Introduction

The American agency with primary carriage of the U.S. anti-money-laundering effort, the Financial Crimes Enforcement Network (FinCEN) reports that, "One recent estimate puts worldwide money-laundering activity at roughly $1 trillion per year, with $300-500 billion of that representing laundering related to drug trafficking." One trillion dollars would be twelve zeros or between two to five percent of the global economy.Other estimates have put the figure even higher. These trillion dollar figures have been criticized as being gross exaggerations and even outright fabrications for the purpose of attracting media attention. The figures have been used to support widespread invasions of privacy and the expenditure of significant sums to track the flow of money. They have also formed the justification for strong encouragement by the United States to compel other states to establish surveillance measures similar to those put in place by the Americans. Money laundering certainly does occur, and on a significant scale. But is there evidence to support trillion dollar estimates?

The object of money laundering is to remove the taint from any money in the possession of the launderer. For example, if money is stolen, obtained through drug dealing or earned without paying the requisite income tax, it will be tainted. The laundering process typically goes through three stages: first, placement, the depositing of tainted proceeds into a financial institution; second, layering, the separating of proceeds of criminal activity from their tainted origin through a series of complex financial transactions; and third, integration, using apparently legitimate transactions to disguise the illicit proceeds. During these stages, legitimate funds are often mixed in with the tainted proceeds.

Anti-money-laundering operations became popular with law-enforcement agencies when their strategy of targeting the upper echelons of organized criminal groups proved ineffective. If crime-bosses were replaceable, perhaps the best way to cripple the organization was to confiscate its assets. Only the future will tell whether targeting the money will be any more effective than targeting up.

Part I of this paper will examine the evidence, or lack thereof, behind FinCEN's estimates. Where did FinCEN get its figures? How were these figures calculated? How accurate are the figures? Can more realistic figures be suggested? Part II will examine FinCEN's programs and the impact of its policies. It will also examine the basis, or lack thereof, for FinCEN's assertions as to the serious negative effects caused by money laundering. FinCEN's stance towards the hawala informal remittance networks will be used as an illustrative example.

The paper's thesis is that 'money-laundering' is used for ideological reasons above and beyond mundane crime control. Allegations as to the pervasiveness and invasiveness of money laundering lack substantiation. Strident rhetoric, especially surrounding post 9/11 terrorism, is foreclosing debate as to the effectiveness of anti-money-laundering efforts. The end results are sub-optimal allocation of law enforcement resources and unnecessary incursions on privacy and civil rights. Anti-money-laundering programs should therefore be urgently scrutinized with a view to determine their efficacy or lack thereof.

What is the Financial Crimes Enforcement Network ?

FinCEN was established in 1990 and over time became the United States Treasury's primary agency involved in anti-money-laundering operations. It is responsible for establishing, overseeing and implementing policies to prevent and detect money laundering. The Financial Crimes Enforcement Network views money laundering as involving the disguising of financial assets so that criminals can use these funds without detection of the illegal activity that produced them so as to transform these assets into funds with an apparently legal source. FinCEN's mission is to combat money laundering by supporting and strengthening domestic and international anti-money laundering efforts, encouraging interagency and global cooperation through information collection, analyzing and sharing data, providing technological assistance, and implementing Treasury initiatives relating to counter-money laundering programs. Most financial reports, including Suspicious Activity Reports (SARs), are now submitted through FinCEN.

FinCEN accomplishes its mission in two ways. First, it uses counter-money laundering laws - the Banks Secrecy Act (BSA) - to require reporting and record keeping by banks and other financial institutions. This record keeping preserves a financial trail for investigators to follow as they track criminals and their assets. The suspicious transactions, which the BSA requires be reported, might trigger investigations. Second, FinCEN provides intelligence and analytical support to federal, state, local and international law enforcement agencies using state-of-the-art-technology. FinCEN's analysts combine information reported under the BSA with other government and public information; this information is then provided to the law enforcement community in the form of intelligence reports. These reports provide targeted tactical information and strategic analysis designed to assist law enforcement agencies to build investigations and plan new strategies to combat money laundering.

FinCEN has played a significant role in promoting U.S. demands for the creation of a worldwide network of Financial Intelligence Units as part of America's overall strategy of fighting transnational crime. As the United States' Financial Intelligence Unit (FIU), FinCEN plays a lead role within the FIU network known as the Egmont Group.
 
 

FinCEN's Figures

While FinCEN's website uncritically repeats a trillion dollar estimate of global money laundering, a more detailed read shows that the Network recognizes that there is a lack of scientific foundation for such figures.

