment of these merchants.

The Washington bureaucracy, along with ideologues in the Obama Administration, simply decided to impose an onerous new policy.

In effect, the paper pushers were telling financial institutions “nice business, shame if anything happened to it.”

But at least when mobsters engage in that kind of a shakedown, there’s no illusion about what’s happening.

Professor Calomiris explained that this regulatory initiative of the Obama Administration made no sense economically.

It is rather comical that regulators would use the excuse of regulatory risk management to punish banks. Banks are in the business of gauging risk and have every incentive to avoid customer relationships that could hurt their reputation. Regulators, on the other hand, have shown themselves unwilling or unable to acknowledge risk, the most obvious example being the subprime mortgage crisis in 2008.

And he also explained why Operation Choke Point was such a reprehensible violation of the rule of law.

The FDIC’s regulators never engaged in formal rule-making or announced penalties for banks serving undesirable clients. Such rule-making likely would have been defeated in congressional debate or under the Administrative Procedures Act. Instead, regulators chose to rely on informal decrees called “guidance.” …Financial regulators find regulatory guidance particularly expedient because it spares them the burden of soliciting comments, holding hearings, defining violations, setting forth procedures for ascertaining violations, and defining penalties for ignoring the guidance. Regulators prefer this veil of secrecy because it maximizes their discretionary power and places the unpredictable and discriminatory costs on banks and their customers.

Well, we have some good news.

The Trump Administration has just reversed this terrible Obama policy. Politico has some of the details.

The Justice Department has committed to ending a controversial Obama-era program that discourages banks from doing business with a range of companies, from payday lenders to gun retailers. The move hands a big victory to Republican lawmakers who charged that the initiative — dubbed “Operation Choke Point” — was hurting legitimate businesses. …House Judiciary Chairman Bob Goodlatte…and House Financial Services Chairman Jeb Hensarling (R-Texas), along with Reps. Tom Marino (R-Pa.), Blaine Luetkemeyer (R-Mo.) and Darrell Issa (R-Calif.) praised the department in a joint statement. “We applaud the Trump Justice Department for decisively ending Operation Choke Point,” they said. “The Obama Administration created this ill-advised program to suffocate legitimate businesses to which it was ideologically opposed by intimidating financial institutions into denying banking services to those businesses.”

And Eric Boehm of Reason is pleased by this development.

A financial dragnet that ensnared porn stars, gun dealers, payday lenders, and other politically disfavored small businesses has been shut down. Operation Choke Point launched in 2012… It quickly morphed into a questionably constitutional attack on a wide range of entrepreneurs who found their assets frozen or their bank accounts closed because they were considered “high-risk” for fraud. …Assistant Attorney General Stephen Boyd called Operation Choke Point “a misguided initiative” and confirmed that DOJ was closing those investigations… “Law abiding businesses should not be targeted simply for operating in an industry that a particular administration might disfavor,” Boyd wrote. …The repudiation of Operation Choke Point is a welcome development, says Walter Olson, a senior fellow at the libertarian Cato Institute.

I shared a video last year that explained Operation Choke Point in just one minute. But that just scratched the surface, so here’s a video from Reason that explains in greater detail why Operation Choke Point was so repulsive.

Kudos to the Trump Administration for reversing this awful policy.

But hopefully this is just the first step. Regulators are still squeezing financial institutions in an attempt to discourage them from doing business with low-tax jurisdictions. This policy of “de-risking” exists even though so-called tax havens generally have tighter laws against dirty money than the United States.

Trump should put an end to that misguided policy.

Ultimately, what’s really needed is a complete rethink of money-laundering laws and regulations.

Amazingly, some politicians actually want to make these laws even worse. Ideally, Trump will move completely in the other direction.

P.S. While it’s good that Trump has reversed Operation Choke Point, his Administration has moved in the wrong direction on civil forfeiture policy. One step forward and one step backwards is not a recipe for more growth and prosperity.

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Thanks to decades of experience and research, we now know several things about so-called anti-money laundering (AML) laws.

It’s not that the theory behind these laws is without merit. The original notion was that perhaps we could reduce crime by figuring out ways to prevent crooks from utilizing the banking system. That’s a worthy goal. But it turns out that it doesn’t work.

For all intents and purposes, AML laws are a misallocation of law-enforcement resources.

