March 24, 2021

Conventional wisdom dictates that an investment is justified by the return it provides. This clearly is not a driver for the $180B banks spent in 2020* fighting money laundering because, let’s face it, the ROI of the global AML regime is depressingly poor. The money spent by banks exceed recovered funds many times over. Institutions often allocate 10+ percent of their workforce to detecting financial crime but the persistent lack of results continues to disappoint regulators, politicians and, thanks to spectacular newspaper headlines, the general public. Giving heed to public indignation, the private sector is subjected to larger penalties than the criminals, undermining staff morale and the public’s trust in these institutions even further. And lest we forget, public trust is the very foundation of a well-functioning financial system so there is every reason to avoid chipping away at that trust. To make matters worse, no competent authority has the resources to fully evaluate all the data submitted to it by industry anyway.

In short, the system is broken. Here are a couple of suggestions to remedy it.

  1. Onshore centres should start to mirror the costly high standards relating to reporting and disclosure, controller and beneficial owner checks, registration, and corporate governance that offshore centres have been obliged to follow. The USA, for example, does not permit reciprocity in respect of FATCA’s automatic exchange of information. Does anybody know what business is being transacted in Delaware, Nevada and Wyoming?
  2. According to Tax Justice Network (TJN, a NGO), countries are losing a total of $427B in tax each year to international corporate tax abuse and private tax evasion. The impact of this tax loss is particularly harsh on lower income countries’ public spending. And all of this is happening in plain sight. The recently released 2021 TJN global tax haven ranking points out that countries setting global tax rules do most to help firms bend them. In the top 10 of TJN’s list of greatest enablers of corporate tax abuse, and listed after the top three usual suspect British Overseas Territories are The Netherlands, Switzerland and Luxemburg as numbers 4-6 respectively. The OECD, the organization which through its BEPS programme promotes a more equitable sharing of tax revenues between rich and poor countries and to which these rich countries belong is at risk of losing its credibility. TJN has previously calculated that the annual tax base withheld from resource-rich developing countries through transfer pricing schemes is ten times the total development aid benevolently provided by these same rich countries (usually with strings attached). It’s time for a higher dose of sincerity in the drive to achieve a more equitable global tax system.
  3. While raising millions in fines from firms for failed AML controls, authorities everywhere are unable to investigate SARs effectively because Financial Intelligence Units (FIUs) are not resourced properly. This is deliberate for, should they be adequately resourced this would lead to many more cases for the Public Prosecution offices to pursue, and the system would be overwhelmed. It makes sense to review and recalibrate the whole judicial chain.
  4. Financial crime is the domain of lowlifes who make obscene amounts of money preying on human misery. The better we are at preventing financial crime, the more likely that criminal misfits will cease their illegal activities and the world would be a better place. It seems like a no-brainer for the rest of us to bundle our expertise and make life as difficult as possible for these misfits. Fighting financial crime is a collective responsibility and we should act accordingly. We see some encouraging private sector collaboration initiatives such as with the Nordic KYC Utility and TMNL in the Netherlands. An area where effectiveness could also be enhanced but where progress is slower is through a better aligned partnership between public and private sector parties. Finally, an area also needing attention is cross-border cooperation. Too often, cross border investigations are hampered by bureaucratic red tape. Yes, national sovereignty should be respected, but as long as criminals thumb their noses at national boundaries we owe it to ourselves to join forces.

*https://risk.lexisnexis.com/insights-resources/research/true-cost-of-financial-crime-compliance-study-global-report