The August, 1996 FinCEN Advisory exerpted part of the 1996 Financial Action Task Force's Report on Money Laundering Typologies wherein an attempt had been made by the FATF delegates to formulate estimates as to the extent and magnitude of money laundering world-wide. Unfortunately, the vast majority of FATF member countries lacked sufficient data to support credible estimates. Some delegates thought the problem in their countries was decreasing while others felt that more money was being laundered than previously. The assembled FATF delegates favoured pressing ahead with attempts to quantify the global scope of money laundering. The 1997 Typologies report noted continuing efforts towards quantification and the possible usefulness of being able to quantify the extent of money laundering, but failed to provide any significant additional information. There is no mention of any attempt to quantify the amount of money being laundered in FATF's 1998-1999 report and only a passing reference to attempts by member countries. FATF's 2002 report, available through FinCEN's website, does not make mention of any attempt at quantification.

FinCEN's own Strategic Plans acknowledge the need to understand the actual magnitude of the money-laundering problem. In its 1997 plan, it called the estimation of the breadth of the problem "an overriding objective". However, it was not until August of 2000, after the Treasury Department set the granting of a contract to commission the estimate as a goal, that FinCEN took the first step towards realizing this "overriding" objective. The step was a baby one limited to the letting of a contract for the development of a "methodology for estimating the magnitude of money laundering" as opposed to an attempt at the calculation of the actual figure.

I entered into direct correspondence with FinCEN to attempt to discover their view as to the extent of money-laundering. My first query requesting the background information FinCEN uses to quantify the extent of the global money laundering problem was answered by referring me to two websites. The first website was to the Department of Justice. The second was to the OECD's FATF window which had less information than could be obtained from FinCEN's own site. My second query was restricted to the 2000 contract (referred to in the paragraph above) for the developing of "a methodology for estimating the magnitude of money laundering" and asked for any details as to any information which has been learned as a result of the letting of the contract. I received the following reply:

It is worthy of note that FinCEN views its own data sources as clearly inadequate for this task. FinCEN's data sources consist of all the reports that are required to be filed under the BSA, commercially available databases and databases of other law-enforcement organizations. This acknowledged inadequacy clearly calls into question the presumed efficacy of the ever-expanding reporting requirements which are being inflicted on civil society.

Does it matter what the figure is so long as we know that the problem is serious? The answer is yes, it does matter. There are several reasons. The monetary costs of compliance with the stringent and detailed reporting requirements are enormous, in excess of a hundred million dollars annually. There are also impacts on privacy rights and other civil liberties.

This section will attempt to describe the relative seriousness of the money-laundering problem and the relative efficacy of current anti-money-laundering efforts. Could the money spent in the United States, and in other countries be spent in a more constructive fashion?

Claims made by FinCEN as to Impact of Money Laundering

FinCEN paints money-laundering as constituting an enormous multi-faceted danger and claims that the negative effects of money-laundering include the following:

1. It fuels the engine of crime. By this FinCEN means that money-laundering provides the means for criminals (including drug dealers, terrorists, arms dealers) to operate and to expand their operations. It has also been called the "life blood" of profit generating criminal activity.
2. It facilitates corruption.
3. It undermines confidence in the integrity of financial institutions.
4. It corrupts financial institutions.
5. It corrupts economies and currencies.
6. It destabilizes democracy and free markets including their commercial and trade systems.
7. It facilitates trade fraud.
8. It facilitates tax evasion.
9. It is part of the process of many fraudulent activities.
10. It allows unfair competition with legitimate businesses.
11. It is related to the funding of terrorism.

If the evidence in support of FinCEN's quantification of the seriousness of money-laundering was scanty, it offers even less support for its contention as to the impact of money laundering. While it stands to reason that the eleven impacts described in the previous section are real - money laundering is part of organized criminal enterprises - FinCEN provides no indication as to their relative seriousness. A personal query to FinCEN requesting information as to any studies or sources substantiating the eleven alleged impacts described in the above section drew the following response: "Due to limited resources, we are unable to assist you further". Thus there may well be a complete lack of empirical support for the contention that money-laundering, as opposed to the predicate criminal activity, harms society to the extent advocated by the anti-money-laundering establishment.

FinCEN's reticence to substantiate the negative impacts of money-laundering likely arises from the fact, as described below, that there are positive impacts as well. While the criminality connected with money-laundering almost certainly has a significant and negative impact, some of its alleged impacts are minor, open to question or even beneficial. Letting a doctrine 'stand to reason' instead of being tested may leave that doctrine defenceless against countervailing arguments. It must be remembered that, at one time, it stood to reason that the sun orbited the earth while empirical study has established that the contrary is the case.

