The document discusses money laundering within a positivist framework, highlighting its processes, estimated global impact, and the challenges posed by its detection and regulation. It critiques the efficiency of anti-money laundering (AML) measures, revealing their reliance on inadequate data and questioning their effectiveness in combating the perceived growing criminal threat. Additionally, it emphasizes the financial burden of compliance on institutions and the often misguided belief that increased legislation can effectively address the issue.

1. MONEY LAUNDERING RESEARCH WITHIN A POSITIVIST PARADIGM PROFESSOR JACKIE HARVEY Newcastle Business School

2. Money Laundering The process of transforming, through a series of stages, the proceeds of illegal or criminal activity, into apparently legitimately acquired funds. “ The more able launderers are in exploiting legitimate financial transactions, the greater their likely success” Money laundering entered into the legislative framework in 1986, gaining momentum in 1991 with the first EU Money Laundering Directive Newcastle Business School

3. Source: UNODC - UN Office on Drugs and Crime : The Money Laundering Cycle http://www.unodc.org/unodc/en/money-laundering/laundrycycle.html Three Stages of Money Laundering Newcastle Business School

4. Global Scale Newcastle Business School Institution Estimate Year OECD $1.1 trillion (drug money) 1995 IBRD $300 - $500 billion 1995 IMF 2% - 5% GDP ($0.62 – 1.55 trillion) 1999 UN Up to $1.5 trillion 1999 FATF 2% global GDP up to $1.5 trillion 2001

5. Phantom or Fact? Global estimates are little more than informed guesses, gaining ‘reliability’ through mere repetition but lacking empirical underpinning The bigger and more threatening the estimate, the more likely it is to be adopted (van Duyne (2003), Reuter and Truman (2005), Levi and Reuter (2006), Harvey (2005, 2008)). Implicit assumption that amounts involved are huge and pose a significant threat to the integrity of the financial system and to the reputations of domestic financial institutions Tendency to ‘talk up the figures’ as lower figures would invalidate the logic of AML (van Duyne et al 2005) “ Social Panic” (Harvey, 2008); “Moral Panic” (Alldridge 2008) Newcastle Business School

6. Countermeasures Dual pronged approach comprising Criminalisation of money laundering Regulatory enforcement through a reporting framework KYC and SARs The imposition of both increases the probability of detection and conviction (costs) and reduces the financial attractiveness of laundering (benefits) However, “most launderers face a low risk of getting caught” (Reuter and Truman, 2005) Newcastle Business School

7. Theoretical Framework Money laundering can be considered by applying an economic framework to the legal system transferring the notion of the rational actor The purpose of the legal system can be viewed as maximising ‘social welfare’ with laws used to achieve specified ends Laws are efficient solutions to the problems of organising society The positive approach to law is concerned with how actors behave in response to changes in the legislative framework Reliance on the presumption that criminal activity is reactive to external forces Newcastle Business School

8. Theoretical Framework Removing access to the financial benefit of crime will reduce its attractiveness ‘ rational’ criminals will apply cost/benefit analysis to activity However, “laws may come about because of the rent-seeking activity of politically powerful actors” (Jolls, Sunstein and Thaler,1998) Thus laws can be introduced to maximise social welfare or to redistribute ‘wealth’ towards interest groups. Newcastle Business School

9. Vested Interest and the “Status Quo” Politicians need to be seen to be doing something “ tough on crime” “removing the benefit of crime” “ Rent-seeking” behaviour by government departments and LEAs Goal of budget maximisation supported by “The criminals are always ahead of us” Those employed within compliance Specialist organisation Creation of a ‘profession’ The ‘security’ industry AML solutions, profiling and training is a multi-million pound business Responsibility to balance the call for an ever widening arsenal of tools against the costs imposed on society and against legal rights (Van Duyne et al 2005) Newcastle Business School

10. The Relentless Expansion of Legislation No real analysis of costs, benefits or effectiveness of existing regime but sheer hope that such a blanket approach will in some way prove effective. “ Unfortunately legislators sometimes behave like fishermen who cannot stand the fact that some fish may escape their nets. This leads to an ever greater widening of the nets of the penal law in order to catch the last remaining fish (van Duyne, 2003) The UK “the greatest devotee of AML provisions within the EU (Levi 2003) Van Duyne et al. (2005) draw attention to the belief in ever increasing amounts of crime money as an ‘ article of faith ’ whereby the righteous believers do not question its existence but look for and repeat the scattered pieces of evidence that reinforces its existence. Newcastle Business School

11. Money Laundering Offences POCA, 2002, Part 7 “ acquisition, use, possession, disguise, concealment, conversion, transfer or removal from one country to another of the benefit of any criminal conduct can be money laundering. Even an attempt to do any of these things, or becoming involved in an arrangement which facilitates them can constitute a money laundering offence”. Crown Prosecution Service, 2008 Newcastle Business School

