[fc-discuss] Financial Cryptography Update: The Economist on the FATF - a net 'bad'

iang@iang.org iang@iang.org
Sat, 29 Oct 2005 14:21:52 +0100 (BST)

 Financial Cryptography Update: The Economist on the FATF - a net 'bad' 

                            October 29, 2005




I haven't time to write a proper blog entry on the net 'bad' that is
the FATF and the anti-money laundering people.	Economists know that
anti-money laundering is unlikely to work just from common sense - the
procedures proposed and implemented will probably cause more costs than

But nobody wants to be the messenger writing against one of the world's
most powerful, entrenched - and now damaging - bureaucracies.  Which
makes the Economist's recent article all the more welcome.  Read it and
spread it:

For now the burden of implementation appears likely to rest with the
private sector. “Banks are going to have to start behaving like the FBI
and CIA,” contends David Porter of Detica, a Britain-based consultancy
with expertise in financial crime. “They need to start connecting the
dots.” This “risk-based” approach—concentrating time and energy on
checking a smaller number of individuals or businesses based upon their
transaction histories, sources of funding and other factors—is gaining
wider acceptance.

For KPMG's Mr Dillon, the resources already spent on the effort have
handed a victory to the terrorists. “The cost to our global economy is
so large, they've already had the effect they wanted,” he says. “The
increasing costs of compliance and technology are a form of terrorism.
We're damaging ourselves.”

The championing of terrorism is an easy soundbite - it can't possibly
be wrong can it?  Unfortunately, it's dead wrong and in time people
will come to think about terrorism in an common sense way.  Anyone who
is familiar with finance, war or expatriatism can tell you that trying
to control flows that small is futile, and all you are doing is adding
costs to your own people while arguably providing cover to the people
you are trying to catch.

The Economist pulls its punches - but that's because no economist wants
to sit down and take the risky job of documenting how the FATF and the
OECD are damaging the economy and life in general.  As Financial
Cryptographers we know how this is the case because we see the rules
and regulations, and we see real crooks.  There is little connection! 
But sometimes we can also spot where the anti-money laundering agencies
have done palpable and painful damage.	Here's such a case:

The gang reportedly stole customer login ids and passwords using
keylogging software and then used the information to steal cash from
Web banking accounts. The stolen funds were then transferred into the
accounts of "mules" who were offered cash in exchange for the use of
their bank accounts.

I first spotted this new money laundering technique a year or so back,
and no doubt it has been used more extensively before that.  What
happens is that innocent people are approached with a business deal
that just happens to launder funds.  The deal is dressed up in such a
fashion that the innocent can't tell what the real purpose is, so they
go for it.  Everyone needs a job, and maybe your lucky break just
turned up?

The damage done by the FATF has been to move money laundering out of
the domain of the banks - where it can be watched - into the domain of
the people.  Goodhart's Law, in other words.  People who have no clue
what is happening are now being used as 'mules' in a crime which when
uncovered - and of course that's a very high probability - will do
immense damage to their lives and livlihoods.

I've seen it used on students, on expats and others.  If you asked
those people whether they'd preferred not to have to deal with such a
complex fraud, then I'm sure they'd have begged for the chance.

Our thanks go to the FATF and OECD for making business unsafe for all
of us.	Is asking us all to behave like the FBI and the CIA really
worth it?  When you do get around to doing the benefit analysis, don't
forget the costs that we have to pick up.

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