The global fight against illicit finance is wavering because nations to date have failed to align their varying legal definitions of money laundering and are overly focused on preventing illegal wealth from entering their financial systems.
So argue Tristram Hicks and Nicholas Gilmour, co-authors of “The War on Dirty Money.”
Hicks, a former detective superintendent with London’s Metropolitan Police, and Gilmour, a former financial intelligence unit official-turned-anti-money laundering consultant in New Zealand, envision a new approach against financial crime, one in which governments invest heavily in asset recovery and law enforcement prioritizes financial investigations at all times.
Hicks, who now advises governments and private companies on the efficacy of their AML frameworks, spoke to ACAMS moneylaundering.com London bureau chief Koos Couvée about why he and Gilmour believe global standards for tackling illicit finance developed the way they did, and what can be done to optimize them.
What follows is an edited transcript of their conversation.
Why did you and Nicholas decide to write this book?
Well, three statistics on the AML regime leapt out at us: research that has found that only 1 percent of criminal assets are recovered, that in 80 percent of countries convicted criminals keep all the money from crimes for which they were convicted, while according to LexisNexis, the whole compliance industry is worth about $210 billion a year and rising. And while we should caveat that by saying that each of those statistics have their own issues, they’re quite a useful benchmark for illustrating that things aren’t going very well.
So the question is: Why? We say it’s a series of misunderstandings about fundamental concepts, coupled with the fact that we’ve placed a huge emphasis on preventing dirty money from getting into the system while investing almost nothing in enforcement. The whole system is based on this assumption that compliance works. But is there research that supports the logic? And if the dirty money’s already in the system, what are we doing about that?
After 30 years—the length of my career in the fight against financial crime—I felt I had something to say, and Nick and I felt that our expertise would fit together quite well.
In the book you talk about various “misunderstandings” and “absurdities” that are central to the global AML regime as we know it. Where did it all go wrong, in your view?
The point we make in the book is that money laundering is really basic, and the reason that this is the case is because it’s integral to the predicate crime. If you’re a drug dealer, your primary goal is making money, not dealing. Dealers spend their money directly and after meeting their immediate needs, invest the excess funds or find someone to invest it for them. Criminals are all money-driven individuals and money laundering is integral to their activity.
What went wrong right at the beginning of the war on dirty money is that the United Nations recognized that money laundering was an issue—they’ve got three main conventions, against narcotics, corruption and transnational organized crime, all being put together in the late 1980s—but when they were transposed into national law by the signatories to those conventions, the U.N. didn’t say that money laundering is integral to these crimes.
So individual countries created an additional offense and kind of bolted it on to the system, and, because it’s bolted on, it doesn’t work. We’ve ended up in a situation where individual countries then wrote their own criminal codes, and they approached it, for example, with the view that money laundering only matters in the context of serious crime, or only matters when it relates to offenses punishable by more than two years in prison, or it only matters when it relates to organized crime—meaning that at least two or three people must be engaged in the activity.
In other words, they put caveats on money laundering, which constrains its utility as a concept and makes it more difficult to investigate and prosecute. So, in a nutshell, we almost went wrong straightaway, because the U.N. didn’t integrate the offense of money laundering into criminal codes across the world, which means that we’ve got 200 different criminal definitions of money laundering.
And that really gets in the way of international cooperation.
You write in the book that there are fundamental problems with other definitions as well.
Yes, we have a separate definition of money laundering—placement, layering and integration—that is commonly used by the prevention side of AML. But it doesn’t really translate well into the law enforcement side.
If you go to a law enforcement officer and say, “I’ve got some integration here,” that just doesn’t make any sense. This means that we’ve got two halves of a regime using two totally different definitions, which don’t really work well together.
Secondly, there’s a human tendency to make simple things quite complicated, and that goes for the way we think about money laundering as well. It all comes back to the simple transfer of property: it’s the handling or transfers of, or purchases with, dirty money.
But we spend far too much time generating generic red flags we think might be relevant, and not enough time asking: “Do I really know my customer? Do I really know their business? Do I look at these transfers that are taking place as transfers? The answer is: No, we really don’t. I believe that if we ask ourselves those questions—as opposed to referring to a generic set of red flags—we’d get a lot further.
