The money laundering challenge

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No reasonable bank manager really wants to see money funnelled to terrorists, padding the huge wealth of drug dealers or preventing economic sanctions from inhibiting governments from unreasonable actions/sanctions. However, ever since the United States enacted sanctions against Castro’s Cuba in the early 1950s the effectiveness of such actions has been challenged by a multi-trillion dollar flow of funds around the globe on a 24/7 basis with no efficient system of knowing who the funds belonged to at any specific time, or where they came from.

In fact, the dangers of this unruly global money flow represent a potential economic tsunami that rarely gets adequate attention at national, G-20, World Bank or IMF levels. Making the many existing laws and regulations totally effective on a global basis may be impossible.

For example, a bank in one country may issue a letter of credit to a verified well-known customer. The customer uses the available line of credit to make a business transaction in a second country with a verified client. What that client may do with his share of the money may or may not be as verifiable, especially if used for legal transactions in one of the several zones in Sudan. Some of the original funds may indeed end up enabling undesirables to purchase arms or otherwise fomenting terrorism.

Today, banks in the United States, Europe, Japan and around the world spend millions of dollars on training programs on Anti-Money Laundering (AML) and buy from a growing list of software programs on both AML and KYC (Know Your Customer).

Is the intent honorable? In the vast majority of cases, the answer is a definite yes. Are there scoundrels who cannot resist the temptations of the many loop holes in the controls of the flow of billions of dollars, sometimes across two, three, even four borders, and dip in for a small piece? Unfortunately, yes. Are these tips of the massive iceberg of global flow of funds worthy of a public condemnation of both the United States and global banking system? Absolutely not.

The stampede to get all the mandates enacted by Dodd/Frank finished before the 2012 election has created a rush by each of the several regulatory agencies to be first in getting their part done—even if working on similar challenges with other agencies. These demands can be a distraction from the needed time on money laundering.

The Financial Stability Oversight Council has met twice in two years. Its original charter was to oversee the activities of the several regulatory agencies to insure comparability and, most importantly, a sound methodology or cost benefit analyses to insure that the regulations fostered an efficient and transparent system. This has not occurred.

Both financial institutions and the staffs of the regulatory agencies are overloaded with reviewing new rules for comment, analyzing and evaluating those made law in the Federal Register and training their personnel to effectively manage the new regulations.

The result is massive uncertainty at every level, huge increases in costs of doing business, lower earnings within the financial institutions, morale problems at some regulatory agencies, and an increasingly difficult and complex examination process.
It is time for a pause. 

James is executive director of the Center for Global Governance, Reporting and Regulation at Pace University’s Lubin School of Business in New York City. James is also program director of Pace University’s new Certified Compliance and Regulatory Professional certificate program. He began his management consulting career with Hewitt Associates in Chicago and McKinsey & Co. in New York City.

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