As the fight against corruption has become more sophisticated, understanding has also grown that money laundering is an integral part of the picture.
If you are an oligarch who has bribed your way to a state monopoly, and then abused that monopolistic power to enrich yourself at the expense of ordinary citizens; or a health minister who has mis-appropriated the budget for building hospitals; or a politician who has received a multi-million dollar bribe to facilitate the passage of a defence or oil deal: you need somewhere to keep the money.
A few things you might look for when salting away proceeds of corruption are:
Let's focus on the low chance of detection. The world's largest financial centres - places like London, Singapore, Dubai, Shanghai, New York and others - are often also cited as global centres of money laundering. It's obviously easier to hide dirty money in a large market where most of the money is clean and there are billions of transactions every single day. Assuming the authorities genuinely want to keep out the dirty money - and there are those who question that assumption - what's the best way to do it?
For around the last fifteen years, money laundering has been taken more seriously than ever before. It's not simply to combat corruption: anti-money laundering (AML) defences are designed to tackle all sorts of dirty money, from organised crime, illicit drugs and - most importantly - terrorist financing. AML was given a huge impetus in the wake of the World Trade Centre attacks. And the system that was created, particularly in the UK and the US, envisaged that the private sector would become the front line of defence against money laundering. Certain private sector institutions - in the 'regulated sectors' like banking - would be responsible for spotting suspicious transactions, and reporting them to the authorities. And for those who failed in their responsibilities, there would be large penalties.
There has been lots of activity; investment worth billions of pounds by the private sector and a widespread acknowledgement that the system is failing. So what should we do?
Cue the very timely report on the 'Future of Financial Intelligence Sharing', which gives both an overview of the current state of play, and an analysis of whether greater intelligence sharing between the public sector (essentially law enforcement agencies) and the private sector (principally the banks) would yield better results.
A key question is whether greater sharing of intelligence, between and within the private sector and the relevant authorities, would lead to more criminal activity being detected. But the report goes beyond that analysis, and also addresses important questions about how and when the private sector should play a role in the AML process. It is clear there are both advantages and pitfalls.
I'll focus first on the pitfalls, and most of these can be grouped around the issues of alignment of interests and public trust.
Critics allege that the current AML system – driven by FATF and the US - has already gone too far in out-sourcing governmental responsibilities to the private sector. It is argued that those who should be the gamekeepers are actually complicit with the poachers: one of the AML patterns evident in the past fifteen years has been that there can be great incentives for banks and others to take on suspicious clients. And for individuals who benefit with bonuses and career-enhancing prestige, and their institutions which want to make a profit, why not? So transferring responsibilities to the private sector might not seem the most sensible way to manage our AML defences.
You might think that greater intelligence sharing is just that – a bit of sharing, and therefore a practical response to a difficult question. But it is also a bit more than that. It is giving the private sector a shared responsibility to both set up and police the frontline defences against corruption. By extrapolation, it assumes that they are willing and able to fulfil such a function, and that they can do so in alignment with the public interest. By establishing this principle, it also opens to door to a much wider involvement; and it does so behind closed doors.
Which brings us to the issue of trust. Bankers, lawyers, accountants, estate agents, do not rank highly on anyone’s list of trusted sectors. Look at the expensive properties in London bought through the proceeds of corruption: in each case, requiring a bank, an estate agent and a lawyer. This huge trust deficit is the biggest barrier any government will face if it wants to give more responsibility on AML to the private sector.
Neither is it obvious that the solution is to allow law enforcement agencies privileged access to private data, whether in a data-sharing environment or some other mechanism. Just as there is little trust in banks, in many areas of the world it is law enforcement agencies that are regularly cited as their countries’ most corrupt institutions.
So there are some big pitfalls, but also some opportunities: the private sector has resources that dwarf those of law enforcement agencies; the intelligence sharing system used in the UK and elsewhere has started to find its feet; and given the importance of the private sector as key links in the chain, nobody seriously believes that a country’s defences against money laundering can be effective without private sector buy-in.
Moreover, and fundamentally, it seems a sensible hypothesis that being able to share information about very suspicious customers will improve both the defences and the detection rates.
How to square this circle? Here are three things that could help, derived from RUSI’s forward-thinking report:
Meanwhile, the regulated sectors should be working in parallel to address the alignment of incentives and the trust deficit. Without that, the notion of a greater role for the private sector around the world is doomed to failure before it starts.