Anti-money laundering enforcement fails

KYC = Know Your Customer regulations, AML = Anti-money laundering

When it comes to the benefits, it is worth asking tough questions. For instance, do KYC and anti-money laundering regulations adequately protect consumers, investors and the overall financial system from financial crime? How much do they deter would-be criminals? How much of the illicit flows are recovered thanks to such checks?

A 2018 study by American political scientist Ronald Pol suggested that the overall impact of AML policy intervention on criminal finances is less than 0.1 percent – that is, absolutely negligible.

Mr. Pol’s findings are in line with those of a 2011 research report by the UNODC, according to which “much less than one percent (probably around 0.2 percent)” of the proceeds of crime laundered via the global financial system are seized and frozen.

A 2023 Europol report confirmed what one could have suspected: terrorists, criminals and fraudsters always find ways to circumvent even the most complicated regulatory processes. Among others, they exploit cutting-edge technologies much faster than authorities can keep up.

If criminal enterprises are keeping 99.8 percent or more of their dirty money, it is hard to call the current regulatory systems efficient. Mr. Pol acknowledged that his data and methodology could be subject to criticism. Money laundering is a secretive activity, so accurate information on illicit flows is difficult to obtain and estimations cannot be definitive.

Nevertheless, the gap between policy intent and results is huge. A similar critique also came from Christopher Giancarlo, former chairman of the United States Commodity Futures Trading Commission (CFTC).