There’s a tendency within financial institutions to find a quick route to training staff in how to identify something suspicious, and then we end up with a box-ticking system when we would probably get better results by understanding that suspicion is something that doesn’t look right, and then trusting our instincts to find those things.
The difficulty is that regulators encourage it because they like to have tick boxes as well. With a lot of AML compliance, we’re not really finding suspicious transfers, because we’re distracted by all these processes.
So your conclusion is that the compliance industry—with its know-your-customer software, transaction-monitoring tools and corporate databases—doesn’t achieve much by way of tackling financial crime at all?
My argument is that there isn’t enough evidence to show that it does, which is a slightly different thing. I’m not against technology at all, but we could do with a lot more technology on the enforcement side, and make sure that SARs get to law enforcement automatically and electronically.
But getting better at throwing up examples that might be suspicious doesn’t seem to be working. There’s this idea of the needle in the haystack: that the financial sector can produce, from its massive trove of transactional data, something that is really useful for law enforcement.
But the reality is they produce half a needle: the financial side of a predicate crime. They cannot produce the crime and the criminal because that data is all on the law enforcement side. The analysis and disseminating model of financial intelligence units is fundamentally wrong; what we should do instead is merge SARs database held by FIUs with the criminal intelligence databases held by law enforcement agencies.
We need automated dissemination of SARs—unless there’s a compelling reason not to.
It’s important to recognize that when people ask whether the compliance industry is effective, they often refer to the total amount of assets being recovered as a result of this compliance work. In other words, the compliance industry is constantly being misjudged because the main weapon against crime—asset recovery—isn’t being resourced properly.
It’s very unfair.
In the book, you also address the lack of prominence financial investigations tend to have within law enforcement agencies. Why is that?
We argue in the book, based on academic research, that financial investigation is better, quicker and cheaper than other, more traditional forms of investigation. In my own experience in policing, financial investigation has been used to solve football hooliganism, domestic violence, murder, public disorder and other crimes, because it’s an incredibly versatile technique that allows you to connect people to other people, to places, to events, and to specific times.
We’d be in a much better place if law enforcement changed its position and said: ‘Let’s start with financial investigation, start with the dodgy money, and then see where that leads us.’ And if that leads us to environmental crime, then we’ll bring in some specialists who know about environmental crime, and if it leads to theft or drug dealing, then we’ll bring in subject matter experts to provide us with evidence that helps us prove that—but let’s start with financial investigation, because it is so, so useful.
You also dedicate a chapter to the Financial Action Task Force’s use of watchlists of countries with weak AML regimes. What do you see as the main weakness of FATF’s listing process?
Our main point is that the core mutual evaluation report methodology looks at what an individual country does, but it doesn’t look at the context of that individual country: the illicit financial flows in between that country and other countries. And that’s important, because very often the issues aren’t the individual jurisdiction, it’s how it relates to other jurisdictions.
But with these global evaluation processes and watchlists, we don’t look at the financial flows between individual countries. So there’s a big gap in the whole process, which isn’t being recognized by FATF. Perhaps we should have an evaluation process that looks at one jurisdiction but also at illicit financial flows internationally, and then simultaneously evaluates the system at both ends.
Finally, are you optimistic that countries will make steps to begin winning back some territory in this war against dirty money?
The book is intended to flag up some successes and highlight some ridiculous things that could be quite easily fixed. We’ve built the infrastructure, we understand money laundering is a real issue, but, we argue in the book, the war against dirty money hasn’t really begun.
That said, I’m encouraged by individual stories of success, such as Kenya’s efforts to convict corrupt people and confiscate their assets, and the U.K. Proceeds of Crime Act, which was an outstanding success just in simple terms of the thousands of criminals who lost hundreds of millions of pounds.
These successes do exist in the world, we’re just not very good at recognizing them, and we are often tinkering with system which really needs some fundamental rethinking. But as we’ve seen in the past, terrible events such as the war in Ukraine now have often driven things forward.
So yes, I am optimistic.
Contact Koos Couvée at firstname.lastname@example.org
|Anti-money laundering , Counterterrorist Financing
|FATF , United Nations
|June 5, 2023