Proponents of the allocation of substantial resources to combat money-laundering point out that the churning of assets and the criminal activity itself increases difficulty in measuring macro economic performance. Economists are therefore hampered in their efforts to design the most optimal financial policies due to this contamination of their data. Furthermore, illegal money corrupts those in power.

On the other hand, it is law enforcement itself which drives up the price of popular contraband, thus driving up prices (and profits) and thereby increasing the amounts available to fuel crime in general and bribery in particular. This tendency is magnified by the militaristic and moral-crusade-style war on drugs currently being waged. Furthermore, because anti-money-laundering legislation criminalizes what would ordinarily be legal financial transactions, otherwise law-abiding persons are increasingly exposed to temptation.

Money laundering is presumed to have significant negative impacts on legitimate businesses. However, there is evidence to the contrary. Money-laundering provides significant fees for the banking industry. It has helped fuel the growth of the offshore banking industry.

It is often said that banks need to avoid having their reputations tainted by money-laundering allegations. However, the argument is tautological. The risk to reputation arises only when it can be said that the bank's conduct is criminal: if money-laundering was decriminalized, the risk to the bank's reputation would essentially vanish. The Bank of New York, which was used for a significant laundering operation, suffered little more than momentary embarrassment and likely ended up adding to its bottom line.

Injecting money into the legitimate economy, particularly through the purchase of luxury items, has a beneficial effect. Enhanced consumer buying behaviour has never been a threat to an economy. On the other hand, well-off pimps and drug pushers may constitute negative role-models for our youth.

Criminalizing money-laundering may lead to a leveling of the playing field and the recognition that the damage done to society by white collar criminals equals or exceeds the damage done by their blue-collar brethren.

Tracking money may help police catch dangerous criminals. And organized crime is a legitimate threat: organized crime related homicides have more than doubled over the past five years.

On the other hand, the inflated statistics used to promote anti-money-laundering have led to unnecessary empire building by law enforcement agencies. These agencies are often more intent on gaining media attention and on expanding their powers than they are on deploying their resources to properly analyze the information already gathered for them at enormous cost.

In short, 'it stands to reason' is not an acceptable substitute for scientific study. At one time it stood to reason that the function of lungs was to cool the heart. Before we continue, let alone expand, the massive incursion into our privacy and the allocation of substantial resources to the collection and analysis of data, both the degree of the problem posed by money-laundering and the efficacy of the means proposed to combat it should be subjected to empirical testing. In times of fiscal restraint, it must be remembered that pursuing organized criminals, such as the Hells Angels, continues to be expensive. Resources must be allocated in an efficacious manner.

The Impact of FinCEN's Practices and Policies

The cost to the financial services industry of complying with the regulations administered by FinCEN has been reliably estimated to exceed one hundred million dollars annually. In addition to these direct costs, financial institutions must initiate detailed training programs and have rigorous procedures for identifying their customers, for monitoring their accounts, transactions and procedures. They must also establish and maintain internal auditing of their own departments and personnel. Financial institutions are encouraged to have free-standing anti-money-laundering units. This careful scrutiny requires the attention of all staff members, including senior management.

Estimates as to the cost of compliance parallel to the inflated trillion dollar estimates of money-laundering itself. The most widely circulated estimate of the cost of compliance is ten billion dollars. When cited, this billion-dollar figure is always attributed to the American Bankers Association (ABA). However, the ABA denies ever publishing any such statistic. In direct correspondence with John J. Byrne, Senior Counsel and Compliance Manager of the ABA, I was advised that,

FinCEN's own annual budget exceeds thirty million dollars. FinCEN Director, James F. Sloan, has requested more than fifty-two million dollars for the 2003 fiscal year.

FinCEN is part of the Americanization of international justice and the drive to compel other nations to adopt U.S. practices. This trend continues despite a lack of evidence for the efficacy of these practices. The money spent on compliance, especially in poor countries which can ill afford to squander their resources, may be wasted. One key American demand is that each country assemble its own FIU, preferably affiliated through the Egmont Group. Those who resist complying face international blacklisting. Essentially the Americans are forcing others to spend money to track financial transactions to provide the U.S. with an excuse for not dealing with its own problems in a more constructive way. The negative international effects go beyond the merely financial: armed rebellion and other violence in Columbia have been exacerbated by American policy. While American policy is cloaked in the rhetoric of the war on drugs, its real target may be substantially less noble.

Anti-money-laundering efforts have a taxation component. Even FinCEN is starting to concede that one of the reasons for its intrusive data gathering is to combat tax evasion. This is a welcome concession and a move towards the transparent rule of law advocated by the UN. However, economic sanctions have been threatened and in some cases have already been imposed. These sanctions are likely contrary to international law and should therefore be urgently re-examined.

