Anti-anti money laundering

[Dave Birch] I was involved in a discussion about the relationship between the cost of customer acquisition for simple payment services and KYC/AML/terrorist finance legislation and, once again, I said that I was not sure that keeping people out of the “system” was the best strategy (because if the terrorists, drug dealers and bank robbers on the run stay in the cash economy, then they can’t be tracked, traced or monitored in any way). I made a similar point when I was in the City at a round table on financial regulation. I really didn’t expect my views to be particularly controversial, but they were. What I was arguing for was a relaxation in the controls around small payments — and in particular, getting away from quite strict identity checks, which I think hold back the development of low cost, competitive mobile and Internet payment systems — in order to shift the inclusion vs. exclusion balance that we’ve spoked about before.

I’ll play by Chatham House rules and not attribute what was said by anyone (except me, of course) about money laundering. I said — with poetic exaggeration — that the huge amount of time, money and effort that goes into the AML industry never catches any criminals, and I was given a suitablly hard time by someone from part of Her Majesty’s Revenue and Customs (HMRC) who said that they did indeed use Suspicious Activity Reports (SARs) to detect crime and used the example of last year’s major prosecution of criminals who had been using bureau de change as a front for money laundering. OK, I shouldn’t have said “any” criminals. What I should have said was “almost no” criminals.

To what extent should payment systems be co-opted for the purpose of law enforcement? Surely it would be better to separate the identification/authentication and payment transmission elements and optimise each of them. So, it seems reasonable to me, it ought to be simple to remove any restriction on low-value payments (say below $100 or something) thus greatly benefiting the poorest people while simultaneously developing a proper identity infrastructure. But would any identity infrastructure make a dent in money laundering? It seems unlikely to me, for the simple reason that cash still exists. As the noted economist Willem Buiter noted in a recent Financial Times “Maverecon” piece

The only domestic beneficiaries from the existence of anonymity-providing currency are the criminal fraternity: those engaged in tax evasion and money laundering, and those wishing to store the proceeds from crime and the means to commit further crimes. Large denomination bank notes are an especially scandalous subsidy to criminal activity and to the grey and black economies. There is no economic justification for $50 and $100 bank notes, let alone for the €200 and €500 bank notes issued by the ECB. When asked why the ECB subsidises and encourages crime by issuing these large-denomination notes, the answer comes back that Spaniards like to make large transactions in cash

[From FT.com | Willem Buiter’s Maverecon | Negative interest rates: when are they coming to a central bank near you?]

Indeed. And the police are well aware of this.

Detective Inspector Martin Ford said the gang used a small number of bureaux de change to launder their “dirty money”… He said: “They have been laundering between £3m and £4m a week. They will take a suitcase full of £10 and £20 notes and exchange it for 500 euro notes. The beauty of the 500 euro note is that it’s the highest denomination that is universally accepted. So they can convert a suitcase-worth of sterling into a quantity of euros which will fit in a small box.

[From BBC NEWS | UK | Raids target £100m drugs network]

Doesn’t anyone else find this at all odd? No-one uses 500 euro notes for day-to-day transactions and if they were withdrawn from circulation it wouldn’t make the slightest difference to the 99.97% of the European population who aren’t trying to avoid Spanish property taxes. It’s wrong. And as long as central banks continue to issue these notes it also seems wrong to load costs on more efficient electronic alternatives while facilitating crime with currency. Ah, you might argue, but without these strict (and costly) controls on payments, money laundering might be far worse. Really? The UK’s controls don’t seem to be doing much good.

The US government has placed the UK alongside Afghanistan, Colombia and Russia on a list of countries that need to do more to crack down on money laundering, it emerged yesterday.

[From Britain among the world’s 50 main money laundering countries, says US | UK news | The Guardian]

So what do we need to do? Well, it sounds trite to say it, but we need innovation. We need genuine new thinking and we need to share that thinking with stakeholders who may take some persuading to move away from the (comfortable) assumptions about the relationship between payments, law enforcement and society. As Sanjay Bhargava (formerly of Citibank and PayPal) puts it,

Encourage disruptive innovation and do not allow vested interests to preserve the status quo. KYC is a good example where disruptive thinking is required. Document based KYC makes it difficult for the honest and excluded person while criminals and terrorists bypass the controls easy. There are much better ways which include everyone and are better at AML and CFT.

[From LinkedIn: Discussion: CGAP’s Mobile Banking and Microfinance Group]

I couldn’t agree more. Meanwhile, what is the point of all of the controls, regulation and, frankly, costs? We’re spending a fortune on this stuff, driving up the costs of payment system for all users (not just prostitutes and corrupt politicians) and it’s not working. Isn’t it time for some different thinking, perhaps requiring the industry to be a little more robust in the face of Financial Action Task Force (FATF) strictures? We have to have a more informed debate and a more open settlement.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]