The War on Money Laundering: An Impossible Victory

Unanimous international recognition of the priority of preventing and combating money laundering is one of the most remarkable developments of recent decades. The 2000 United Nations Convention against Transnational Organized Crime marked a universal starting point in the fight against money laundering.

The scale of the phenomenon is alarming. Although estimates of the amount of money that escapes state control are fraught with uncertainty, the International Monetary Fund’s estimate of 2% to 5% of global GDP speaks for itself. Transactions in financial markets total close to $100 million per second. The volume is enormous, and it is impossible to prevent money launderers from combining transactions worth many millions in just a few minutes to conceal or bring to light proceeds of crime.

The 2001 attack on the Twin Towers gave the problem a new and terrible dimension, making clear to the international community that money laundering is not only a serious drain on states’ economies but also a source of funding for the most brutal forms of terrorism. That same year, the United States passed the so-called Patriot Act, introducing a set of forceful measures against money laundering and terrorist financing. These required financial institutions to adopt much more robust prevention programmes and increase due diligence reporting on overseas bank accounts.

The European Union, which had already adopted a directive on money laundering controls in 1991, has issued four more since then, including one in 2001, tightening its enforcement tools and addressing new forms of money laundering. A European regulation is now in preparation. It will harmonise member states’ rules and establish a European Authority, the AMLA (Anti-Money Laundering Authority), based in Frankfurt, to coordinate national Financial Intelligence Units.

The Financial Action Task Force (FATF) has, in turn, become a global benchmark in the fight against corruption and money laundering. Its well-known 40 Recommendations and periodic assessments of states have ended the apathy of many of them. A country’s inclusion on a blacklist or grey list has become a major stigma, prompting distrust and rejection in international trade. No one wants to be on these lists anymore.
In Latin America and the Caribbean, many states have adopted, or are adopting, all or most of the FATF Recommendations.

The creation of GAFILAT, comprising 18 countries in the region, has helped build a sound legislative framework for combating money laundering. The International Monetary Fund, the World Bank and the Inter-American Development Bank are also supporting countries in the region as they strengthen their financial supervision systems. However, structural weaknesses and entrenched corruption in some of them hamper—or, in reality, make impossible—the effective implementation of the legislative measures adopted. Corruption frustrates money laundering investigations, and some economies in Latin America and the Caribbean have become money laundering hubs where criminal groups operate freely and convert their proceeds as they please.

The road is long, and much remains to be done

In general, the fight against money laundering focuses on two stages: prevention and enforcement.

Prevention aims to stop money laundering before it occurs through rigorous controls on funds and monitoring of clients and business partners (the process known as KYC, “know your client”). Financial institutions have primary responsibility for implementing measures that can flag any attempt and for reporting suspicions to the Financial Intelligence Unit. But all organisations, large or small, are equally required, each at its own level, to protect themselves against the risk of using or being used to move funds derived from corruption or drug trafficking.

As for enforcement, recent years have seen the offence of money laundering spread remarkably through criminal codes, along with a considerable—and sometimes excessive—increase in prison sentences. This has been driven by the FATF’s ongoing scrutiny of states and by the influence of the OECD. But an effective fight against money laundering requires a far more ambitious approach than expanding or increasing penalties for criminal offences. It must genuinely put an end to the underlying criminal activity—drug trafficking, tax fraud, corruption and so on—so that dismantling a criminal organisation does not end with the arrest and imprisonment of its members. Authorities must reach the heart of its financial system, intervene and neutralise it; otherwise, criminal organisations reproduce at speed, like the Hydra.

The emergence of crypto-assets in 2009, with no legal regulation and enormous potential for anonymity, opened up a new and enticing landscape for money launderers. According to Europol, money laundering through cryptocurrencies increased by 30% in 2021 alone. Some estimates from that same year put the total cryptocurrency market capitalisation at a record €2.6 trillion in November. The rise of this new economy—which is no longer all that new—is simply meteoric.

Thanks to their anonymity, speed and cross-border reach, crypto-assets are a tempting and relatively safe way to move dirty money around the world.

In 2018, alarmed by this gap in enforcement, the European Union brought providers of virtual-to-fiat currency exchange services and custodial wallet providers within the scope of anti-money laundering obligations, subjecting them to duties such as monitoring and business relationship oversight. More recently, it issued the European regulation known as MiCA (Markets in Crypto-Assets), which provides for ambitious regulation of crypto-assets. It is binding in all EU member states and is already entering into force in stages. However, the crypto sector is evolving so rapidly that it is still too early to assess the effectiveness of these initiatives.

In Latin America and the Caribbean, the situation is quite different. Crypto-asset regulations are fragmented, with substantial differences between countries. Each national financial authority is developing its own rules, with little concern for designing legislation that converges with that of other states and could pave the way for future legal and judicial cooperation in this area. The differences are so stark that, for example, bitcoin has been legal tender and part of El Salvador’s financial system for three years, while in Bolivia it was completely prohibited from 2014 until now.

Crypto-assets are a fascinating reality that will almost certainly transform our economic world profoundly in a very short time. But they inhabit a high-risk zone, a veritable highway for the uncontrolled movement of money and assets. States must develop robust, coordinated rules.

About Diego Cabezuela:
Diego Cabezuela is a lawyer and president of In Law Alliance of Lawfirms, as well as senior partner at Círculo Legal (Spain).

In Law Alliance is an international network of firms specialising in business law. Founded in Panama in 2006, it aims to provide legal services, reports and advice across all areas related to companies and business.