Anti-money-laundering efforts focus police attention on assets instead of on real criminals. Chasing money has resulted in widespread compromises of the liberty of the subject and of civil rights. Citizens have been placed in jeopardy of losing their homes for growing marijuana. As Professors Blumenson and Nilsen have noted:

There is a dearth of direct evidence to show that FinCEN's strategy and tactics are cost effective.

Given FinCEN's inability to accurately quantify money-laundering, the network has had to use secondary measurements to gauge its effectiveness. Its Strategic Plans include bureaucratic measurements focussing on internal operational abilities. Claims of success tend to be based on industry compliance with regulations as opposed to any reduction in money laundering. Director Sloan's recent testimony before the U.S. Senate measured the success of his agency in terms of its performance in moving information. Certainly there is room for improvement: It takes 48 days from the time of the filing of a BSA form for the information to reach FinCEN's databases. This gives any money-launderer plenty of time to move on.

The Treasury Department has recently proposed measuring success by the cost of laundering money. The presumption is that if anti-money-laundering efforts are starting to be successful, criminals will have to pay a larger percentage of their proceeds to have those proceeds laundered.

At present, FinCEN's data collection strategy is certainly far from being a model of efficiency:

FinCEN's programs have assisted in the pursuit of perpetrators of the crimes which produced the proceeds in the first place. However, this has usually taken the form of providing evidence against already apprehended criminals as opposed to the discovery of previously undetected crime. If anti-money-laundering record-keeping was effective, an analysis of those records would be the starting point for investigations. If reports are being used merely to facilitate proof in investigations which have already been commenced, search warrant seizures would likely be more efficacious.

Hawala Banking: A Case in Point

Hawala banking is one of many informal value transfer systems. Hawalas are traditional networks of money brokers who transact their business based on trust. A simple hawala transaction might consist of me paying the sum to be transferred, plus a commission, to a hawaladar in Toronto followed by his associate in Pakistan paying the sum to my relative in Karachi. More complicated transactions occur, for example, where:

None of FinCEN's own publications discuss hawala banking. Hawalas were not discussed in the Treasury documents referred to above either. However, even before September 11, the State Departmentís International Narcotics Control Strategy Report, which is linked to FinCEN's website, did describe hawalas as possible conduits for money-laundering. The Financial Action Task Force, in several reports linked to FinCEN's website, had recognized that hawalas were used in money-laundering. However FinCEN, prior to September 11, 2001, declined requests to investigate hawalas. This despite the fact that it then had one of the foremost hawala experts in its employ. FinCEN has recently hosted a seminar attended by fifty law enforcement representatives as part of its process of compiling a report on informal value transfer systems for the U.S. Congress. Further information is not publicly available.

After September 11, investigations were ramped up resulting in the successful prosecution of Mohamed Hussein for failing to obtain a licence for his money-wiring office. Hussein's business, Al-Barakaat, was primarily engaged in assisting Somalia immigrants to send money back home to their poorer relatives. Al-Barakaat was shut down, both in the United States and in Canada. No link to terrorism was proven. Hussein has been criminalized for a minor infraction. In the absence of the anti-money-laundering legislation which was meant to frustrate criminals, Hussein would not even have been prosecuted.

The expansion of the entities which must file Suspicious Activity Reports and other documentation exacerbates FinCEN's inability to properly synthesize all the information in its databases. A larger haystack makes it harder for FinCEN to find the needles. Professor Hughes notes that "U.S. officials believe that it cost terrorists a mere $500,000 or so to create the horrors of September 11. Consider that some $1.2 trillion passes through foreign exchange markets every day, then imagine hunting for that $500,000. It's a needle-in-a-haystack story - except this needle is trying to evade the hunter." She concludes:

The lack of any reliable quantification of the extent of money-laundering renders it impossible to properly evaluate the efficacy of any anti-money-laundering program.

The inability of the proponents of large-scale anti-money-laundering programs to empirically substantiate the negative effects of money-laundering and the stridency of their rhetoric casts doubt on their assertions. Before any program is initiated, there should be a clear understanding of the negative and positive effects of the targeted behaviour. A lack of any study which reliably quantifies the scope of the perceived problem further calls the wisdom of the programs into question.

The effectiveness of targeting money instead of targeting criminals as well as the effectiveness of the current reporting regime has not been established. Early reports certainly disclose problems. Anti-money-laundering programs often serve agendas other than the purported crime control. As the recent hawala cases show, bazookas are being used where fly swatters might be more appropriate.