The Tenuous Relationship between the Fight against Money Laundering and the Disruption of Criminal Finance

Article excerpt

This article examines the fight against money laundering as a case study of the separation between an enforcement system's objectives and performance. To launder money is to hide its illegal origin. The fight against money laundering is supposed to disrupt laundering in its various forms--especially what is done by third party launderers and leaders of criminal organizations. In the process, the fight is supposed to undermine the process of financing and profiting from crimes ranging from drug trafficking to terrorism. Yet this fight delivers less than what it promises. Like many other enforcement systems, the fight against money laundering involves three major components: statutes with criminal penalties charged by prosecutors, rules administered by regulators, and detection systems primarily run by investigators. A close analysis of its three components reveals the fight to have quite a limited scope, involving (1) the disproportionate imposition of severe penalties on predicate offenders who are easily detected; (2) lax and narrowly-focused regulatory authority; (3) limited capacity to detect a range of chargeable domestic and international offenses; and (4) global diffusion of a fight against money laundering that leaves implementing authorities plenty of room for discretion and lax enforcement. These limitations probably arise not because of blindness or bad intentions but because the major players involved in running the system--including legislators, prosecutors, investigators, and regulators--face a tangle of incentives that leads them to dilute the intensity and scope of enforcement against some targets and to enhance the sanctions faced by other targets. While there is some evidence that suspicious activity reporting probably helps identify drug money placement in banks, the system seems ill suited to detecting and disrupting the larger universe of criminal financial activity that is so often vilified by the rhetoric justifying the fight against money laundering. All of this makes it hard to target terrorist financing using the anti-laundering system, even though it is easy to freeze assets allegedly linked to terrorism. Some changes in the system such as enhancing audit trails and strengthening suspicious activity reporting and analysis could be defended in the name of making the system work, though politics would make them difficult to achieve and their ultimate consequences are hard to predict. In the meantime, any inequities in the detection of predicate crimes end up being reproduced in money laundering prosecutions, and the system's most compelling objectives--detecting crimes in a new way, and targeting third-party launderers and leaders of criminal networks-seem mostly beside the point.

INTRODUCTION

Here is a classic description of the "money laundering" game. (1) A drug dealer has a large amount of currency earned from the sale of crack and heroin. (2) His immediate problem is getting someone to turn stacks of crumpled $10 and $20 bills into balances at a local bank branch that can be easily transferred around the world, or across town to pay his supplier. (3) Once the money is credited to an account and moved around enough, it can be plowed back into more of the same criminal activity, invested in the legitimate economy, used to finance other criminal activities such as terrorism (so we are told in a post-September 11 world), or simply enjoyed by someone as profit.

To fight this system of criminal finance, governments aver a commitment to use a combination of criminal investigators--including undercover agents who offer to launder money and then catch the criminals who accept their generosity--as well as informants and regulatory tools, such as reports of large currency transactions to supplement traditional methods of criminal investigation. (4) Banks insist they cooperate with investigators and regulators by telling the government about suspicious transactions and trying to ensure that their accounts do not become coffers for laundered money. …