Speaker: As Anti-Money Laundering, Counter-Terrorist Financing Efforts Mature, New Complexities Emerge

Chris Gaetano
Published Date:
Oct 25, 2017
Money Laundering

In the grand scheme of things, anti-money laundering and counter-terrorist financing regulations are relatively recent phenomena, and though they have evolved quickly, they will be tested by the complexities and challenges of a global economy under rapid change, according to Daniel L. Glaser, former Assistant Secretary for Terrorist Financing and Financial Crimes in the U.S. Department of the Treasury and a speaker at the Foundation for Accounting Education's Oct. 25  Anti-Money Laundering Conference. 

Glaser, currently a principal with the Financial Integrity Network, pointed out that the United States did not criminalize money laundering until 1986 and was the first country in the world to do so. Prior to that, he said, "there was not a country in the world where that as a crime." Even then, however, it was limited strictly to the proceeds of narcotics sales. 

"So if [you] laundered anything else, you weren't necessarily committing a crime!" he said. 

The fight against money laundering became a global obligation in 1988 with the UN Narcotics Convention, which required all signatories to criminalize money laundering, though Glaser pointed out that, again, this was only in the context of drug sales. 

The '90s, he said, were characterized by an expansion of what crimes anti-money laundering laws covered as well as what institutions needed to comply with them. The range of crimes the laws applied to began to grow until, by the end of the decade, they covered "basically" all serious crimes. Also growing were the types of institutions that were obligated to follow the regulations. While at first it was banks and only banks, Glaser said coverage progressed to non-bank financial institutions and then, again, to nonfinancial businesses and professions. But this expansion then led to several questions that came to dominate anti-money laundering discourse over the next two decades. 

Glaser observed that even though participation expanded to include all major financial centers, the two major challenges had to do with getting foreign countries and international institutions to sign on to these laws, and then getting regulated entities to comply: "Is everyone else doing this? Is anyone else? And [those were] very significant question[s] as the '90s progressed and the telecommunications revolution progressed. ... And beyond that, is anyone doing this even in countries where these laws exist? How strictly are they enforced? Are real cases made? Are people taking this seriously?" 

In terms of the first challenge, he noted that there were very few partners at the time. While the Financial Action Task Force, an international body formed by the G7 in 1989, set standards for combating money laundering, vital international bodies such as the World Bank and International Monetary Fund chafed at their insistence that they follow them. 

"The IMF and World Bank didn't agree. They wouldn't get involved in anti-money laundering; they wouldn't get involved in promoting FATF standards. They considered it a law enforcement issue and, in fact, the IMF and World Bank were leading the charge, supported in places like the U.S. Treasury Department, in creating offshore financial centers. That was their model for the Caribbean. And they didn't believe in anti-money laundering," he said. 

Things changed in the late '90s, when then-Treasury Secretary Larry Summers articulated anti-money laundering in financial, rather than law enforcement, terms. He talked about, in the post-Soviet era, building a new international financial system and the need to protect its integrity. Preventing illicit financial activity was listed as a key part in doing so, which he said was a revolutionary concept at the time. 

"Everything we talk about today emanates from that notion, that there's an independent finance ministry perspective on illicit finance and that finance ministries and central banks have an independent interest in going after illicit financial activity ... separate and apart from criminal and justice agencies," he said. 

Summers backed up the rhetoric by creating the National Money Laundering Strategy, which was the first time the U.S. government took a comprehensive look at anti-money laundering efforts as part of protecting the U.S. and international financial system. Internationally, too, he was a driving force behind the Noncooperative Countries and Territories Process, a G7 initiative that identified countries that were not helping fight money laundering and blacklisted them. 

"This was a huge gamble.  ... And it worked! You never had, after the year 2001, a country saying the FATF weren't the international standards. The argument was over after that. And then the IMF comes on board, the World Bank comes on board, even the UN recognized the FATF standards. Now there's no debate," he said. 

The anti-money laundering regime had a further expansion after 9/11, when countries began to focus on counter-terrorist financing, which paired well with ongoing anti-money laundering efforts. Before, he said, counter-terrorist financing had been a niche issue, but now it was a major part of of combating illicit financial activity. He noted that he, himself, helped set up the Office of Terrorism and Financial Intelligence in the Treasury Department as part of this effort. This, in turn, greatly expanded the tools available to fight illicit activity, as well as to implement foreign policy (Glaser noted that this was the time when financial sanctions began becoming a more routine part of U.S. foreign policy). 

The second challenge, whether regulated entities were complying, became a big issue in the wake of the 2008 financial crisis, when the Department of Justice began finding that the answer was pretty much "no." The years 2011 and 2012 saw a series of enforcement actions against the largest banks in the world for failing to comply with FATF standards. 

"Calling them just compliance violations is underemphsizing how bad these violations were: knowingly engaging in schemes to evade U.S. sanctions," he said. 

This resulted in fines in excess of a billion dollars, as well as the imposition of monitors at large banks. Banks, he said, began taking compliance seriously. However this in turn led to banks realizing that complying was more difficult than they thought. This has led to a massive number of false positives at financial institutions trying to develop useful procedures for guarding against illicit activity. The industry rate for false positives, he said, is 97 percent, and sometimes it can be as high as 99 percent. He said that he himself provides consultation to a global bank and its goal is to reduce its false positive rate from 97 to 92 percent. This, he said, is not an efficient system.

"The reason I know the current system is going to evolve is because it's completely indefensible, given what we can do with technology and given what financial institutions do every day with technology in other aspects of their operations. We're at a point now where the markets will demand it and institutions will demand it," he said. 

These compliance costs have also had the effect of making financial institutions more risk-averse, which in turn has reduced their global footprint. He said he was wary of this, as international correspondent accounts are the lifeblood of the global financial system. What's needed is a balance, and he said that financial institutions are in the process of trying to find where that balance lies. 

Glaser is confident that, going forward, there will not be a rolling back of anti-money laundering rules. He noted that he has served in both Democratic and Republican administrations and neither were particularly interested in doing so. He added that the Trump Administration is unlikely to do so either. 

"If you listen to some of the rhetoric of what the Trump Administration wants to do, they will need this stuff, they will need to enforce these laws and go after this stuff, so I'd be shocked if you saw some sort of contraction," he said. 

Within just the first six months in office, he noted, the administration has already invoked Section 311 of the PATRIOT Act, its anti-money laundering provision, and issued new sanctions against Yemen, which has enacted an anti-money laundering regime.

However he also said that he thinks the world is in for a period of much greater confusion with regard to anti-money laundering enforcement. For instance, the U.S. government has been trying to pressure China to crack down on North Korea by targeting Chinese entities, which could lead to a breakdown in cooperation between the two countries. It also makes compliance more difficult on the part of businesses that want to do business in China. Similarly, he said that the Iran deal might cause a break between the United States and the European Union, which largely supported it.

On top of that, he said that while sanctions had before been largely the province of the United States, European Union and United Nations, other countries have started upping their usage too. Saudi Arabia, the United Arab Emirates and Bahrain all have their own lists of sanctions targets now, as does Russia. Glaser said, in light of this, China won't be far behind. This will ultimately mean a fractured set of different compliance regimes in different financial markets, which will require skill to successfully navigate. 

"We're in for a period of much greater confusion. ... Putting aside geopolitics, the challenge it presents to compliance professionals will be pretty interesting for businesses," he said. 

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