Anti-money laundering regulations need to work – expert
The blacklisting by the European Commission over anti-money laundering (AML) processes will have next to no impact on profit motivated crime, according to senior researcher and principal at AML Assurance, Dr Ronald Pol.
The Commission identified 23 countries, including Samoa as having “strategic deficiencies in their anti-money laundering and counter-terrorist financing frameworks,” meaning that Samoa does not comply with international AML regulations.
Dr Pol, who wrote his PhD on the effectiveness of AML controls, discovered that those regulations are “almost completely ineffective.”
For Samoa, the blacklist will make access to international financial markets tough for businesses and banks, without actually impacting the amount of crime passing through the country, even as Samoa works to improve its AML ratings.
“What happens is banks in other countries with correspondent relationships with Samoan banks use these ratings as a proxy for risk,” Dr Pol said.
“So, Samoa appears as a high risk nation. Whether it actually is a high risk nation doesn’t much matter. Simply being listed means that financial dealings with Samoa are flagged as high risk. Banks have to perform more checks, which makes it more expensive and more difficult for Samoan entities to deal with financial institutions overseas and for Samoan legitimate businesses.”
Correspondent relationships between banks allow citizens to conduct business in other countries where their local bank has no presence. Dr Pol said sometimes banks cut correspondent banking relationships because of the hassle, and other banks might follow suit.
“That’s when it gets really difficult for local businesses to import, export, and so on, and remittances can also be affected,” he said.
While he believes the risk of that may be low for Samoa because of close diplomatic relationships with its main trading partners in New Zealand and Australia, the implications of negative ratings do add up.
According to Dr Pol, coming off the blacklist may not actually increase Samoa’s chances of fighting money laundering.
But in the meantime, as Samoa works to get off the list and continues down the path of improving its FATF ratings, businesses should work with their international partners like banks and suppliers to demonstrate they are legitimate, and that they have AML systems in place.
“They have to do their best to maintain the working relationships they have,” Dr Pol said.
“Banks for example often hire more compliance people and conduct more checks on customers, which is a pain for businesses and customers, and costly, but necessary to maintain their correspondent business relationships around the world.
“Retailers and so on will have to work with banks in particular to show their systems are all transparent, so the banks can have confidence in dealing with them, while Samoan authorities work on getting off the black list, which is a turgid and completely pointless exercise, but necessary, because blacklisting hurts the economy.”
He said working to get off a blacklist can even get in the way of actually trying to reduce crime, in the efforts to made trade easier because of the impacts of the blacklist.
“We do all these things, we work with the EU, we get off the blacklist. What was the impact on crime? We don’t know, we were looking,” Dr Pol said.
According to Dr Pol, United Nations and Europol figures clearly show how regulations and AML controls have not been effective in denting money laundering crimes, or apprehending a majority of criminals.
“Globally, roughly 0.1 per cent of profit making crime is intercepted because of these controls,” he explained.
“That means that criminal enterprises get to keep up to 99.9 per cent of serious crime related profits.”
The figures, which come from the United Nations and the United States in 2011, and Europol in 2016 range between 0.1 percent to 1.1 per cent.
But for Dr Pol, that number hardly matters. What is important is that it is tiny, compared to how much criminal funds are not caught.
“Globally, we’ve had nearly 30 years of anti-money laundering controls, we spend hundreds of billions of dollars per year on compliance costs, which affects local businesses as well, and the impact we’ve had is 0.1 per cent. You do kind of wonder,” he said.
In 2017, Dr Pol was quoted in testimony in the US Senate in 2017, calling anti-money laundering rules possibly the least effective anti-crime measure, ever, anywhere.
And in July 2018, Radio New Zealand reported that: “over the next decade the cost to New Zealand businesses of complying with anti-money laundering legislation is expected to hit $1 billion.”
According to Dr Pol that cost will not lead to a significant, demonstrable impact on financial crimes, because the regulations have not been working for the last 30 years.
“This industry is brand new, it’s only 30 years old, and is still based on a series of beliefs and assumptions, many of which have not been tested, and some are plain wrong,” Dr Pol said.
“Other industries like law, accounting, law enforcement, go back centuries.
“They were also based on assumptions when they started, but they have been worked through. They have rigorously tested their founding assumptions and beliefs and they have become proper disciplines, based on evidence and objective analysis about what works.
“AML is unique because it is still driven by often very strongly held beliefs and assumptions, many of which remain untested or poorly validated.”
Dr Pol’s research, titled “Uncomfortable truths? ML=BS and AML= BS2” was published last year 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. He is currently writing a book with new solutions to the problem of profit motivated crime.