So you would think that policy makers would be endeavoring to repeal these counterproductive rules and regulations, right?

But you would be wrong. Some of them actually want to double down on failure. To be more specific, four senators have introduced a bill to make these laws more intrusive and onerous.

Senate Judiciary Committee Chairman Chuck Grassley and Ranking Member Dianne Feinstein, along with Senators John Cornyn and Sheldon Whitehouse, today introduced legislation that modernizes and strengthens criminal laws against money laundering – a critical source of funding for terrorist organizations, drug cartels and other organized crime syndicates.  The Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017 updates criminal money laundering and counterfeiting statutes, and promotes transparency in the U.S. financial system.

It’s quite possible that these politicians actually think this new law will somehow reduce all the bad things they put in the bill’s title (I’m surprised they didn’t add tooth decay and cancer to the list).

But if past experience is any guide, the real-world result will be more abuse of law-abiding citizens.

Writing for the Blaze, Justin Haskins warns how the new legislation can endanger innocent people.

Four U.S. senators have proposed legislation that would significantly expand the power of the federal government to seize citizens’ money when traveling in or out of the United States. …several troubling provisions in the law could put law-abiding American citizens at risk of losing tens of thousands of dollars for doing nothing more than failing to fill out a government form. Under current federal law, travelers transporting $10,000 or more in cash or other monetary instruments are required to report those funds to U.S. Customs and Border Protection. Failure to report funds, even if unintentional, can lead to the seizure of the money and criminal or civil penalties.

That approach already produces horrible abuses of innocent people.

And imagine what will happen if this new law is enacted.

The Combating Money Laundering, Terrorist Financing and Counterfeiting Act would expand “monetary instruments” covered under current law to include “prepaid access devices, stored value cards, digital currencies, and other similar instruments.” This is particularly problematic because digital currencies, such as Bitcoin, are theoretically always transported by the owner of the digital currency account wherever he or she goes, which means digital currency owners with accounts valued at $10,000 or more must always report their funds or risk having them seized. Even more troubling is the law treats all blank checks as though they are financial instruments valued in excess of $10,000 if the checking account contains at least $10,000, which means if a traveler accidently fails to report a blank check floating around in his or her luggage, the account holder could face stiff penalties — even if there is no suspicion of criminal activity.

Some of you may be thinking that it’s okay to subject innocent people to abuse if it achieves a very important goal of stopping terrorists.

But that’s not happening. In a must-read article for Foreign Affairs, Peter Neumann points out that AML laws are grossly ineffective in the fight against Islamo-fascism.

…the war on terrorist financing has failed. Today, there are more terrorist organizations, with more money, than ever before. …Driven by the assumption that terrorism costs money, governments have for years sought to cut off terrorists’ access to the global financial system. They have introduced blacklists, frozen assets, and imposed countless regulations designed to prevent terrorist financing, costing the public and private sectors billions of dollars.

And what’s the result of all this expense?

It hasn’t stopped terrorism.

…there is no evidence that it has ever thwarted a terrorist campaign. Most attacks require very little money, and terrorists tend to use a wide range of money-transfer and fundraising methods, many of which avoid the international financial system. …Terrorist operations are cheap, and according to a 2015 study by the Norwegian Defense Research Establishment, over 90 percent of the jihadist cells in Europe between 1994 and 2013 were “self-funded,” typically through savings, welfare payments, personal loans, or the proceeds of petty crime. …many jihadists have used their own savings and welfare payments or taken out small loans; others have borrowed money from their friends or family. …Financial tools cannot stop lone attackers from driving cars into crowds.

But it has imposed major burdens on innocent parties.

…the focus on the financial sector proved ineffective; it has also harmed innocent people and businesses. To address policymakers’ demands, financial institutions have “de-risked” their portfolios, shedding investments and clients that might be linked to terrorist financing. …De-risking, moreover, has resulted in the de facto exclusion of entire countries, mostly poor ones such as Afghanistan and Somalia, from the global financial system. The bank accounts of refugees, charities that operate in regions torn apart by civil war, and even Western citizens with family links to so-called risk countries have been closed. Practically no Western bank now offers cash transfers to Somalia, for example, although 40 percent of the population depends on remittances from abroad.

And what is the author’s bottom line?

Simply stated, the current system is a failure.

