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Does Anti-Money-Laundering Work?

Posted on April 9, 2014, 7:46pm | Source: blogs.wsj.com | Join the conversation
Does Anti-Money-Laundering Work?

Bitjuice Editor's Note: A recent independent report found serious shortcomings in how the IMF and the Financial Action Task Force (FATF) have been policing money laundering. The report examined the recently concluded third round of assessments under the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) program. Rick McDonell, executive secretary of FATF, addressed criticisms in an interview with Risk & Compliance Journal.

Two questions of particular interest to Bitcoin supporters are regulations regarding Virtual Currencies and regulatory abuse in the form of political surveillance and repression. An edited version follows:

Q: How do new technologies, such as virtual currencies, affect the picture, and do you anticipate further challenges from technological innovation?

A: I can say we are ...discussing it in depth with the private sector. Money launderers are always looking for a way around the system and will use whatever is available. In each of these ways of transferring money, can you put in place effectively a system that identifies who is sending what to whom? In terms of virtual currencies that remains the same. We leave the handling of regulation or non-regulation to each individual country. That’s their prerogative provided they can show the misuses of such electronic tools are covered adequately and they don’t leave loopholes.

Q: Some suggest that the mechanisms put in place ostensibly to police money laundering can also work as instruments of political surveillance and repression. Is there adequate attention to this risk at FATF, and if so how is it operationalized?

A: Yes, these sorts of concerns have been voiced specifically with respect to the operations of NGOs (Non-Governmental Organizations), for example, and transfers of money through or with them. The FATF standards are aimed at trying to deal with a public bad: money laundering and terrorist financing. All we are looking for is for a country that puts these recommendations in place to aim them in the right way. If they use them in the wrong way, there is nothing we can do as a group to stop that. 


A recent independent report by the Center on Law and Globalization  found serious shortcomings in how the International Monetary Fund and the Financial Action Task Force have been policing money laundering. The report examined the recently concluded third round of assessments under the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) program. Rick McDonell, executive secretary of the Financial Action Task Force, addressed criticisms in an interview with Risk & Compliance Journal.

Is there evidence that fighting money laundering makes a difference in crime reduction or terrorist financing? Critics say that is merely a “plausible folk theory”.

Mr. McDonell: The FATF has proceeded on the basis that there is a problem, demonstrated, with proceeds of crime and terrorist financing entering the financial system and not being identified. The FATF is a consensus body of all of its members. That means that all of them have signed up at a top ministerial level to do something about money laundering. The financial intelligence work in connection with money laundering has led to prosecutions and seizure of criminal assets.

The report criticized the third round of assessments for focusing on processes rather than impact, and failing to tie processes to results. Is that a fair shot, and how will the fourth round be different?

Mr. McDonell: I think the third round did work for the purpose it was set up to do. What we are looking at is a pretty massive global effort. One of the things the report says is that it will take years to achieve the outcomes we are aiming for in the fourth round, and I do not dispute that at all.

The main distinction between the third round and the fourth round is that the third round was almost entirely looking at technical compliance. In the fourth round we will still look at technical compliance but will be able to use the database from the third round to focus on areas where countries had deficiencies identified, rather than a total rerun from scratch. But the majority of reports in the fourth round will look at effectiveness. Does the country understand its risks? Is there international cooperation? Are supervisors doing their jobs? Are financial institutions reporting adequately? Are legal persons covered? Each country will be given a rating as well as a detailed report on its effectiveness. So we won’t be looking just at technical compliance but at what is it producing.

Will we see more of a move to so-called “problem oriented policing,” and if that is the intent, how will FATF make that shift?

Mr. McDonell: There is a complaint in the report that I accept, that calculating how much money is being laundered hasn’t been done scientifically. But money laundering by nature is a hidden thing. Proceeds of crime is what it deals with. What we do need is for a country to demonstrate it has a good understanding and has in place a written national risk assessment that covers the areas of crime prevalent in that country. It could be drugs, trafficking of humans, offshore financial center misuse, or other. What we will expect of countries ...

Image credit: fincen.gov
 

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