12. “ Put simply, POCA makes it possible to seize cash from a suspected criminal and places the onus on that individual to prove that the money has been acquired legitimately. Confiscation orders, reflecting the value of criminal proceeds, can be made against those who commit any of a wide range of offences or can be shown to engage in a ‘criminal lifestyle’. The Act also creates an all-encompassing web to catch anyone who moves, hides, converts or otherwise has possession of cash or property that represent the proceeds of crime . ” Source: Payback Time JOINT REVIEW OF ASSET RECOVERY SINCE THE PROCEEDS OF CRIME ACT 2002 Newcastle Business School

13. Impact Assessment – the Benefits “ there will be benefits to business from reducing their vulnerability to money laundering ” (1993) “ s ociety will be the main beneficiary of the new regime, as a result of the more effective combating of money laundering and the criminal activity that underlies it ” (2001) “ reduction in money laundering activity ” (2003) Simplification measures estimated to result in savings of £10 - £31 m (2007) Newcastle Business School

14. Impact Assessment – the Costs “ total costs for the financial services sector - an initial £30m with recurrent compliance costs of between 0.03% and 0.5% of annual running costs” (1993) “ additional costs of the regulatory regime to be relatively small ” projected total sector costs £5 – £7m pa. (2001) Between £80 and £100m for the legal and accounting professions and £10 to £15m for estate agents. (2003) “ The Government’s preferred options total £25 – 52m in policy costs and £10.5 – 13m in administration costs for implementing the Directive”(2007) Newcastle Business School

15. The Regulatory Framework It remains to be seen whether this increased burden will be justified by a proportionate increase in the amount of money laundering which is detected and prevented” (Fox and Kingsley, 2002) That burden comprises Operating costs of compliance Costs of enforcement Costs on society Newcastle Business School

16. Major significance for business practice Regulations cover banks, financial institutions, accountants, legal professions, gaming, estate agents, auctioneers and so on Total costs of compliance run to hundreds of millions a year Need to focus on accuracy of risk assessment ensuring cost of prevention on industry and on society is appropriate Business Practice Newcastle Business School

17. Just as communication and technology enabled developments have dramatically altered patterns of business activity they have created potential for associated criminal exploitation of new modus operandi Criminal infiltration of legitimate business can have a significant impact IF it occurs Issue – how much to invest in prevention? Challenge is to objectively assess the scale of the problem How likely is it to unwittingly facilitate the action of launderers? How great would be the negative impact on reputation? Risk Background Newcastle Business School

18. Expenditure on AML Compliance A profit maximising firm will invest in AML to the point where costs of compliance just offset ‘costs’ or losses arising from not undertaking such activity (AMLE) Expenditure Extent of AML Effort Cost of compliance ‘ Cost’ of noncompliance AMLE Total cost Newcastle Business School

19. The Costs of Compliance “ demands of ML are immense and it is harder to cope with the costs of compliance” and “the level of rigour disregards how little is achieved by obtaining the required information ” (interviewee 7) “ there is a need to reduce money laundering but...it is difficult for a profit oriented institution to carry these costs ” (interviewee 6) “ in the past we were prepared to spend on compliance but it is now like an escalator – constantly going up ” (interviewee 1) Survey of compliance officers June 2009 budgets ranged from millions to a rather worrying zero “done as additional task outside company time” majority of responses £100-£200k per annum Newcastle Business School

20. Reputation Why do profit maximising institutions commit resource to compliance? A culture of ‘sanction avoiding’ rather than reputation enhancing compliance SARs used as an internal performance measure “ much compliance activity is driven by fear rather than by benefits to the firm” (interviewee 3) 60% of respondents to 2009 survey noted no disclosure in annual reports and accounts “ no mention or statement of money laundering activity is included in the annual report. We do not wish to draw attention to the amounts being spent on compliance as this would result in a small revolt internally” ............... “the BBA would have to drive any disclosure of costs but..it does not have the appetite to do this as they are too much in the pocket with the statutory authorities” (interviewee 1) Newcastle Business School

21. Public Perception Impact on institutions fined for non-compliance? Integrity of the financial system is built on trust and it is this that contributes to reputation not where criminals maintain their bank accounts. money per se is neither clean nor criminal the tag of laundering becomes attached by association with something perceived to be illegal. Public awareness remains low It will only become an issue when customers lose money (Alldridge, 2003) Newcastle Business School

22. Rationalisation Evidence of a legitimacy seeking approach focused on compliance with systems and procedures “ most of the people think this is a moral crusade but the end is seen as a good thing... [it is] hard to describe what you do on a day to day basis and to say it is a complete waste of time” (interviewee 9) Emergence of a ‘tick-box’ culture where the objective becomes compliance rather than protecting from criminal contamination Being seen to do the right thing “ the level of rigour disregards how little is achieved...identification does not provide a barrier to crime” (interviewee 7) Evidence of a “sunk cost bias” “ the KYC procedures are embedded in mythology of money laundering compliance and it will take a lot to suggest a different approach” (interviewee 5) Newcastle Business School