Instead of continuing to look for needles in a haystack, governments should overhaul their approach to countering terrorist funding… Otherwise, they will waste time and money on a strategy that cannot deliver security for many more years to come. .. Policymakers need to acknowledge that the war on terrorist financing, as it has been conducted since 2001, has often been costly and counterproductive, harming innocent people and companies without significantly constraining terrorist groups’ ability to operate.

I agree.

Indeed, I wrote an article for Pace Law Review, published back in 2005, that made many of the same points, including a lot of attention on theoretical role of cost-benefit analysis.

Law enforcement policy should include cost/benefit analysis so that resources are best allocated to protect life, liberty, and property. This should not be a controversial proposition. Cost-benefit analysis…already is part of the public policy process. For instance, few people would think it is acceptable for a city of 10 million to have just one police officer. Yet it is also true that few would want that city to have five million police officers. In other words, there is a point where additional law enforcement expenditures – both public and private – exceed the likely benefits. Every government makes such decisions. Cost-benefit analysis applies to aggregate resource allocation choices, such as how many police officers to employ in a city, but also to how a given level of resources are utilized. In other words, since there are not unlimited resources, it makes sense to allocate those resources in ways that yield the greatest benefit. On a practical level, city officials must decide how many officers to put on each shift, how many officers to assign to different neighborhoods, and how many officers to allocate to each type of crime. The same issues apply in the war against terrorism. Officials must decide not only on the level of resources devoted to fighting terrorism, but they also must make allocation decisions between, say, human intelligence and electronic surveillance.

Now let’s shift from theory to evidence.

I argued AML laws didn’t pass the test.

…while anti-money laundering laws theoretically help the war against terror, this does not mean that they necessarily are justified by cost-benefit analysis. A…book from the Institute for International Economics…strongly supports anti-money laundering laws and advocates their expansion. But the authors admit that these laws imposed costs of $7 billion in 2003, yet they admitted that, “While the number of suspicious activity reports filed has risen rapidly in recent years…total seizures and forfeitures amount to an extremely small sum (approximately $700 million annually in the United States) when compared with the crude estimates of the total amounts laundered. Moreover, there has not been an increase in the number of federal convictions for money laundering.” The private sector bears most of the cost of anti-money laundering laws, but the authors also note that, “Budgetary costs for AML laws have tripled in the last 20 years for prevention and quadrupled for enforcement.” The key question, of course, is whether these costs are matched by concomitant benefits. The answer almost certainly is no. …the government seizes very little dirty money. There are only about 2,000 convictions for federal money laundering offenses each year, and that number falls by more than 50 percent not counting cases where money laundering was an add-on charge to another offense.

Let’s close with passages from a couple of additional articles.

First, Richard Rahn explains why all anti-money laundering laws are misguided in a very recent column for the Washington Times.

…what is even more shocking is the extent to which various government organizations monitor and, in many cases, restrict financial freedom, and seize assets without criminal conviction. …The government argues that it must collect financial data and then share it with many domestic and foreign government organizations in order to stop tax evasion, money laundering, drug dealing, other assorted criminality, and terrorist finance — all of which sounds good at first glance, until one looks at what really happens. If you think that the war on drugs has been a failure, look at the war on money laundering, tax evasion and terrorist finance for an even bigger failure. …money laundering is a crime of intent, rather than actions, in which two different people can engage in the same set of financial transactions, but if one has criminal intent he or she can be charged while the other person is home free. Such vague law is both ripe with abuse and difficult to prove. …The financial information that government agencies now routinely collect is widely shared, not only with other domestic government agencies, but increasingly with foreign governments — many of which do not protect individual liberty and other basic rights.

And here are some excerpts from a column in Reason by Elizabeth Nolan Brown.

American and British banks are monitoring customers’ contraception purchases, DVD-rental frequency, dining-out habits, and more in a misguided attempt to detect human traffickers… Their intrusive and ineffective efforts come at the behest of government agencies, who have been eager to use asset-forfeiture powers… The U.S. and U.K. banks RUSI researchers interviewed said they were happy to help law enforcement prosecute human traffickers and had little problems turning over financial records for people already arrested or under investigation. But proactively finding potential traffickers themselves proved more difficult. As RUSI explains, “the often unremarkable nature of transactions related to” human trafficking made finding criminals or victims via transaction monitoring a time-consuming and unfruitful endeavor. Yet financial institutions are boxed in by regulations that threaten to punish them severely should they participate in the flow of illegally begotten money, however unwittingly. The bind leaves banks and other financial services eager to cast as wide a net as possible, terminating relationships with “suspicious” customers, monitoring the bank accounts of people they know, or turning their records over to law enforcement rather than risk allegations of not doing enough to comply.

