Improving our anti-money laundering operations will help prevent great-power war

Interest is grow­ing in illic­it finance because great-pow­er com­pe­ti­tion is play­ing out in board­rooms, stock mar­kets, trade wars, and com­pli­ance depart­ments. The US anti-mon­ey laun­der­ing (AML) regime needs an update that enhances nation­al secu­ri­ty and sets an exam­ple for the rest of the world.

The US leads in craft­ing and enforc­ing glob­al stan­dards of finan­cial integri­ty and account­abil­i­ty. However, like most US eco­nom­ic reg­u­la­tions, the cur­rent AML regime is a hap­haz­ard, ad hoc patch­work rid­dled with loop­holes and inef­fi­cien­cies. An illic­it finance bill should encour­age com­mu­ni­ca­tion between and with­in com­pli­ance and law enforce­ment, safe­guard indi­vid­ual pri­va­cy rights, and help small­er busi­ness­es and finan­cial insti­tu­tions. It has been 17 years since the last AML over­haul. It is time to address the clear and present dan­ger — dirty money.

National security concerns

For the past thir­ty years Western democ­ra­cies have active­ly and pas­sive­ly sought out eco­nom­ic inte­gra­tion with author­i­tar­i­an states. Westerners hoped (and many still do) that mod­ern­iza­tion would cre­ate mid­dle class­es that demand rights. Investors and busi­ness­es sim­ply saw new mar­kets as oppor­tu­ni­ties to turn a profit.

Profits came to fruition, but eco­nom­ic inte­gra­tion mor­phed into a sort of messy imbroglio, or a rules-based lib­er­al order entan­gled with opaque, vio­lent, and klep­to­crat­ic author­i­tar­i­ans eager to bend the rules in their favor.

Currently, klep­to­crats and their ilk can store and move wealth in the US anony­mous­ly. Some prof­it from break­ing drug laws, oth­ers evade tax­es, and many set up sim­plis­tic fraud schemes. Dastardly agi­ta­tors use anony­mous cap­i­tal to sup­port polit­i­cal and eco­nom­ic espi­onage, nation­al­is­tic vio­lence, and reli­gious zealotry.

The absence of clear and trans­par­ent rules in non-democ­ra­cies (and among thieves) breeds insta­bil­i­ty, uncer­tain­ty, and vio­lence. A sim­ple first step toward pro­tect­ing the US from these neg­a­tive exter­nal­i­ties is to require legal enti­ties to reg­is­ter and ver­i­fy their ben­e­fi­cial own­er­ship (BO) at the time of incorporation.

Two examples

The General Services Administration appar­ent­ly can­not iden­ti­fy the ulti­mate ben­e­fi­cial own­ers of up to a third of high secu­ri­ty leas­es. This means that uniden­ti­fied Russians can, and might, own the build­ings that the FBI leas­es to inves­ti­gate Russian activities.

An inves­tiga­tive report recent­ly uncov­ered thou­sands of planes in the US reg­is­tered to com­pa­nies known to use secre­cy tac­tics to pro­vide ser­vices to non-US cit­i­zens. Planes trans­port drugs — and, post 9/11, well.

New reporting and securing individual privacy rights

Thresholds for cur­ren­cy trans­ac­tion reports (CTRs) and sus­pi­cious activ­i­ty reports (SARs) are not adjust­ed for infla­tion. The esti­mat­ed 55,000 SARs that the Financial Crimes Enforcement Network (FinCEN) receives every day are not being effi­cient­ly com­mu­ni­cat­ed or lever­aged with sim­ple, cheap, and pow­er­ful data sci­ence tools.

Legislation should ensure that report­ing data (BO, SARs, and CTRs) will nev­er be made pub­lic. But data shar­ing with­in and between finan­cial insti­tu­tions and law enforce­ment needs to be increased and modernized.

The prob­lem is that pri­va­cy is now pro­tect­ed by effec­tive­ly dep­u­tiz­ing the finan­cial sec­tor. In the cur­rent threat envi­ron­ment this puts a mas­sive amor­phous bur­den on com­pli­ance depart­ments. That cost is ulti­mate­ly passed on to the con­sumer and ham­strings the effec­tive­ness of law enforcement.

One solu­tion is for FinCEN to host a basic BO dataset (such as name, address, ID) that com­pli­ance depart­ments can access and search, ver­i­fy­ing their own due dili­gence find­ings. This allows FinCEN to lever­age big data ana­lyt­i­cal tools to eas­i­ly find trends in CTRs and SARs. Also, more sen­si­tive infor­ma­tion remains in pri­vate hands.

How legislation can help smaller competitors 

A small American ship­ping com­pa­ny has to turn a prof­it in order to pay its employ­ees and stay open. A drug car­tel-owned ship­ping com­pa­ny in the same town has no need to turn a prof­it. All it has to do is not get caught. It can and does swal­low up fair com­peti­tors by seek­ing out legit accounts to cov­er its ille­git­i­mate activity.

Second, large gov­ern­ment con­tracts have “set asides” for small busi­ness­es. Shell com­pa­nies defraud the gov­ern­ment by under­bid­ding fair­ly com­pet­ing small busi­ness­es for these set asides and then pro­vid­ing shod­dy prod­uct or engag­ing in oth­er schemes. Congress could also make it cheap­er and eas­i­er for busi­ness­es to become a pub­licly-trad­ed company.

Bottom Line: Updating the AML regime for the explic­it pur­pos­es of cre­at­ing a bet­ter busi­ness envi­ron­ment strikes a prag­mat­ic bal­ance between the duty of gov­ern­ment to pro­vide the pub­lic good of nation­al secu­ri­ty and the pri­va­cy nec­es­sary for free enter­prise. Doing it before great-pow­er com­pe­ti­tion turns into great-pow­er war might just be what pre­vents that calami­ty and ush­ers in a brighter future.

By Clay R. Fuller

Improving our anti-mon­ey laun­der­ing oper­a­tions will help pre­vent great-pow­er war

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