The dirty money governments recover isn’t worth the paperwork

Oliver Bullough

 

SUSPICIOUS ACTIVITY

This past week I have been in the Bahamas, attending a very interesting conference organized by the Central Bank of the Bahamas on money laundering. I met up with some old friends and made some new ones, which was great (and I went snorkeling). I mentioned a couple of the conference papers in last week’s newsletter, and this week I want to highlight an interesting presentation by Aretha Campbell of the University of the West Indies, comparing the costs of complying with money laundering regulations between small and large countries.

She argued that, since most requests for information come from large countries (members of the OECD, the European Union or others) while the cost of answering those requests is covered by small countries, there is a mismatch in who is paying for anti-money laundering work.

  • “The overall conclusions drawn from these findings are that [anti-money laundering] initiatives undertaken in The Bahamas, Bermuda, the BVI and the Cayman Islands and the costs associated with them serve to benefit mainly OECD and EU countries, with the larger benefactors being the European Union, the US and UK,” her paper states (it’s the fifth on this list).

I’m sort of sympathetic to this argument, although my sympathy is tempered by the fact that all four of those countries make a decent living out of helping citizens and companies from large countries to avoid taxes, so I’m also sort of not sympathetic. But there was an interesting discussion afterwards about the part of her presentation dealing with Suspicious Activity Reports (also known as Suspicious Transaction Reports), which are the means by which professionals that handle money report any concerns to the authorities.

In some countries, professionals report huge numbers of SARs/STRs, while in others they report very few. So, which is better? Does a large number mean there’s a lot of money laundering because professionals are reporting so much? Or does a large number mean there’s not much money laundering because professionals are so suspicious? Or does it mean something else entirely? Or nothing at all?

  • “It means you are in compliance with regulations matters. The quality of the data is more important than what it means,” said Campbell, which struck me as her coming down on the side of “SARs mean nothing at all.”

But on that note, for the first time in — drum roll! — two years, the U.K. has published its data on how many SARs have been filed by the country’s financial professionals. In 2020-2021, there were 742,317, but in 2021-2022 there was a truly remarkable total of 901,255. Huge round of applause, well done to all concerned, another record has been achieved, what a large number. If they keep this up, they’ll hit a million in no time.

I don’t want to be too sarcastic here, because of course it’s important that suspicions are passed onto the police and acted upon, but the proportion of those SARs that ended up being used is tiny in comparison to the number filed. It’s good that money was frozen as a result of SARs being filed, but it was still only 305 million pounds, which isn’t much more than 300 pounds of potentially dirty money identified per SAR. Since the U.K.’s financial sector alone spends 30 billion pounds a year on compliance, they probably don’t cost much less than that, each. To put that 305-million-pound figure into context, the National Crime Agency estimates that hundreds of billions of pounds are laundered through the City of London each year. The University of Portsmouth estimates that fraud alone costs the British economy 137 billion pounds a year. We are clearly, despite everyone’s efforts, identifying just the tiniest fraction of a fraction of what needs to be identified.

Anti-money laundering policy is in a rut. For decades, its basic philosophy has been (a) acquisitive crime is a problem but (b) criminals can’t move money without the help of financial professionals, so (c) if we force financial professionals to tell the authorities about suspicious transactions, then (d) the authorities can block those transactions, meaning (e) criminal money gets seized, therefore (f) crime no longer pays and (g) the problem is solved. But the problem has not been solved, so governments have concluded that there just aren’t enough suspicious activity reports, demanding more and more of them, which explains the tsunami that floods into the U.K.’s Financial Intelligence Unit, into FinCEN and into those Caribbean financial intelligence units in Campbell’s paper.

The definition of insanity, as someone who apparently wasn’t Albert Einstein once said, is doing the same thing over and over again and expecting different results. Perhaps it’s time to stop and think about whether the whole global anti-money laundering edifice isn’t a bit insane.

On a side note, I heard a funny bit of gossip while I was in the Bahamas, relating to the (in)famous estimate of the scale of global money laundering made in 1998 by Michel Camdessus, then the head of the International Monetary Fund.

  • “The estimates of the present scale of money laundering transactions are almost beyond imagination, 2 to 5 percent of global GDP would probably be a consensus range,” Camdessus said. And that estimate has been used ever since, including by senior figures speaking at the conference last week.

So where did it come from? Apparently, one IMF official invented it off the top of his head in the lift on the way down to the venue, since they felt the speech lacked a bit of oomph, and everyone involved has been mortified ever since by its omnipresence in the global debate around financial crime. The general consensus now, by the way, is that (a) you can’t accurately measure money laundering because (b) what would you include, and how would you include it? But (c) if you did, the total would probably be more like 10% of global output.

Entirely separately, I can’t help liking the way that there is a little red label marked “popular” next to literally every single report published on the U.K.’s Financial Intelligence Unit website, up to and including clickbait like “UKFIU SAR Glossary Codes Note March 2022.” It has similar energy to the time I wrote “I am Cool” on my pencil case at school.

