Money-Laundering Efforts Stained by Political Interests

By Heifetz, Stephen R. | American Banker, May 18, 2001 | Go to article overview

Money-Laundering Efforts Stained by Political Interests


Heifetz, Stephen R., American Banker


The government's efforts to stop money laundering have become increasingly prominent, and activities labeled "anti-money-laundering" are almost universally applauded. But not all anti-money-laundering efforts are beneficial, and many are detrimental to the public.

The fight against money laundering takes place in two dimensions: prosecution and compliance. While prosecution is fundamental to our nation's commitment to deterring and punishing crime, compliance is a wasteful way for elected officials to score political points.

Prosecution affects individuals and corporations that manage the financial aspects of criminal enterprises. These are conspirators in or accomplices to drug trafficking, fraud, corruption, and other crimes. The criminal money-laundering laws simply provide another tool that can be used either to increase the severity of sentences or to obtain convictions of money launderers.

This is crucial to making sure that people who do or try to cause harm are punished and that others are deterred from following in their footsteps. Moreover, because money launderers are often wealthy people and corporations, the focus on money laundering brings resources to bear against persons whose wealth might otherwise enable them to evade the prosecutorial radar screen.

In "anti-money-laundering compliance," politicians repeatedly demand that financial institutions create and improve upon compliance programs to detect "dirty money." In other words, the mere movement of money is harmful if the money has any kind of connection to an illegal activity. But that is plainly silly: One federal court of appeals has noted that more than 75% of paper currency in Los Angeles carries traces of illegal drugs, yet the mere use or transfer of that currency in commercial transactions is not perceived -- and should not be perceived -- as wrongful activity. The wrong arises only when the use or transfer of the currency is intended to facilitate or conceal some harmful activity.

Nevertheless, politicians buff their image by accusing banks and other financial institutions of failing to have sufficient programs to detect "dirty money." The recently released Senate report "Correspondent Banking and Money Laundering," for example, begins with the statement that "U.S. banks, through the correspondent accounts they provide to foreign banks, have become conduits for dirty money flowing into the American financial system." The report proceeds to recommend, among other things, that U.S. banks investigate not only their customers, which virtually all banks already do, but also their customers' customers.

Notwithstanding the popularity points that politicians may gain, it is counterproductive to brand U.S. financial institutions as somehow complicit in criminal activity merely because they do not detect dirty money. It makes no more sense to insist upon anti-money-laundering compliance from financial institutions than it does to insist that airlines investigate their passengers to ensure that the airlines are not unwittingly carrying passengers engaged in criminal activity.

That commercial airlines carrying passengers to, say, Bogota, are not required to investigate their passengers' financial affairs, suggests either that the airlines need to change their practices or, more plausibly, that the compliance measures that have been required of U.

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