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News Release

Improvements Needed in the Fight Against Global Money Laundering

December 14, 2004

Contact:    Edwin M. Truman    (202) 328-9000

Washington, DC—The global anti–money laundering regime has had a limited impact on either the extent of money laundering or the targeted crimes—drug trafficking, financing of terrorism, and embezzlement. The regime has expanded dramatically over the past 15 years with little attention being paid to its costs or its effectiveness.

Direct measures of the effectiveness of money-laundering controls in reducing targeted crimes are not available. Indirect measures for the United States, which leads the way in enforcement, indicate that only about 2,000 money-laundering prosecutions occur each year, leading to fewer than 1,500 convictions in which money laundering is the most serious offense. Comparable statistics for other countries are tiny. The risk of conviction for money laundering, even in the United States, is consequently less than 5 percent—hardly enough to act as a substantial deterrent to the activity.

The use of the anti–money laundering regime to combat the financing of terrorism has also produced disappointing results. The principal reasons are the complexity of applying the anti–money laundering tool to this objective and the lack of global cooperation in the effort.

These are the principal conclusions of Chasing Dirty Money: The Fight Against Money Laundering by Peter Reuter and Edwin M. Truman. The authors assess the current regime's effectiveness with respect to three goals: reducing crime, protecting the integrity of the core financial system, and controlling global “public bads” such as terrorism, corruption, and failed states.

The authors recommend

  • strengthening the global anti–money laundering regime by ensuring that money laundering linked to major underlying crimes committed in other jurisdictions can be prosecuted in all jurisdictions (US law has covered official corruption in other countries only since the passage of the USA PATRIOT Act in October 2001);
  • including tax evasion in foreign countries on the list of crimes that can lead to money-laundering prosecutions in the United States as well as in the other countries, in order to encourage those countries to participate more actively in the global regime;
  • providing not only technical assistance to the poorest countries with rudimentary regimes to combat money laundering but also financial support for upgrading those regimes as well;
  • the United States, as the world's major money-laundering jurisdiction, should request a comprehensive IMF/World Bank review of its compliance with global standards on anti–money laundering and combating the financing of terrorism;
  • reviving on a modified basis the US National Money Laundering Strategy (NMLS);
    and
  • establishing a research agenda, including the development of a database of money-laundering cases and the systematic analysis of the use of suspicious activity reports (SARs), which today threaten the US anti–money laundering regime with information overload.

Reuter and Truman review the scale of money laundering and conclude that the amount can be imprecisely estimated at hundreds of billions dollars a year. However, such aggregate estimates are not very useful for policy purposes because of the different social impact associated with the underlying crimes—for example, the social harm associated with a million dollars that finances terrorism vastly outweighs the social harm associated with a million-dollar embezzlement. They also describe the diverse methods of laundering money and suggest that analysis of the activity is not advanced by the application of a simple market model because there are few stand-alone money launderers offering their services to criminals.

The authors characterize the global anti–money laundering regime as built on two pillars: prevention and enforcement. The prevention pillar consists of the familiar elements of customer due diligence, reporting requirements, regulation and supervision, and threats of sanctions on financial and nonfinancial businesses for failure to comply. The enforcement pillar is less well developed and consists of the list of predicate or underlying crimes associated with money-laundering offenses, investigations, prosecutions and punishments, and confiscation of the proceeds of the crimes.

The study reviews favorably US experience with its NMLS and suggests that a strengthened version of the 1999–2003 NMLS would help provide strategic direction to US anti–money laundering policy. It also puts forward a ballpark estimate of the gross financial costs of the US anti–money laundering regime for the government, private-sector institutions, and the general public of $7 billion in 2003 or about $25 per capita.

One goal of the global anti–money laundering regime is the protection of the integrity of the core financial system—principally banks. Reuter and Truman argue that it is a relatively low hurdle to stop institutions from openly soliciting business from criminals and only marginally more difficult to limit the solicitation of such business by rogue employees. The available evidence suggests substantial success in achieving this limited objective for banks in the major financial centers. Nevertheless, banks may be unwitting accomplices in money laundering, and at times that secondary involvement may be associated with negligence in the design and operation of internal anti–money laundering controls.

A final category of goals for the regime is combating global “public bads” such as terrorism, corruption and kleptocracy (high-level political corruption), and failed or failing states. The study concludes that the anti–money laundering regime plays a constructive but limited role in these areas, combating the financing of terrorism in particular. In connection with corruption and failed states, the link with money laundering appears to be weaker than some have argued.

About the Authors

Peter Reuter is a professor in the School of Public Policy and Department of Criminology at the University of Maryland. Since July 1999, he has been the editor of the Journal of Policy Analysis and Management. He was a senior economist in the Washington office of the RAND Corporation (1981–93). He founded and directed RAND's Drug Policy Research Center (1989–93). His early research focused on the organization of illegal markets and resulted in the publication of Disorganized Crime: The Economics of the Visible Hand (MIT Press, 1983), which won the Leslie Wilkins award for the most outstanding book of the year in criminology and criminal justice. He is coauthor of Drug War Heresies: Learning from Other Vices, Times and Places (Cambridge University Press, 2001). He has served as a consultant to numerous government agencies (including the US General Accounting Office, the White House Office of National Drug Control Policy, the National Institute of Justice, and the Substance Abuse and Mental Health Services Administration) and to foreign organizations including the United Nations Drug Control Program and the British Department of Health.  

Edwin M. Truman, senior fellow, was assistant secretary of the US Treasury for interna-tional affairs (1998–2000). He directed the Division of International Finance of the Board of Governors of the Federal Reserve System from 1977 to 1998. From 1983 to 1998, he was one of three economists on the staff of the Federal Open Market Committee. He has been a member of numerous international groups working on international economic and financial issues, including the Financial Stability Forum's Working Group on Highly Leveraged Institutions (1999–2000), the G-22 Working Party on Transparency and Accountability (1998), the G10-sponsored Working Party on Financial Stability in Emerging Market Economies (1996–97), the G10 Working Group on the Resolution of Sovereign Liquidity Crises (1995–96), and the G7 Working Group on Exchange Market Intervention (1982–83). He has published on international monetary economics, international debt problems, economic development, and European economic integration. He is the author of Inflation Targeting in the World Economy (2003).

About the Institute

The Institute for International Economics, whose director is C. Fred Bergsten, is the only major research center in the United States that is devoted to global economic policy issues. The Institute's staff of about 50 focuses on macroeconomic topics, international money and finance, trade and related social issues, and international investment, and covers all key regions—especially Europe, Asia, and Latin America. The Institute averages one or more publications per month; holds one or more meetings, seminars, or conferences almost every week; and is widely tapped over its popular Web site.

 

Chasing Dirty Money: The Fight Against Money Laundering
by Peter Reuter and Edwin M. Truman
November 2004 • 226 pp. • $23.95
ISBN paper 0-88132-370-5