1. RAND1 Assessing the AML system Peter Reuter University of Maryland

2. RAND2 Many activities subject to anti- money laundering (AML) controls U.S. Banks required to conduct prevention activities since 1986 –Know your customer Also aid investigations –File Suspicious Activity Reports (SARs) –Check account names against target list More recently financial services firms, casinos also regulated –Financial Action Task Force has created global regime

3. RAND3 Money laundering control regime still expanding Initially generated by drug trafficking concerns –Vienna conventions Broadened in the 1990s –Capital flight, kleptocracts Focus on terrorism post 9/11 FATF 2004 recommends covering lawyers, accountants, other gatekeeper professions –US Treasury considering insurance regulations Growing private sector pressure for accountability

4. RAND4 Laundered Money May Be a Point of Vulnerability for Both Crime and Terrorism from crime $ …for use in legitimate activities $ $ $ …laundered in the legitimate financial system… from legal sources $ …for use in terrorist activity $ $ $ …laundered in the legitimate financial system…

5. RAND5 Anti-Money Laundering Controls Are a Means to Diverse Ends Primary Goals –Reduce predicate crimes –Protect the integrity of the core financial system –Combat global public bads Terrorism Kleptocracy/corruption Secondary Goals –Sanction major felons –Administer just desserts –Inconvenience felons

6. RAND6 But AML Controls Also Impose a Substantial Burden AML controls affect business, the public, and government A rough estimate places the costs of AML controls in the United States in 2003 at $7 billion AML controls are also onerous and intrusive

7. RAND7 Summary Conclusions Some progress in the area of prevention Little impact on the activity or incidence or underlying crimes Regime must strengthen intellectual underpinnings before any further expansion

8. RAND8 Outline Overview Assessment Conclusions and Recommendations

9. RAND9 Current Estimates of Money Laundering Are Not Credible Current estimates range from $100 billion to $1 trillion Both traditional approaches are problematic There is little prospect for strengthening these estimates Builds on estimates of the underground economy Produces implausibly high estimates Micro approach Builds on estimates of income from criminal activity Produces estimates that lack a systematic empirical base Macro approach

10. RAND10 Money Laundering is a highly differentiated activity CrimeCash Scale of Operations Severity of harm Most affected population Drug dealingExclusivelyVery largeSevere Urban minority groups Other blue- collar Mostly Small to medium Low to modest ? White collarMix Low to modest Broad Bribery and corruption SometimesLargeSevere Developing countries TerrorismMixSmallMost SevereBroad

11. FATF Typologies Reports indicate many methods used by all offender groups

12. Two Pillars of the Anti-money Laundering Regime

13. RAND13 Prevention Pillar of the U.S. regime differentiates among regulated entities Customer due diligence Reporting requirementsSupervisionSanction Financial Institutions Core Financial Institutions a Yes Other Types of Financial Institutions b Yes SomeLimited Non Financial Businesses Casinos Yes SomeYes Dealers in Precious Metals and Stones PendingYesNo Real Estate Agents No Other c NoSomeNo Professions Lawyers and Accountants Limited Very limited Trust and Company Services Providers Limited Very limited 1. Depository institutions, securities firms, insurance companies and combinations. 2. For example, mutual funds and investment advisors. 3. For example, travel agencies, commodity trading advisors and vehicle sellers.

14. RAND14 Outline Overview Assessment Conclusions and Recommendations

15. RAND15 Costs of U.S. 2003 AML Regime Government: $3 billion Private institutions: $3 billion General public: $1 billion Total: $ 7 billion or $25 per capita

16. RAND16 Predicate Crime Reductions Indeterminate Volume estimates very rough Price measures largely absent Stand alone professional launderers are scarce –Simple market model is an inapplicable premise

17. RAND17 Defendants Charged with Money Laundering, 1994-2001

18. RAND18 U.S. Risk of Conviction Half of 2,000 annual convictions = 1,000 launderers $200 billion laundered at $10 million per launderer –20,000 launderers –5% annual conviction risk Compare 20% for cocaine dealers

19. RAND19 U.S. much more aggressive than other nations Regimes differ across countries –Reflect differences in legal culture British cast very broad net –high value goods reporting requirements Swiss highly discretionary Germany minimal number of criminal cases