PERCEPTIONS

Aren’t indexes great? They reduce the whole complexity of human existence to a single number, rather like the rankings of rugby teams. On that note, I’ve been thinking of creating a Democracy Perceptions Index to assess democracy in different countries, so we can compare them to each other. Perhaps it would help our governments know who to invade?

Anyway, my proposed methodology is foolproof. I’ll take the leading media outlets in each country and assess what they say about its democracy. If they’re negative, we’ll give the country a low score, and if they’re positive, we’ll give it a high score. Then we put all the countries’ scores in an Excel spreadsheet, click “Sort & Filter” and congratulate the winner. Yay, well done, North Korea, what a victory! Better luck next year, Eritrea, but second place isn’t bad. Congratulations, Russia, on your bronze medal.

In entirely unrelated news, Transparency International has once again missed a good opportunity to discontinue its annual Corruption Perceptions Index. The CPI has a slightly more sophisticated methodology than my DPI but with similarly nonsensical results. In 2023, for the umpteenth year running, it has concluded that the countries in Asia, Africa and South America that get looted are more corrupt than the countries in Europe, Australasia and North America where the loot ends up. Congratulations though to the U.K., U.S., UAE, Switzerland, Singapore, Austria and Luxembourg, which all kept their places in the top 30. Good job, everyone.

Anyone tempted to use the CPI as a way of judging which countries are corrupt, and which aren’t, please don’t. It’s misleading, victim-blaming tosh with real-world consequences, in that it informs decisions by rating agencies, aid organizations, international financial institutions and others. Developing nations deserve more from an organization that should know better.

UKRAINE

Coming in 116th place on the CPI was Ukraine, and coming in 137th was Russia. Yet it was in Ukraine that a deputy minister has been fired, and the defense ministry, along with front-line governors, is under investigation after allegations of corruption. If it’s less corrupt than Russia, why is there corruption, eh? Answer that with your science. This has certainly given ammunition to extreme-right politicians in Western countries (examples here, here and here) to denounce support for Volodymyr Zelensky’s government and to claim that the money sent to Ukraine is being embezzled.

There is a parallel to the question about SARs here. How do you know if a country is more corrupt: if it has public corruption scandals or if it doesn’t?

I have written extensively about corruption in Ukraine in the past (like this article from 2014, as well as material in my last two books), and I get annoyed by the widespread argument among certain public figures in the West that officials in Kyiv are only corrupt if they’re pro-Russian. In the past, Ukrainian oligarchs and supposedly pro-Western politicians have been as much to blame for undermining the integrity and prosperity of their nation as Russians. Ukraine’s great strength is not in being free from corruption, but in the brilliance of its pro-integrity activists, welded together by organizations like the Anti-Corruption Action Centre, journalists like Kristina Berdynskykh and activists-turned-politicians like Serhiy Leshchenko.

The fact that they are still demanding anti-corruption measures, even in wartime, criticizing corrupt officials, even if they sit in the defense ministry, and generally behaving like free people in a free country is a sign that Ukraine deserves our support, not that it doesn’t. The reason Russia lacks such scandals is not because too few officials are on the take, but because too many of them are.

I am convinced that one of the reasons Vladimir Putin felt so threatened by Ukraine was precisely because of the successes its activists had in forcing through anti-corruption measures. The measures weren’t perfect, and they weren’t sufficient, but they provided an example of how to start building an honest society, which was potentially existential to the Kremlin’s business model.

SLAPPs

Speaking of Russia, the scandal around the U.K. government giving the lawyers representing Yevgeny Prigozhin permission to accept his money — despite him being sanctioned — so he could sue Eliot Higgins for saying something completely true will hopefully run and run. Along with other deeply-questionable libel threats, the Higgins affair is proof that Britain finally needs to rein in its greedy lawyers who need to remember they are “officers of the court, not public relations professionals in wigs,” as Edward Lucas aptly put it.

A decade ago, organizations English Pen and Index on Censorship proposed that arbitration should be introduced in libel proceedings to lower costs and reduce the risk of them being used abusively. It is time the idea receives the hearing it did not get at the time. For journalists, the costs of avoiding defamation cases, protecting against them and fighting them are weighing on their efforts to expose corruption and wrongdoing. Too often, the solutions proposed to prevent abusive cases involve more lawyers taking more time to argue among themselves, which would just make things worse. The problem is the cost, and it is caused by lawyers.

Lawyers fight hard to retain their income streams (is it not written that “the way to change the world is to find a way for lawyers to make money out of it”?), and we can expect strenuous efforts to suggest that justice would be harmed if they were excluded from defamation cases. But here it is the presence of lawyers that is causing the injustice, and that needs to be reduced to allow poorer defendants a chance.

WHAT I’M READING

I read Paul Newman’s autobiography while I was in the Bahamas, which was good in parts, but I’m thoroughly enjoying “The Power Law: Venture Capital and the Art of Disruption” by Sebastian Mallaby, which delves all the way back to the 1950s to look for the origins of the funders that helped build Silicon Valley. Along the way, it somehow manages to make the inner workings of investment funds fun. Highly recommended.