Losing the War Against Dirty Money: Rethinking Global Standards on Preventing Money Laundering and Terrorism Financing

60 Pages Posted: 6 May 2010

See all articles by Richard K. Gordon

Richard K. Gordon

Case Western Reserve University School of Law

Date Written: May 4, 2010

Abstract

Global standards for preventing money laundering and terrorism financing are among the most widely observed standards in the world today. Unfortunately there is substantial evidence that they do not work. A main reason is that private sector parties, mostly financial institutions but including a few others, are tasked with duties for which they are ill suited. While they are required to monitor client transactions and report to the government those that raise suspicion of money laundering or terrorism financing, they do not have sufficient expertise, access to key data, or incentives to do so effectively. A second reason is that by giving the private sector the task of identifying suspicious transactions, law enforcement, which is responsible for investigating them, is tasked with too little. This Article argues that dividing these tasks between the private sector and law enforcement is inherently inefficient. It separates expertise and data pools among many different private parties and the government, making empirically based analytical tools for identifying possible criminals both difficult (by dividing data bases) and unlikely (because the private sector has few incentives to spend money to do so). It also includes an inherent contradiction: the public sector is tasked with informing the private sector on how best to detect launderers and terrorists, but to do so could act as a road map on how to avoid detection should such information fall into the wrong private hands.

These problems can be addressed by turning all analytical work over to law enforcement and reserving for the private sector only the reporting of objective information: certain client profiling data and records of all financial transactions. Law enforcement should then be required to use, to the extent possible, empirically based analytical tools to select clients and transactions for investigation. While such a system would be substantially different from the current one there is considerable precedent in the way in which modern tax administrations select taxpayers for audit investigation. A careful review of key aspects of those systems reveals that private parties transmit only objective information to tax administrators, and that tax administrators use empirically based analytical tools to select taxpayers for audit. Such reforms should result in additional effectiveness as well as over-all cost savings as redundancies among multiple private sector party analytical duties are eliminated.

Keywords: Money Laundering, Terrorism Financing, Standards, Suspicious Transactions, Global Financial Issues

JEL Classification: K23, K33

Suggested Citation

Gordon, Richard K., Losing the War Against Dirty Money: Rethinking Global Standards on Preventing Money Laundering and Terrorism Financing (May 4, 2010). Case Legal Studies Research Paper No. 2010-20. Available at SSRN: https://ssrn.com/abstract=1600348

Richard K. Gordon (Contact Author)

Case Western Reserve University School of Law ( email )

11075 East Boulevard
Cleveland, OH 44106-7148
United States

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