Invasive Anti-Money Laundering Rules Don’t Work

The skepticism with which voices in the crypto space meet government financial regulations can sound like a broken record, but it isn’t a knee-jerk reaction. It’s actually a position informed by principle and by experience.

As we’ve written before, for instance, government sanctions against other nations almost always hurt their own citizens rather than the targeted nations. And as Coindesk writes, the anti-money laundering measures the US government employs impact innocent people while doing nothing measurable to stop criminal money laundering.

In theory, anti-money laundering (AML) measures are meant to identify and stop the global movement of funds either earned through criminal activity or intended to fund bad actors. The big-picture goal is to increase human happiness by strangling the bad guys’ finances. Those efforts extend into the realm of cryptocurrency – anti-money laundering measures are why you probably had to provide personal identification, or “know your customer” information, when you signed up to use the Coinbase (COIN) or Binance crypto exchanges.

That requirement illustrates one of the big trade-offs of the current surveillance-heavy AML model. Like FinCEN’s trove of SARs but on an even larger scale, KYC data imposes security risks on law-abiding citizens. In early 2021, for example, a trove of KYC data was hacked from Indian payment app MobiKwik.

But there are deeper, more systemic costs to the current status quo in anti-money laundering efforts. And they fall most heavily on some of the most marginalized and powerless people on Earth.

The entire system may be less a tool for crime prevention, than a means of bureaucratic ass covering.

“It drives up the price of banking across the board,” Jim Harper says. “So the person who feels they can no longer afford a banking account, that’s because of the surveillance that makes it much more expensive.” While AML requirements may not be the only factor, there’s no denying the rising costs and declining services of conventional banking in recent years, which Lisa Servon documented in her excellent 2017 book “The Unbanking of America.”

Another major concern has been the threat of tighter regulation to global trade and developing countries. Stricter sanction regimes and higher fines for violations after the Sept. 11, 2001, attacks and the 2008 financial crisis appear to have contributed to American banks severing international relationships, a process broadly referred to as “de-risking.” The main culprit here is the set of national blacklists maintained by the global Financial Action Task Force (FATF).

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These risks and barriers could be considered trade-offs for a financial system that restricts criminal activity. But the shocking truth is that we have almost no insight into what exactly we’re getting in return.

“The idea that cracking down on money laundering and tax evasion should eliminate the incentive to commit the predicate crime is a fundamental pillar to this system,” says Matt Collin. “And it’s the most untested part of the theory of change behind the whole apparatus.”

In other words, we have very little solid evidence that harsher anti-money laundering rules reduce the volume of drug trafficking or other major crime.

Collin says he is unaware of a single economic study clearly showing a reduction of crime following new AML rules (though he admits such a study might be difficult to design).