In other words, these laws are a costly – but ineffective – burden.

Which is what I said in this video for the Center for Freedom and Prosperity.

P.S. In closing, I should point out that statists frequently demagogue against so-called tax havens for supposedly being hotbeds of dirty money, but take a look at this map put together by the Institute of Governance and you’ll find only one low-tax jurisdiction among the 28 nations listed.

Even the State Department’s most recent list of vulnerable jurisdictions shows only a handful of international financial centers.

Yes, places Cayman and Bermuda are on the list, but so are countries such as Canada, China, India, Italy, Netherlands, Russia, and the United Kingdom. In other words, it’s basically a random list of jurisdictions rather than a helpful guide.

P.P.S. You probably didn’t realize you could make a joke involving money laundering, but here’s one starring President Obama.

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President Trump says he wants to roll back the burden of regulation. Give the morass of red tape that is strangling the economy, this is a very worthy goal.

It’s also a daunting task. Fixing the sprawling regulatory state is the modern version of cleaning the Augean stables and I’m not brimming with confidence that Trump and his appointees have Herculean powers.

That being said, if they’re deciding where to focus their deregulatory efforts, cost-benefit analysis would be a very useful guide. Simply stated, go after the red tape that imposes the highest costs while yielding the fewest benefits.

And if that’s the approach, so-called anti-money laundering regulations should be on the chopping block. Banks and other financial institutions are now being forced to squander billions of dollars in order to comply with laws, rules, and red tape that require them to spy on all their customers. The ostensible purpose of AML policies is to discourage criminal behavior, but experts have concluded that this approach has been a failure.

To the extent that AML policies have had an impact, it’s been negative. In addition to high costs and inefficiency, the laws and regulations have disproportionately harmed poor people.

Richard Rahn, in a column for the Washington Times, says AML laws are the modern version of prohibition, well-meaning in theory but counter-productive in practice.

Money laundering fits under the definition of vague law because, unlike murder or robbery, it is not a crime of an act but one of “intent.” …This leads to many problems and substantial prosecutorial abuse. It is not only banks and financial institutions that are supposed to know the source of their clients’ funds, but also such diverse people as car dealers, pawnbrokers, real estate agents, and on and on. Often, it is not considered good enough to know the source of a customer’s funds (often a near-impossibility), but the source of the funds of the customer’s customer. …The result is that banks and other financial institutions increasingly refuse to open accounts for low-income people… There is a very high fixed cost for banks and others to do “due diligence” on their customers — the costs being roughly the same for a $5,000 deposit, a $500,000 deposit or a $5,000,000 deposit. Given the massive penalties banks and other financial institutions are subject to for making even an unintentional mistake, their safest course of action is to drop small customers. …Recent academic and think tank studies show the situation only getting worse — all cost and no gain. …the poor, including poor countries, and the honest pay a huge price for all of the additional compliance costs, which reduces productive global capital formation and real incomes.

And the price isn’t trivial for the nations that get targeted, as I pointed out in testimony to the Organization for American States.

A working paper from the Center for Global Development digs into the numbers.

The past fifteen years have seen an unprecedented level of attention on anti-money laundering…issues by financial regulators…the total value of fines levied by regulators peaked at $15 billion in 2014 in the US alone. …Between 2010 and 2015, the Financial Action Task Force (FATF), an international group tasked with setting common AML standards across the globe, added over fifty different countries to an internationally-recognized list of high risk countries. …there are growing concerns that this increase in regulatory activity is leading to a chilling effect on cross-border economic activity as banks limit their exposure to high risk clients or jurisdictions, a process known as ‘de-risking’… This contraction of the correspondent banking network has sounded a number of alarm bells, as these services are seen as being crucial for most cross-border services… The ICC survey reported that over 40% of respondents felt that AML and know-your-customer (KYC) requirements were a significant impediment to trade finance, with nearly 70% reporting they declined transactions that year…a large number of money transfer companies in the US, the UK and Australia have lost access to banking services as a result of banks’ desire to reduce their exposure to regulatory risk, potentially leading to a reduction to a decrease in formal remittances to developing countries, a critical source of development finance… The combined effect of all of these pressures should be leading to declines in the aggregate flow of cross-border payments.

