My call to repeal the anti-money laundering laws got published in the current issue of the Cayman Financial Review. In "Repeal the anti-money laundering laws" I explain how the AMLs stifle currency competition. I concluded:
There are political costs to consider. The increased scrutiny of politically exposed persons and sanctions greatly complicate AML compliance, increase costs and can cause unintended political by-products. In addition, to the extent the AML programs are successful, they can divert funds away from monitored channels to places with no financial intelligence. Iran trades with gold marginally reducing demand for the U.S. dollar in international trade. Individual Iranians use bitcoins as an alternative to their currency instead of the U.S. dollar. Just recently, the Cuban interest section in Washington, D.C. is closing for lack of legitimate banking options because of AML and FATCA compliance concerns.
Even when the authorities shut down the Liberty Reserve operation (an alternative electronic currency operation allegedly set up for money laundering), they admitted that most people using the site were there for the low 1 percent transaction fees for remittances or get around forex restrictions. The plight of the Kenyan, Guatemalan and Somali people and others around the world who depend on low-cost money transfers to survive or rise out of poverty or recover quickly from disasters should not be ignored.
AMLs stifle needed new payment systems such as bitcoin. Less regulated industries such as technology are adapting much faster than the financial system. Actors in the financial industry are often late adopters to quickly changing technologies. On the other hand, new electronic monies have been less regulated (though this is changing).
It is bitcoin, Liberty Reserve and others that are allowing faster and cheaper mobile payments to more of the world's population, including the unbanked, than has ever been possible. These changes mean more money is reaching the people who need it most ─ and faster including situations when lives depend on it. Grafting a failed AML approach from the polyester-wearing disco music era onto the fast changing 21st Century technologies can't end well.
In conclusion, as I cited in my 2001 Congressional testimony on what became the USA PATRIOT Act, money launderers do not have a statistically significant chance of being caught so the deterrent effect of our AML approach is negligible. Only a minuscule fraction one percent of CTRs and SARs result in criminal convictions. I know of no examples where AML reports prevented any terrorist events.
Our AMLs are a failure: the drug trade continues unabated, financial fraud is more prevalent now than ever, and terrorist groups continue to finance their operations. The greatest tragedy is what everyone knows and policymakers don't seem to care: it is the unbanked, the poor, and the racially and ethnic minorities in rich countries (and the populations of poorer countries) that suffer these costs for such elusive benefits.
Time to reboot our AML policies to aid law enforcement, encourage innovation, cut costs and protect privacy and other human rights.
On a humorous personal note, the original story ran with a bio that added a "g" to the end of my dot org email address before I got it corrected.
Relatedly, Larry White made many of the same points in his talk at the Cato Monetary Conference last year. Video here.
Edit: The American Banker has a white paper out calling for reform of the AMLs making similar arguments to mine. They want to "modernize" them "using predictive analytics to pinpoint suspicious activity."