staci warden is the executive director of the Milken Institute’s Center for Financial Markets and chair of the Rwandan Capital Market Authority. This is a follow-up to her article in the Second Quarter 2015 issue of the Milken Institute Review.
Published December 2, 2016.
Despite never having come close to winning a men’s World Cup, the United States now finds itself the most popular country in global soccer. Why? It had the audacity to take down top officials from FIFA, an organization widely loathed for its deep and insidious corruption. More important, it had the wherewithal: the Department of Justice was able to go after this wholly foreign entity because FIFA insiders had used the U.S. banking system to take bribes and keep safe their ill-gotten gains. Chalk up another victory for the United States in its global fight against money laundering and terrorist finance (in the lingo, anti-money laundering/countering the financing of terrorism — or just plain AML/CFT).
Since its inception, arguably the most effective tactic in the U.S. "war on terror” has been to focus on how the bad guys get paid and how they move money. For the vital role that banks operating under U.S. regulation play in the global financial system gives the United States remarkable leverage to bend anybody with an active bank account to its will.
Some, in fact, would say too much leverage: Donald Trump has already threatened to withhold correspondent banking relationships from Mexican entities if they don't “help pay for the wall.” But never mind about the wall — at least for now. AML/CFT policy has never been meant to be used as a blunt instrument of foreign policy. It has been geared to furthering the broader public good of protecting the international financial system from the illicit flows that undermine its function.
Beyond high-profile victories like that against FIFA, AML/CFT policy’s greatest success has perhaps been the extent to which it has forced improvements in bank-compliance systems designed to deter illicit use. But, unfortunately, it’s also clear that the policy is not fully meeting expectations.
On the one hand, banks don’t even identify 1 percent of the $2-6 trillion in money that is laundered through the U.S. banking system every year. On the other, AML/CFT can be a blunt weapon, generating serious collateral damage to innocent parties. Because the Justice Department has levied fines in the billions of dollars, global correspondent banks are in many cases foregoing risk assessment of individual customers wishing to move money through the network. Instead, it is “de-risking” entire categories of business (e.g., money-transfer services), sectors (e.g., defense contractors), types of flows (e.g., emigrants’ remittances) and regions (e.g., the Middle East), refusing to serve as financial intermediaries for all who fit.
In part, banks fear the remarkably stiff punishment that can come with errors. But they are also making bottom-line decisions about the magnitude of compliance costs they are willing to bear on business that is not particularly remunerative.
By inhibiting foreign investment and remittances from expatriates, de-risking can undermine broader U.S. objectives in furthering economic development in low-income countries.
The United States has both a realpolitik and a humanitarian stake in minimizing such wholesale de-risking. By inhibiting foreign investment and remittances from expatriates, de-risking can undermine broader U.S. objectives in furthering economic development in low-income countries. By the same token, de-risking is making it almost impossible for charities to operate in war-torn or weak-state jurisdictions. Indeed, it took an executive order from the White House to enable a large international bank to transfer funds to pay Cuban doctors working in Ebola-stricken Liberia.
Wholesale bank de-risking, it's also worth noting, can also exact a political price here at home. Large immigrant communities, among them Mexicans and Somalis, now find it significantly more difficult to send remittance payments back home — and they are not keeping their displeasure a secret.
Given the stakes, the challenge for U.S. policy is to improve the efficacy of AML/CFT efforts while at the same time lowering the cost (and risk) of compliance for banks. Fortunately, new thinking on how to get from here to there is beginning to emerge. At the heart of a new approach is an explicit recognition that, in light of the fact that the Patriot Act effectively deputized the banking sector to fight terrorism, law enforcement would be better served by treating the banking sector as an ally rather than an adversary.
The insight fundamental to this more nuanced approach is that no one bank alone could possibly discover what a bad actor is up to. They change banks, create shell companies and use proxies. To get the full picture, information about the entity (and the way it morphs into other entities) must be gathered from a wide range of sources. As a practical matter, that means sharing intelligence both among banks and between government regulators and the banking industry.
From the banking perspective, an ideal world would be one in which policymakers share more information about their priority AML/CFT targets, and then, as an extension of the same logic, officially deem other entities as safe for doing business. No such luck on the latter, say authorities. But while regulators won’t give the Good Housekeeping seal of approval that banks crave, they are beginning to recognize that they might do well to share a bit more information about their priorities as well as the fruits of their own intelligence gathering.
Here, the UK is leading the way. Last year the UK’s National Crime Agency set up a Joint Money Laundering Intelligence Taskforce (JMLIT), whose goal is to “provide an environment for the financial sector and government to exchange and analyze intelligence to detect, prevent and disrupt money laundering and wider economic crime threats.” As such, JMLIT is making a serious effort to move away from “gotcha” regulation to an environment in which government agencies and the banks work together and, equally important, share the risk of being wrong.
A bank, for example, might uncover an internal compliance oversight that has been unattended for some time. Once informed, regulators would offer the benefit of the doubt, welcoming the disclosure rather than automatically exacting punishment for the compliance failure. That is, all parties would bring judgment to bear in a setting in which the initial assumption was that banks are trying to do the right thing.
The JMLIT process started as a one-year pilot but has been extended because it is plainly succeeding in building trust at the highest levels of the UK financial sector — and, more importantly, it is improving the efficiency of Britain’s AML/CFT efforts. Making a similar program work for U.S. banks would be more difficult because the United States has so many more institutions involved in global banking and lacks the we-all-belong-to-the-same-club chumminess of the UK financial elite. But it would be worth a try. If the fundamental goal of AML/CFT policy is to protect the integrity of the banking system as a whole, the right approach must surely lie in greater cooperation among the good guys.