Losing the War against Dirty Money: Rethinking Global Standards on Preventing Money Laundering and Terrorism Financing

"We must now wage an all-out war to prevent money laundering and the financing of terrorism." (1) "One and one is two. Two and two is four. I feel so bad 'Cause I'm losing the war." (2) INTRODUCTION Since at least the 1970s, there has been a sustained and increasingly global interest in stopping money laundering. (3) The reasons are hardly complex. Law enforcement may be able to follow a money trail of criminal proceeds to find the perpetrator or use the proceeds as evidence in a prosecution. (4) The state may also be able to confiscate the ill-gotten gains. (5) Criminals, therefore, seek to disguise the illegal origins of the proceeds of crime and their ownership of the proceeds. (6) At least in theory, preventing criminals from succeeding makes it harder for them to benefit from their crimes. (7) Over the past forty years anti-money laundering rules have been expanded, refined a bit, but rarely completely re-thought or substantially rewritten. (8) The vast majority of the world's jurisdictions now endorse the latest version of the Financial Action Task Force's Forty Recommendations on Money Laundering ("FATF 40 Recommendations") (9) and accompanying Methodology for Assessment. (10) Starting in 1990, these global standards have required financial institutions (11) to monitor the transactions of their customers and to report to special government authorities (known as financial intelligence units) those transactions they suspect might involve the proceeds of crime, (12) and since 2001, the financing of terrorism. (13) Financial intelligence units then analyze the reports along with other data and make recommendations to law enforcement as to which clients or transactions should be investigated. (14) The terrorist attacks of September 11, 2001 greatly intensified the global "war" on money laundering and, for the first time, on terrorism financing. (15) In 2002, the International Monetary Fund and the World Bank adopted the FATF 40 Recommendations and the eight new Special Recommendations on Terrorism Financing as a world standard. (16) They, along with the Financial Action Task Force and various regional anti-money laundering groups, also began a joint global compliance program by assessing the extent to which individual countries were implementing those standards. (17) Failure to implement the standards adequately can result in a broad application of sanctions or countermeasures, including bans on doing business with financial institutions located within the borders of non-complying jurisdictions. (18) As a result, millions of suspicious transaction reports have been forwarded to financial intelligence units by financial institutions throughout the world, (19) although how many have resulted in further investigation, prosecution, and conviction is not publically available. (20) These measures to prevent money laundering and terrorism financing in the financial sector have been endorsed by nearly every country in the world. (21) The only major problem is that they do not seem to work. (22) In fact, this Article argues they cannot work, and that they need to be rethought. The Article suggests that the long-accepted view that such a significant amount of criminal law enforcement should be left in private hands (23) is wrong. Instead, the government should undertake the key role financial institutions currently play in deciding if their clients are possible money launderers or terrorists. The article also argues that financial intelligence units should make such determinations in ways that are analogous to how some advanced country revenue authorities select income tax returns for audit, particularly the United States Internal Revenue Service. Financial institutions, this Article suggests, should be relegated to reporting only objective information on customers and transactions in much the way that certain third parties must report taxpayer transactions to revenue authorities. …