Anti-money laundering has been a big compliance trend in the financial sector, but how effective are the laws set up to prevent it? A recent book gives a mixed verdict.

"The argument presented here relies on the idea that institutions and policy can owe more to the need to conform to outside conceptions of legitimacy than the need to solve actual problems at home. As a result, I find a pronounced decoupling or disconnect between the content of the formal models and templates and what actually happens in practice. For poor states in particular, adopting anti-money laundering policies allows them to avoid international censure, spares local officials embarrassment at foreign meetings, and soothes nervous international financial firms.”

The Money Laundry: Regulating Criminal Finance In The Global Economy, JC Sharman, page 2.

This book is a fascinating examination of anti-money laundering (AML) laws and comes up – as the quotation above shows – with some fairly unflattering conclusions as to the effects of such laws. For example, in too many cases, Sharman says, governments that adopt AMLs are more concerned about giving the right impression than actually stamping out the problem. As he says: “My argument is instead that diffusion [of global AML standards] has occurred not because it solves the problem of criminals abusing the financial system or related offences but because AML policy is now a symbol of what all modern, progressive states must have.”

In this sense, his strictures against such laws, and their “one-size-fits-all” stature, has something in common with criticisms of tax information exchange agreements that, when signed by some jurisdictions, leaves one wondering if they are very effective in combating tax evasion.

The author even posed as a money launderer to show how easy it is to get away with manipulating the system; some of the examples in the book are startling. Sharman is at pains to stress, right at the outset, that he cannot conclusively prove that anti-money laundering laws are useless, not least because reliable data on the level of financial crime is hard to measure precisely. He also argues that some of the international organisations responsible for enforcing AML laws have been (page 8) “curiously uninterested in measuring the results of their labour”. In general terms, Sharman concludes that rich countries fall short in enforcing the law and has various examples of frank doubts being expressed by officials in some nations.

The world of anti-money laundering is a shadowy one. Even before the terrorist attacks on New York and Washington DC in September 2001, terror financing was already a concern across the Middle East, the former Soviet Union, parts of Latin America (particularly when connected to drugs), the UK (Northern Ireland) and Italy and Spain (Red Brigades and ETA, respectively). The 9/11 attacks have undoubtedly galvanised AML work, as have concerns about some of the flows of money stemming from the Middle East and North Africa during last year’s so-called “Arab Spring”. We have seen in recent months some strong statements on the importance of AML enforcement and control from jurisdictions such as Singapore.

Anti-money laundering laws, along with other measures by states to stamp out, say, tax evasion by expatriate citizens, also throw up important questions of how, in a globalised world, countries can reconcile concerns about the need for privacy, national sovereignty, democratic accountability, and freedom of movement. As has been shown by the recent US actions against UBS (2009) and now Switzerland’s Wegelin (2012), on the issue of alleged aid for tax evasion, some regimes such as the US have spread their jurisdictional powers very widely indeed. Anti-money laundering laws are no different.

And as the author says on page 180: “The fact that a small number of rich, powerful countries, most especially the US, were responsible for the economic crisis has not stopped the rush to coercively diffuse these new [AML] standards to the rest of the world… many observers have regarded international standard setting as prone to settle on lowest common denominator solutions”. There are people in Zurich, for example, who would nod at that statement.

Anti-money laundering is a complex subject that is without a simple answer, as this book makes clear. For specialists in the field, I recommend it.

J C Sharman is Professor in the Centre for Governance and Public Policy, Griffith University. He is the author of The Money Laundry: Regulating Criminal Finance in the Global Economy and Havens in a Storm: The Struggle for Global Tax Regulation, both from Cornell, and coauthor of Corruption and Money Laundering: A Symbiotic Relationship.