23. Effectiveness Perfectly in order for authorities to anticipate and pre-empt criminal action that has a detrimental impact on society but requirement for prudence Should we not have seen the impact of over a decade of rigorous application of AML? It is impossible to measure the impact of the anti-money laundering regime on predicate offences. Cannot measure how much would have occurred in its absence (Levi and Reuter, 2006) “ The vast majority of FATF members lack sufficient data to support any credible estimate” (FATF, 1997. p.3) Convenient to suggest that criminal activity continues to expand Newcastle Business School

24. Effectiveness AML may lack effectiveness as it targets the wrong area (Chong and Lopez de Silanes, 2007) Rather than asking how well it works we should ask – does it make a difference? Focus on ‘second best’ measures SARs Regulatory ‘back covering’ Is it ‘suspicious’ or merely ‘unusual’ – Survey 2009 40% of respondents were confident they could distinguish the difference Prosecutions/convictions Asset Recovery “ seizing criminal assets....is a key tool of law enforcement. It reduces crime...and ensures (and shows) that crime does not pay” (Home Office, 2006) Newcastle Business School

25. Suspicious Activity Reports Newcastle Business School

26. Prosecutions * All legislation refers to S49-53 Drug Trafficking Act 1994; Criminal Justice Act s93A-93D as amended by CJA 1993 s29-32 and POCA 2002 s327-334 Newcastle Business School All Legislation* 2003 2004 2005 2006 2007 prosecutions 300 552 1327 2379 2318 convictions 123 207 595 1273 1348 sentenced 119 205 575 1244 1322 Of which POCA prosecutions 87 405 1295 2345 2281 convictions 15 123 566 1257 1330 sentenced 12 121 545 1229 1304

27. Prosecutions for Money Laundering

28. Conviction for Money Laundering Offences Newcastle Business School Data for 2005 Number % Total Convicted 595 Of whom ‘sentenced’ 575 100% Conditional Discharge 54 9.4% Fined 53 9.2% Community Sentence 240 41.7% Suspended Sentence 29 5.0% Immediate Custody* 194 33.7% Otherwise Dealt With 5 0.9% *Average sentence length: 25.7 months

29. Asset Recovery Targeted recovery of £250m 2009/10 Longer term goal of £1 billion Naive and unsophisticated estimates – HM Treasury (2007) study of a sizeable sample of the 200,000 SARs – indicated a median value of £10,000 and a mean of £35,000. assumed 40% ‘suspicious’ thus revealing £2-3 billion of laundered funds (35,000*200,000*40%) Newcastle Business School

30. Asset Recovery Restraints can be placed for any hypothetical value on assets ‘frozen’ in advance of investigation – key is confiscation orders imposed by court But not all of these are recovered Newcastle Business School 2006/7 2007/8 2008/9 £ £ £ Cash seizure 3.3m 8m 9.2m Restraint orders 27.2m 46.8m 128.8m Confiscation orders 14.5m 11.6m 29.7m Civil recovery n/a n/a 16.7m

31. Costs of the FIU *other agencies refers to ARA, NCS, NCIS and part of Customs and Excise. It was not possible to determine which of the costs and associated budget for HMRC was also transferred Newcastle Business School £million 2004/5 2005/6 2006/7 2007/8 2008/9 SOCA 419.4 456.5 465.3 Total for other agencies* 279.5 282.8

32. Is it entering the Financial System? US DEA seize $207 million, 200,000 Euros and 158,000 pesos in a drugs raid in Mexico http://www.washingtonpost.com/wp-dn/content/article/2007/07/24/AR2007072400150.html Newcastle Business School

33. What is the scale of the problem and how threatening are criminal money flows? Extensive data bases obtained from Home Office (JARD) and ARA Findings – no evidence to underpin size of threat estimates, flaws in data management and unsophisticated criminals Evidence Newcastle Business School

34. Home Office Home Office data on asset recovery tracked by remitting agency Newcastle Business School 2003/4 2004/5 2005/6 Largest single payment £1.01m £1.07m £0.91m Average payment size £11,122 £1,050 £7,832 Median payment size £491 £500 £300

35. Data Reliability - ARA Richer data but contains errors of duplication and amounts do not add up - no internal tracking or verification Database of 162 cases only 32 were for values of greater than £1m. 218 individuals but 11 cases had no ‘client’; majority (118) involve one person although one case had 11 identified people Newcastle Business School

36. Major Areas of Criminal Expenditure (ARA Data) Newcastle Business School UK Property 471 houses £75.02m High value goods Cars, paintings, jewellery £ 7.05m cash £ 9.68m Financial assets Bank accounts, insurance, pensions shares £11.02m

37. Threat that criminal money flows undermine integrity of financial system lacks foundation Estimates of scale are unsubstantiated Criminals appear to lack sophistication Vested interest support the status quo Those employed in the industry will seek to justify the costly existence of a host of AML solutions and the continued importance of their function by repeating the mantra of threat But significant costs for regulated sector There is potential in these spheres but ensure risk assessment is realistic and that response is proportionate, based on empirical evidence – on fact not on phantoms or myths Key findings Newcastle Business School