POST AML is an almost total waste of money

Rob Wainwright, the Director of Europol, has been talking about the great success of the continent's $20 billion per annum anti-money laundering regime. He said that “Professional money launderers — and we have identified 400 at the top, top level in Europe — are running billions of illegal drug and other criminal profits through the banking system with a 99 percent success rate”.

Wait, what? We are only intercepting 1% of the dirty money? That doesn’t sound very good. It’s lucky that we don’t spend too much money on this ineffective system.

Wait, what? Global spending on AML compliance with be more than six billion yankee dollars this year. So we are spending billions on a system that is, statistically, useless. Thankfully, the powers that be are taking stringent action to tackle those money launderers that Mr. Wainwright has identified. For example, while the Fourth Anti-Money Laundering Directive (4AMLD) cut down the monthly transaction limit on prepaid cards to €250 (specifically to disrupt terrorist financing), the new Fifth Anti-Money Laundering Directive (5AMLD sets an even lower limit of €150, which presumably has terrorists around the world flinging away their prepaid cards and going back to the tried-and-tested US $100 bill. Criminals too will be running scared of this crackdown and may well decide to abandon their life of crime in response.

Wait, what? The AML/CFT regime that has been created seems to be, as noted in the Journal of Financial Crime 25(2), "almost completely ineffective in disrupting illicit finances and serious crime".

Actually, the situation is even worse that it seems at first, because not only does the regime we have do nothing to hamper terrorists, money launderers, drug dealers, corrupt politicians or mafia treasurers, it does hamper law-abiding citizens going about their daily business. In fact, as noted in the Journal of Money Laundering Control 17(3), the Financial Action Task Force (FATF) identification principles, guidance and practices have resulted in "largely bureaucratic" processes that do not ensure that identity fraud is effectively prevented. Were strict identification requirements to be imposed everywhere and in all circumstances, though, there would be a very negative impact on financial inclusion.

The costs that this regime impose on the payments industry (grouped under the header of compliance, and there to supposedly make life of criminals and terrorists more difficult: CDD, KYC, FATF, AML) come at a price. Anti-Money Laundering (AML) efforts cost an estimated $7 billion annually in the U.S. alone.

We erect (expensive) KYC barriers and the force institutions to conduct (expensive) AML operations. But suppose the KYC barriers were a lot lower so that more transactions entered the financial system. And the suppose the transaction data was fed, perhaps in a pseudonymised form, to a central AML factory, where AI and big data, rather than clerks and STR forms, formed the front line.

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Therefore detection requires behavioral pattern analysis of transactions occurring over time and involving a set of (not obviously) related real-world entities.

From Detecting Money Laundering — Startup.ML Conf

 

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