In a divided world, the recommendations of the Financial Action Task Force (FATF), whose 38 members include the UK, US and China (Russia’s membership is suspended), represent a remarkable global consensus on anti-money laundering (AML) strategy. But with Giles Thomson (pictured), director for economic crime and sanctions at HM Treasury, now presiding until 2028, is it time for a rethink?
For those of us familiar with the AML compliance obligations of regulated firms, the task force’s approach of requiring due diligence on clients and transactions, and feeding suspicious activity reports (SARs) into overburdened financial intelligence units (FIUs) clearly has its flaws. For those in law enforcement, the FATF report earlier this year (just before Thomson took charge), stressing the additional work needed to translate SARs into effective asset recovery, risks sounding like a painful statement of the obvious.
Part of the problem is an imbalance of resources. Financial institutions spend billions on processes meant to keep dirty money ‘off their patch’. At best, this displaces it into less-compliant environments. At worst, it prompts sophisticated launderers to evade detection and disrupts legitimate business. Chronic underfunding of FIUs and law enforcement makes their job, to use raw data from SARs to fuel criminal or civil recovery investigations, considerably more challenging.
The UK provides a salutary example of how overly strict laws can make these problems worse. By applying AML rules to all crimes and imposing criminal liability on low thresholds of suspicion, our Proceeds of Crime Act (POCA) generates spectacular volumes of SARs. Successive governments have sought to make up for under-resourcing by increasing law enforcement powers and limiting the rights of those affected.
A more fundamental question is whether a ‘hygiene’ strategy (which prompts countries and firms to keep dirty money ‘off their patch’) can really be expected to deter or prevent financial crime, or to help law enforcement capture its perpetrators or its proceeds.
Thomson’s background in financial sanctions may provide him with some insight into what is going wrong. Like AML laws, sanctions rely on the private sector turning away business that is or may be ‘tainted’, while freezing or reporting assets that are already ‘in the system’.
Globally, events connected with Iran and Russia show the limits of this approach. Even with full jurisdictional reach and creative use of secondary sanctions, the effect is often to push transactions and assets into other parts of the world, where they cannot be reached.
Where AML and sanctions differ is in their ‘end game’ (or lack of it). In theory at least, money or other property ‘tainted’ by crime is susceptible not just to freezing, but ultimately to permanent forfeiture. By contrast, in most respects and in most jurisdictions, financial sanctions remain – again, in theory – only temporary.
How should this ‘end game’ for AML inform the task force’s strategy? Certainly, countries are encouraged to develop asset-recovery strategies to achieve forfeiture (post-conviction or otherwise) of tainted assets. But this goal is harmed, not helped, by strict prohibitions that encourage firms to turn away business that would bring such assets (and related data) into the system.
These prohibitions will displace such transactions into less-compliant environments where they may not be detected, and/or escape the reach of the country’s law enforcement. Lower suspicion thresholds and stricter penalties on the unwary naturally increase this backfiring effect.
How would an alternative (‘hunter’) strategy work? In terms of POCA, any acquisition, possession or transfer of criminal property that would bring or keep it within reach of law enforcement could receive prompt or automatic consent (if reported). Transactions that removed property from reach would remain blocked under the existing provisions. The strategy would require property to be covertly ‘tagged’, so that regulated acquirers, though not the suspect parties, would know to restrict its future movement.
The FATF recommendations are compatible with this approach, but only if paired with creative thinking. By default, the ‘hygiene’ approach injuncts firms to avoid dealings with suspect property; their rational (though uneven) response is to erect strict barriers that disrupt all business to some extent, and which shift the problem elsewhere. The challenge is to notice and mitigate this backfiring effect.
Countries naturally cannot expect or require firms to positively attract property tainted by crime (or financial sanctions) into the system. Nevertheless, a ‘hunter’ approach to both problems should find ways to encourage this behaviour (paired with reports and restrictions) to aid asset recovery, or at least to mitigate the effects of prohibiting it.
Could the UK, under Thomson, lead the FATF from a ‘hygiene’ AML strategy to a ‘hunter’ approach, to kickstart asset recovery? The potential benefits extend not only to disrupting crime but also to reducing disruption on legitimate business (and regulated firms). With stakes that high, it is surely an idea worth further examination.
John Binns is a partner at BCL Solicitors, London
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