And here are the results of the new empirical research in the study.

The combination of large scale fines, higher compliance costs and international naming-and-shaming has – anecdotally – led many banks to withdraw from certain lines of business or geographic areas, to the potential detriment of cross-border economic activity. …We find evidence that greylisting by the FATF is consistent with up to a 10% reduction in the number of payments received by an affected country. …Issues of economic impact aside, these results suggest there is more work to be done on assessing both the effectiveness and the efficiency of the global AML/CFT regulatory regime. …First, the reduction in payments received by countries subject to greater regulatory scrutiny raises the spectre of potential losses to these countries. Second, that there is either no effect or a positive effect of FATF greylisting on the number of payments leaving a designated country suggests that increased scrutiny may not do much to prevent illicit money from leaving high risk countries and entering the international financial system at large.

In other words, lots of costs, mostly borne by poor people and poor nations, but no evidence that criminals and terrorists are being stopped.

Rather than imposing lots of red tape and requiring banks to spy on everybody, it would be much better if the government followed normal rules in the fight against crime. By all means, it should investigate real crimes, collect evidence and build cases (within proper limits), and work to punish those who inflict harm on others.

But don’t squander resources in ways that aren’t effective.

Some have suggested that it would make sense to have banks monitor a discrete list of potential bad guys rather than promiscuously spy on all customers.

That might be a step in the right direction, but this story from the UK-based Times shows that this approach leaves something to be desired.

A controversial “blacklist” used by British banks to identify terrorists and potential money launderers has grown so bloated that it includes details of a three-year-old member of the royal family… World-Check, a database of more than two million “high-risk” individuals including criminals and senior politicians, is used by 49 of the world’s 50 biggest banks to carry out compliance checks on existing and potential clients. Customers who are flagged up face extra scrutiny and their accounts…hundreds of individuals were included partly on the basis of unverified blog posts and even far-right or extremist websites.

Wow. Since some of my leftist friends consider International Liberty a “far-right” and “extremist” website, this doesn’t bode well for me. I guess I’m lucky that I still have a bank account.

Here’s more from the story.

Thousands of others were listed on the database, which dates from 2014, only because they were relatives or friends of minor public figures. …Maud Windsor…was listed at nine months old. The apparent justification was that she was a family member of a “politically exposed person” (PEP), a reference to her father, who is the son of Prince Michael of Kent and 43rd in line to the throne. …Other British PEPs on the database include Sir Neil Cossons, a historian and former chairman of English Heritage. …Heather Wheeler, a Conservative MP listed on the database, told parliament this year that her bank of 30 years informed her that she was “high risk” and that it “would not deal with me anymore and that it was closing my account.”

These absurd results are driven by government policies that force financial institutions to treat all customers as potential crooks.

And given the huge fines that are being levied on banks and other firms, you can understand why they drop customers and charge high fees. They are forced to act defensively.

Thomson Reuters, the media company that makes millions of pounds compiling and selling the database, does not inform individuals if they are included and banks have no obligation to tell clients why they have been denied services. …Many financial institutions have become risk-averse… “You have an arms race where there’s this immense pressure to build a ‘robust’ database,” one expert on World-Check said. “They’ll pack this database with as many names of individuals as possible. You end up getting a ton of false positives.”

And some of those “false positives” are mentioned in this video I narrated for the Center for Freedom and Prosperity.

P.S. Statists frequently demagogue against so-called tax havens for supposedly being hotbeds of dirty money, but take a look at this map put together a few years ago by the Institute of Governance and you’ll find only one supposed haven among the 28 nations listed.

P.P.S. You probably didn’t realize you could make a joke involving money laundering, but here’s one featuring former President Obama.

P.P.P.S. But when you look at the real-world horror stories that result from these laws, you realize that the current system on money laundering is no laughing matter.

P.P.P.P.S. And you won’t be surprised to learn that the statists have learned the wrong lesson. They see that AML laws have been a failure and think the right response is to go nuclear and ban cash entirely.

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