Guest Post. Effective AML Strategy: A Small Country Perspective

Smaller states are often thought to be more vulnerable to money laundering: less resources, fewer personnel, a lackadaisical attitude towards others’ problems. But as Charles Littrell explains in today’s guest post, even the smallest jurisdictions can prevent money laundering if there is the will to do so, and those don’t care or think they will benefit by turning a blind eye towards it are inviting a particularly virulent strain of cancer into their society.  Mr. Littrell is head of bank and trust company supervision for the Central Bank of The Bahamas, including AML supervision.  He was formerly an executive at the Australian Prudential Regulation Authority, and a member of the Basel Committee on Banking Supervision. He founded and is the Convener of the International Research Conference on Empirical Approaches to Anti-Money Laundering. This post represents Mr. Littrell’s personal views.

This post outlines a suggested strategy for small states to engage in the international money laundering movement.  The strategy comprises three elements:

  • Know what you don’t want—which is engagement with dirty money and the people associated with dirty money.
  • Deploy locally successful AML tactics in a globally unsuccessful world.
  • Proactively manage the FATF relationship.

Despising dirty money and dirty people

The core element in a successful small state AML strategy is sincere and comprehensive rejection of foreign illicit money, and the people associated with that money. The world’s major league criminals and their financial facilitators are among the least attractive and most dangerous human beings on the planet, and a successful small state will absolutely not welcome such people, their money, or their activities.

It is important to understand that this position is simultaneously the key to suppressing financial crime, and has little to do with the FATF or international compliance ratings.  Ideally a small state’s governing groups will be able to say: “Even if the FATF didn’t exist, we would still be taking robust steps to drive away dirty money and the dirty people associated with that money.”

In my work I am exposed to dozens of jurisdictions, many of which take the above line, and some of which, in essence, are saying: “how can we benefit from dirty money, while pretending not to like it?”  To which the obvious answer is: “you are accepting a cancer into your society.  Do you really want to take a chance on that cancer?”

Becoming effectively unwelcoming to dirty money and dirty people is a difficult and sometimes expensive process.  Small states need to be able to say to the right (or wrong) people, for example: “Don’t invest here.  Don’t move money or assets through here.  Don’t buy a house here, and don’t play here.”  This extends from regulators and policemen to (for example) bankers, fund managers, lawyers, real estate agents, and casinos.

In summary: a small state can only drive away dirty money if it really wants to do so, and takes appropriate actions across society to further that desire.

Local success, global failure

We don’t know how much dirty money moves around the world every year, and we don’t know the sum total of illicit assets invested.  On an order of magnitude basis, however, we can conjecture that more than a trillion dollars moves annually, and the extant stock of illicit assets exceeds $10 trillion.

Against this, we also don’t know the sum total of illicit assets recaptured, but these seem to amount to less than $10 billion per annum.  We also know from consulting firm reports and the like that aggregate financial sector spending on financial compliance including AML/CTF greatly exceeds $100 billion per year, and we can guess that non-financial providers and the world’s financial consumers absorb that level of costs as well.

All this adds up to: the world is stopping or recovering less than 1 per cent and perhaps less than a tenth of one per cent of the global flow and stock of illicit assets, while spending at least ten times illicit asset recoveries on compliance costs.  By any economic measure, this is a picture of comprehensive failure, and we have little confidence that it will improve any time soon.

If the world in aggregate is such an AML failure, what hope do small states have? Time for a parable:

Two hunters in the woods encounter an enraged grizzly bear, who immediately charges them.  As the hunters run away, the first hunter says to the second: “Why are we running? The bear is much faster than either of us.”  To which the second hunter replies: “I am not trying to outrun the bear.  I am trying to outrun you.” 

Successful small states will deploy the “faster hunter” strategy.

The world’s professional money launderers are astute people.  There are plenty of large and stable jurisdictions that are perfectly willing to work with them.  So why would major money launderers bother with small states who:

  1. Don’t want to do business with them; and
  2. Can demonstrate they are effective at driving away dirty money, or even better, at capturing dirty money?

The simple answer is that money launderers will avoid such jurisdictions.  Small states don’t have to be perfect in the AML space, they just need to be reasonably good.

One way to become reasonably good is to pay close attention to the FATF 40 technical compliance indicators.  They are a good basis for creating the infrastructure necessary to become good at anti-money laundering.

It rewards small states to scan the world for international initiatives that have worked.  These include:

  • Reducing tobacco consumption;
  • Reducing automobile deaths and injuries;
  • Safer civil aviation.

Such campaigns move well beyond the criminal justice and regulation focus deployed by the FATF to holistically encompass social norms, harm minimization, careful data collection, and commonly accepted tools such as cost/benefit analysis and international risk management standards.  It is possible to create, for example, robust frameworks to warn off foreign dirty money from the real estate and casino sectors, as well as the financial sectors.

In summary: don’t try to “solve” money laundering, but instead make it clear to any sensible money launderer that your jurisdiction is not the place to ply his trade.  As long as there are slower hunters among the world’s countries, this will prove an effective strategy.

Be like Bermuda if you want a good FATF result

Small states need to accept that:

  1. Achieving a reasonable FATF Mutual Evaluation Report (MER) outcome is a constraint, not the objective.  Your objective is to drive out dirty money from your jurisdiction, and become truly effective at AML. Your constraint is you don’t want to fall onto the FATF gray list.
  2. Small states can improve their MER outcome by over-committing resources to the MER, and not worrying about materiality or proportionality.  In the FATF world, every conceivable small state risk or noncompliance is a major issue, so iron all of them out.

The Bermudan engagement with the FATF is the international exemplar for small states.  In its recent MER, Bermuda achieved the world’s top technical compliance rating, and ranked tenth (out of 106) on effectiveness.  Bermuda is a small state, an island state, an international financial centre, and a non-white majority state.  All these characteristics suggest a bad MER result, and yet Bermuda performed very well indeed. How was this possible?  Reading the Bermudan National Risk Assessment (NRA) (here) is a start, and then their 2020 NRA update on terrorist financing (here). Having absorbed this material, the 213 pages of the Bermudan MER (here) should be an easy read.

The Bermudan lessons for small states are reasonably straightforward:

  1. Devote as many resources as you need to servicing the FATF connection—then double that commitment.  The Bermudans created a whole national agency to coordinate AML matters, for example, including FATF MERs.
  2. Make international AML compliance your number one parliamentary priority.
  3. Do not dismiss any AML or CTF risk, no matter how trivial or nonexistent, from your considerations and documentation.  Obsessively cover every conceivable AML and CTF risk in your economy and society.

The Bermudans achieved a spectacular MER result, at the probable cost of making this an important national priority in perpetuity.  With a national GDP per capita exceeding USD 100,000, Bermuda can more easily afford this than can most small states.

The Bermudan lessons nonetheless remain: understand that a FATF MER requires a striking and permanent national commitment of senior attention and resources, and that a very comprehensive NRA is the best place to start.

Summary Although the world as a whole is failing at AML, this is mainly a failure in large, rich states.  Through a coordinated national strategy and culture of despising dirty money and dirty people, and playing the FATF game effectively, small states can protect their societies and their financial systems from the reality and the appearance of welcoming dirty money.

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