20. RAND20 Cocaine Price Structure Suggests that AML Controls Have Limited Potential Leaf (Bolivia) $300 Export (Colombia) 1,000 Import (Miami) 15,000 Wholesale-Kilo (Chicago) 20,000 Wholesale-Ounce (Chicago) 25,000 Retail (Chicago) 110,000 ML controls target import, wholesale

21. RAND21 Cocaine Price Structure Suggests Limited Potential of U.S. AML Only high level dealers and smugglers earn enough to require laundering services –Retailers earn less than $25,000 per annum Smugglers and high level dealers account for 20% of value added Raising money laundering costs for them by 50 percent, from 10% to 15% would add only 1% to the retail price of cocaine

22. RAND22 Protecting Integrity of Core Financial System Social goal – principally major banks Low prevention hurdle –No active solicitation –Few rogue employees –Unwitting accomplices – another matter Negligence = deficient controls Other

23. RAND23 Evidence from Limited Databases FATF / Egmont –3% active solicitation –3% rogue employees –94% other Press Reports –11% active solicitation –7% rogue employees –11% negligence –71% other

24. RAND24 Qualified Success Core financial institutions only in major financial centers Occasional block-buster scandal –E.g. ABN-AMBRO admitted in 2005 laundering $1.2 billion –Riggs, JP Morgan (Beacon Hill) Private banking – jury still out Layering more complex Unexploited potential of two-way street

25. RAND25 Combating Global Public Bads Three types –Terrorism –Corruption / Kleptocracy –Failed and failing states Conclusion: AML regime constructive, but just one tool

26. RAND26 Terrorism Not new with September 11, 2001 Unique difficulties: size and direction of flows –Minimal funding needed for most incidents (e.g. $10,000 for East African embassy bombings) Success measures imprecise and indirect –$200-plus million frozen and seized –Object: disruption Challenge of differing priorities and legal & institutional cultures Example: New cash courier Special Recommendation (IX)

27. RAND27 Outline Overview Assessment Conclusions and Recommendations

28. RAND28 Conclusions #1 AML Regime = Tool to achieve diverse ends #2 Law enforcement pillar underdeveloped #3 System needs careful examination before expanded further #4 Constraints on coverage and leverage in monitoring international compliance

29. RAND29 Recommendations #1 Global Report on Money Laundering Exercise in global governance & accountability Build on INCSR Assign to U.N. Office on Drugs and Crime with FATF, World Bank, IMF inputs

30. RAND30 Recommendations #2 Financial as well as Technical Assistance AML is luxury public good Rich should pay Crude estimate: $315 million per year to cover 90% of expenses of IDA governments See also U.N. High-Level Panel on Threats, Challenges & Change

31. RAND31 Recommendations #3 Corruption Weak record on ratification of U.N. Convention (14 of 112) Ratification only second step Develop public database on kleptocrats –Cases –Results

32. RAND32 Recommendations #4 Reciprocity on Major Predicate Crimes FATFs 20 principal categories of offenses Make ML a crime when linked to any of them anywhere U.S. covers only 13 –Foreign corruption added in USA Patriot Act –Excluded: Trafficking in human beings, counterfeiting, forgery, etc.

33. RAND33 Recommendations #5 Add Tax Evasion to List Controversial Important to other countries Quid pro quo

34. RAND34 Research Agenda Describe implementation of controls and enforcement Improve understanding of the ML market Develop evaluation framework –How does AML reduce crime etc.? –Who bears financial burden? –Other intangible costs

35. RAND35 Create Data Base Early terrorism research effort provides model Prosecuted cases (public source) and investigative files (agency cooperation required) Potential data elements: –Criminal activity –Mechanism for laundering –Participants Financial institutions Employment of money launderer –Price of services

36. RAND36 Other Data Collection Activities Utilization of SARs for case making and intelligence –How many convictions depended on ML statutes and/or mandated reports? Interview convicted launderers & customers –How do customers and sellers connect? –Knowledge of prices –Response to regulations

37. RAND37 Analytic Agenda Estimating costs –Needs new data Modeling effects of ML costs on crime Interpreting quality in the ML market –What are limits of hawalahs and other Informal Value Transfer systems (IVTS) Creating performance measures for regulatory and investigative agencies