Anti-Money Laundering: A Paper Bureaucracy in a Digital World

In a recent paper, I analyze the US anti-money laundering (‘AML’) regime to point out the deep flaws in the rationale underpinning it. Through the compounding of erroneous assumptions, coupled with assertions of effectiveness that lack evidentiary support, the AML regime has grown into a vast complex, with regulatory stakeholders that literally span the globe. This growth has come at a price though, and has resulted in a system that suffers from a lack of clearly definable metrics and increasingly incomprehensible regulations. The latter has served to create an overarching focus on compliance measures, while the proscribed act of money laundering continues almost completely undetected. Now, with the emergence of digital and alternative remittance systems, the AML complex is being confronted with increasing challenges to the detection of illicit proceeds.

Drifting far from its origins as a simple record keeping measure to uncover tax and regulatory evasion schemes, my research shows that the anti-narcotics focus of subsequent legislative efforts brought the AML rationale to the forefront of the so-called ‘War on Drugs’. Buttressed with tenuous inferential evidence, the various AML stakeholders insisted on the need for increased penalties and investigative authority to combat the widespread distribution of illicit narcotics. Not only was this approach ineffective, it gave rise to increasingly creative means by which drug traffickers and criminal organizations are able to circumvent AML regulations. Claiming that the effectiveness of the AML regime would be improved by even further encroachments on financial privacy, law enforcement and legislators sought stricter measures, only to have their efforts thwarted by strong public opposition. With the attacks of September 11, 2001, however, many of the same legislative proposals that had been previously abandoned were adopted in full measure, accounting for nearly a third of the legislation contained in the 2001 USA PATRIOT Act.

Shifting the rhetoric from an anti-narcotics focus, to an anti-terrorism design, the AML complex vastly expanded its reach and virtually deputized the entire financial sector. Creating ever more complex regulations to combat a perceived problem that was proving difficult to even define, an entire industry devoted solely to compliance efforts was created.  Meanwhile the proscribed act of money laundering continues largely unabated, with only the tiniest fraction of money laundering offenses being detected. This frustration of effort has encouraged the proponents of the system to implement even further restrictions on financial privacy, in a quest to realize the quixotic potential envisioned by the AML regime, namely to prevent criminals from profiting from their crimes. The research demonstrates, however, that in many instances, many of these laws have actually served to exacerbate the problems they were intended to prevent.

Rather than curtailing crime, each reactionary legislative step has instead created a scheme that is now so convoluted as to be nearly impossible to implement in any meaningful form. Thus, what started as a simple record keeping measure has slowly morphed into an incomprehensible set of regulations, where the brunt of criminal prosecution is borne by either legitimate financial institutions or the lowliest of street criminals. All the while, the large procurers and users of illicit proceeds are able to circumvent even the hardiest of legislative efforts with ease. This legislation is an anachronism that should be abolished, for it impedes the adoption of useful financial technology, while incentivizing criminal ingenuity. The irony is, if allowed to flourish, much of the legitimate financial technology on the horizon would likely provide exactly what the AML complex has tacitly failed to deliver – a reliable means to trace income and its source.

Linn White is an Adjunct Professor for the graduate program at Thomas Jefferson School of Law in San Diego, CA.