Jackie Harvey

Compliance and reporting issues arising for financial institutions from money laundering regulations: a preliminary cost benefit study

Explores views on the costs and benefits of financial institution compliance with money laundering regulations as a precursor to a full cost benefit study. Notes that there is very little information on the costs and benefits of money laundering, which is linked with the difficulties of estimating the volume of money laundering that is occurring. Deals with attempts to measure money laundering; the problems involved in this have resulted in a system and procedure based approach which focuses on input rather than output and is clearly inferior. Looks at the costs and benefits for private compliance with money laundering regulation. Moves on to the UK’s money laundering control system, which is based on the Financial Services Authority; financial institutions have to file suspicious activity reports (SAR( and to know their customer, but it is not clear that statistics on these activities show more than the companies’ compliance. Concludes that the industry regards these duties, ie of policing the regulations on behalf of the government, as a burden, and that if this is regarded as excessive, there will be a deterrent to cooperation.

An evaluation of money laundering policies

Considers evidence of the costs and benefits of money laundering compliance activity within the UK, in light of the fact that despite the UK’s particularly assiduous compliance, it remains on the list of identified money laundering countries. Outlines the evidence for the existence of money laundering in the UK: £25 billion is a possibly realistic figure for the amount actually laundered, a figure which is less than 1% of total funds handled by the financial system, although some funds appear to be going into property and other avenues which avoid the banking system. Compares the likely costs and benefits of regulation compliance, which is notoriously difficult. Concludes that the costs of compliance are not negligible, and that there is a need to understand more clearly both the objectives of legislation and the amount of money laundering activity taking place.

The search for crime money – debunking the myth: facts versus imagery

Purpose – The purpose of this paper evolves from a seminar that look place in July 2008 aimed at uncovering the issues facing agencies tackling criminal money management and money laundering policy and compliance. The event brought representatives from financial firms and law enforcement agencies together to debate issues with academics.Design/methodology/approach – The paper rehearses the main arguments arising from the seminar underpinned by appropriate literature prior to introducing the other papers included in the special edition.Findings – The objective is to draw attention to the importance of establishing evidence‐based building blocks of facts, rather than threats and imagery that should be used to inform policy makers.Practical implications – Policy makers need to pay attention to the findings of objective empirical research and use theses to inform policy making.Originality/value – The special edition is of value to academics and policy makers, bringing together, as it does, research that is ta...

The Monty Python Flying Circus of Money Laundering and the Question of Proportionality

This chapter explores the approach to AML, mapping its evolution from the US and the war on drugs in the early 1980s through to the establishment of the FATF and global regulatory framework that we have in place today. We unpick the figures behind the threat narrative and the size of the money laundering problem, highlighting the lack of clarity over what is or is not being counted. Drawing data from the mutual evaluation process and its associated costs, we expose that the severity of the existing anti-money laundering policy fails the basic test of proportionality.

A plea for adoption of ethical compliance: Avoiding pitfalls of compliance groupthink and consulting

Purpose – This paper aims to discuss the evolution of regulation and compliance in the past 20 years, to the current state of affairs. Despite earlier calls for ethical compliance within financial institutions, there remains scope for improvement within practice (as evidenced by on-going regulatory issues in the banking sector). Design/methodology/approach – Pre-crisis academic models of regulation and compliance are reviewed for evidence of use in practice. Some preliminary inductive research evidence is presented, following data collection via interviews with individuals impacted by compliance in financial service organisations. The interview data, facilitated by repertory grid, provide a post-crisis assessment of the issues faced by practitioners to comply with a new regulation. Findings – An over-reliance on group think and consulting services in compliance approach is potentially holding back progress in compliance service. Due to the limited recent empirical data offered in the literature, we believ...

Automated credit decision process – an insight into developing a credit-scoring model within the Nepalese banking sector

There has been significant growth post-2000 in consumer credit within transition economies. Credit scoring, established within Western institutions, has the potential to be used to assess consumer creditworthiness here. This paper presents challenges and complexities relating to credit-scoring model development within the Nepalese banking sector. The research incorporates a mixed methods approach, involving model development using secondary data, supported by five in-depth interviews involving lending managers. A model was developed deploying binary logistic regression comprising six customer characteristics. Its overall ability to predict known outcome was high, particularly repayment success, although challenges remain in terms of predicting failure, pointing to a relative absence of current data on such customers. Implementation challenges also exist, reliance on traditional judgement prevails, together with ignorance of possible approaches to modelling. Decision overrides occur due to conflict between restricting defaulting customers and growth targets, traditional practice retention and desire to demonstrate expertise amongst lending managers.

A ‘Risky’ Risk Approach: Proportionality in ML/TF Regulation

Proportionality matters in the relationship between the government and the public. Though it is not operationalised, it evolves alongside political and legislative developments. However, in the field of money laundering, it is questionable whether this principle is met. A review of the Regulatory Impact Assessments for UK Money Laundering Regulations in 1993 and 2001 showed costs to be significantly understated and benefits unquantified, merely promising sweeping protections for society. This way of dealing with proportionality to justify enhanced measures reduces it to an empty formula. We are of the opinion that the proportionality principle is too important to be ignored, especially in the (global) anti-money laundering (AML) policy which since 2001 additionally encompasses the financing of terrorism. This regime has now been made more targeted by the new risk-based approach. The question is whether this approach has achieved the right proportionality.

The Limitation of the Law in Relation to Financial Crime: Back to Basics

The philosopher Plato is popularly credited with observing ‘good people do not need laws to tell them to act responsibly, while bad people will find a way around the laws’. It might be equally possible to observe that if ‘bad people’ find a way around the legal structures and frameworks, this does not imply the correct solution is to cast a larger net with which to catch them all. For as more laws are enacted and brought onto the statute book, the potential for those rules being transgressed becomes greater, further expanding the scope of criminality. Certainly, societies operate within legal frameworks. Laws are brought into being by the political majority but with the aim of protecting the interests of all members. Those who do not adhere to the culture or values of that society will find themselves on the wrong side of the law. However, legislative intervention within society is not cost free. We can create a society that is completely free of crime, but this would require total control by the state (the totalitarian country of North Korea would provide a good example here). The other extreme of no government-imposed rules or structures would produce a society, wherein individual behaviour is bounded only by each person’s moral compass. Somewhere in between these polar extremes, a balance has to be struck. This balance is between the number of ‘fish’ allowed to swim through the holes in the net against the costs and expense of either tightening the net or of casting an even larger one. This idea of balance finds expression in the underpinning legal foundations of proportionality and subsidiarity. These are essential concepts permeating all legal measures: regulatory and law enforcement responses must be proportional to or in balance with the harm caused by the offence while the measures taken should be the minimum required: the proverbial ‘do not use a sledgehammer to crack a nut’. This criterion sits at the heart of legislation, balancing a satisfactory outcome for society against the required interventions. Alongside criminal law, similar concepts underpin the principles of good regulation. There is a public duty placed upon the policy makers to ensure that regulations are fair and proportional to the problem; targeted to avoid unintended consequences; and consistent to avoid uncertainty in their interpretation