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Blockchain could cheapen cost of remittances

Blockchain technology could soon cheapen the cost of remittances, says a senior researcher, Dr. Ronald Pol.

But he cautions that anti-money laundering (A.M.L.) rules will keep the costs high in the meantime.

Despite new research suggesting the technology could make remittance services better and potentially reduce the costs of sending money around the world, A.M.L. is the bigger problem, he suggests.

“A significant proportion of the high cost of remittances is caused, directly and indirectly, by anti-money laundering regulatory rules and regulatory zeal,” Principal at A.M.L. Assurance, Dr. Pol said.

“That would be ok, if the regulations worked. But they don’t.”

Globally, anti-money laundering and combating the financing of terrorism (C.T.F.) measures are regulated by the Financial Action Task Force (F.A.T.F.) and the European Commission (E.U.).

Their work stopping criminal and terrorist financial flows has not been successful, Dr. Pol argues.

Criminals are keeping 99.95 per cent of their proceeds of crime, while globally trillions have been spent on money laundering controls since the 1990s. 

“That’s a success rate of just one twentieth of one percent away from complete failure,” Dr. Pol said.

“The harsh reality is that the impact of anti-money laundering controls on criminal finances is barely even a rounding error in the accounts of ‘Criminals, Inc,’ but those monumentally ineffective and incredibly costly rules help keep remittance fees high.”

He says poor rankings lead banks to de-risk services and cut off relationships with correspondent banks in countries under suspicion. The drop in banking competition keeps remittances prices high. 

Samoa has been under the close watch of the I.M.F. and F.A.T.F. and has regularly struggled against poor A.M.L./C.T.F. rankings, though made significant legal changes this decade to comply with F.A.T.F. regulations.  

In 2016 a large leak of documents (known as the Panama Papers) revealed Samoa was a major hideaway for offshore financing, where more than 5,000 shell companies had been set up to hide funds, resulting in 

Just last year the European Commission added Samoa to a blacklist of countries with “strategic deficiencies” in their regulations, despite Samoa working closely with F.AT.F. to improve compliance over the years. The new E.U. criteria were partly introduced as a response to the Panama Papers revelations.

At the time, the Central Bank of Samoa (C.B.S.) Governor Maiava Atalina Ainuu-Enari said the E.U.’s blacklisting is inconsistent with the F.A.T.F. list, joining even the United States in hitting back against it (four American territories were also blacklisted). 

But Dr. Pol said the rating systems are “functionally useless” and only harm Samoa’s capacity to participate in the global market.

Meanwhile countries that have money laundering problems have learned how to use the ranking systems to their advantage, he said.

“This means that countries considered major money laundering jurisdictions like the United States and the United Kingdom experience none of the costs imposed on countries who haven’t figured how to use the inherent flaws in the anti-money laundering rating system to dial up higher scores.

“Countries with relatively low ratings, despite anti-money laundering laws being almost completely ineffective, experience very real economic impact, with greater difficulty accessing international markets, fewer banks, and higher costs.”

Last month, the Organisation for Economic Cooperation and Development (O.E.C.D.) looked at whether blockchain could cheapen expensive remittances.

They also pointed to the hefty burden of A.M.L/C.T.F. compliance as a key driver of high prices, but that that cryptocurrencies are risks to A.M.L./C.T.F. efforts, tax compliance and data protection.

In 2014, F.A.T.F. itself said the biggest problems with cryptocurrencies are that they flow through decentralised systems with no customer identification, with no clear structure with which to pin A.M.L./C.T.F. compliance and enforcement to. 

This week, Maiava said the bank has been looking at all options that could improve A.M.L. compliance, including blockchain technology. 

But she disagrees that the regulations driving down competition are the reason prices stay so high and revealed the bank is working on solutions to that right now.

“We believe that competition is not an issue, it has to do with economies of scale, and the fact that many correspondent banking relationships have been terminated as a result of the small size of our Money Transfer Operators (M.T.O.s). 

“This makes it more difficult for these correspondent banks to do business due to smallness in scale,” she said.

“C.B.S. is also working on a project with partners such as the Asian Development Bank (A.D.B.) that aims to address the correspondent banking issues in collaboration with M.T.O.s. This will be announced in due course in collaboration with our A.D.B. partners.”

An internationally agreed upon goal hopes to reduce the cost of remittance down to less than three per cent of the remittance down from an average seven per cent by 2030. 

“With an average cost around $14 for sending $200, across tens or hundreds of thousands of remittances, that adds up to a lot of money that in effect is taken out of the Pacific,” Dr. Pol said.

“Blockchain technology holds considerable promise for helping reduce the cost of remittances, but some existing systems and ways of thinking suggest that many such opportunities will not be realized anytime soon, despite good intentions.”

Previously C.B.S. has been cautious about the use of cryptocurrencies, and in 2019 amended the Money Laundering Prevention Act to include prison or penalties for anyone promoting a virtual currency in Samoa. Registered financial institutions only can promote or engage in cryptocurrency.

“We note the various technological developments worldwide that would assist in facilitating cross-border flows and lower remittance costs,” said Maiava.

“However, many of these would also have associated risks on any financial system.  In view of this, we consider it necessary that any financial technological product or service to be introduced in Samoa requires the prior assessment of the C.B.S., for the safety and soundness of our small island financial system and most importantly, the protection of our people.”

Dr Pol published his PhD thesis “Uncomfortable truths? ML=BS and AML= BS2” in 2018 in the Journal of Financial Crime. He has a PhD in Political Science and money laundering, Honours in Law and a Bachelor’s in Economics, and is the Principal of AMLassurance.com. 

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