Drive Global Action on Money-Laundering

As an inherently transnational activity, global money-laundering is perhaps the definitive problem in need of cross-border, rules-based cooperation. The G7 should lead the way.

Expert comment
4 minute READ

Nigel Gould-Davies

Senior Fellow for Russia and Eurasia, International Institute for Strategic Studies (IISS)

Every year, owners of illicit wealth send huge sums of money from the countries where they made it to jurisdictions where they can conceal its origins. They can do so because laws, practices and intermediaries in the receiving countries make money-laundering safe and easy. These arrangements abet criminality, corruption and insecurity on a global scale. There is a clear, compelling and urgent case for closing this major governance gap.

Transnational organized crime has long relied on the ability to launder its earnings. But the issue goes much wider. Those who enrich themselves through corrupt relationships and tax evasion routinely send the proceeds to safer jurisdictions.[1] The scale of these outflows dwarfs international aid budgets designed to support good governance. The provision by receiving states of what are, in effect, corruption-protection services thus entrenches misgovernance.

Corrupt financial inflows also present a serious security threat by eroding financial integrity and international reputation. But this security dimension has been growing even more severe. Much corrupt money flows from countries that seek to undermine Western interests and values.

The ability of elites in those countries to send assets to, and conceal them in, the West sometimes helps sustain authoritarian regimes. Some illegal financial inflows are used to interfere in election campaigns, co-opt local interests or take stakes in strategic companies. Money-laundering is also used to evade sanctions imposed to punish unacceptable behaviour.[2]

Three steps are needed to make progress against international money-laundering. First, a universal norm of transparency needs to be established in respect of the beneficial ownership of corporate vehicles. Public registries of beneficial owners, bolstered with reliable data, must ensure that such owners are declared as natural persons, not legal entities.[3] These registries should be standardized and interconnected to facilitate cooperation.

Second, intermediaries need to be regulated effectively. These are the individuals and companies (banks, and trust and company service providers, or ‘obliged entities’ in EU terminology) that conduct the financial, legal, accountancy, property and other administrative operations which enable money to enter a country. Their customer due diligence should include, in particular, establishing the identity of the beneficial owners of the entities that they service.

Regulatory authorities should incentivize intermediaries to internalize a culture of compliance. Too often, compliance is formulaic and ‘tick-boxy’. Compare this with best practice in high-physical-risk industries, such as oil and gas. Here, the best companies drive continuous safety improvement in every aspect of their operations. This commitment is part of their corporate culture. Financial, property and legal service providers should adopt a similar mindset in their management of compliance risk.

Third, implementation needs to be properly resourced. Effective and consistent enforcement even of current laws and regulations will yield significant gains. This will require a step change in budgets, personnel and skills. Unlike other transnational crimes that it facilitates, such as terrorism or human trafficking, money-laundering is rarely an emotive issue for public opinion.

Political leaders should therefore provide the drive, direction and resources needed to prioritize enforcement. They should also adequately fund research that supports effective policy with rigorous, evidence-based analysis of the scale of the threat, the forms it takes, and the ways it is evolving.

Over the past decade, a global consensus has emerged that money-laundering should be addressed more effectively. In 2012 the Financial Action Task Force (FATF), the leading international standards-setter in this area, agreed new recommendations endorsed by nearly every country in the world.

Following this example, in 2014 the G20 adopted ‘High Level Principles on Beneficial Ownership Transparency’. In 2015 and 2018, the EU agreed its 4th and 5th Money Laundering Directives. The latter requires member states to establish public registries of beneficial ownership for corporate and other legal entities by January 2020.

But recent revelations, from leaks and whistle-blowers, have brought home the continued severity of the problem. The 2016 Panama Papers investigation revealed multi-billion-dollar fraud, tax evasion and sanctions evasion hidden through offshore companies. In 2018 Danske Bank, Denmark’s largest bank, was found to have processed $230 billion in suspicious transactions.[4]

Revelations from scandals such as these are likely to continue to emerge. They demonstrate that the rules governing financial inflows, and the resources devoted to their enforcement, remain inadequate in relation to the scale of the challenge.

The priority now is to focus on better outcomes by strengthening global norms, bringing national practices into line with them and, above all, developing the capacity to implement them. While this is a global challenge, Western countries should take the lead. They, and the jurisdictions they control (like the UK Overseas Territories and Crown Dependencies), are the major service providers for illicit transnational financial flows.

They also face the biggest security threats from regimes that transfer assets overseas. And Western progress will have a wider demonstration effect by undercutting excuses made by others for resisting higher standards. Established best practice can also provide the basis for peer assistance and technical support to other states.

The most attractive destinations of all for illicit money are the US and the UK, with their highly developed financial and facilitation industries, traditions of light-touch regulation and strong rule of law. Their G7 presidencies in 2020 and 2021 respectively are a natural opportunity to demonstrate sustained global leadership in efforts to counter illegal financial flows.

Both countries should make the achievement of further progress in establishing robust global anti-money-laundering rules, and effective implementation, a priority of their presidencies.

At present, there is far more scrutiny of how money is made than how it is moved. And the West demands higher anti-corruption standards of its own companies overseas than it does of foreign money that flows in from abroad. This is a major gap in global economic governance. On grounds of ethics, policy consistency and security, it is time to close it.

What needs to happen

  • A first priority in strengthening anti-money-laundering efforts is to establish a universal norm of transparent beneficial ownership of corporate vehicles.
  • Public registries must ensure that beneficial owners are declared as natural persons, not legal entities. These registries should be standardized and interconnected to facilitate cooperation.
  • Intermediaries need to be regulated effectively. Mandatory due diligence should include establishing the identity of beneficial owners of the entities serviced.
  • Effective implementation and enforcement will require much greater resourcing. Political leaders should drive this process, including ensuring adequate funding for research.
  • Western countries should take the lead in strengthening global norms, ensuring national-level compliance and developing capacity. Established best practice can provide the basis for peer assistance and technical support to other states.
  • The G7 presidencies of the US and the UK, in 2020 and 2021 respectively, offer a natural opportunity to demonstrate global leadership. Both countries should use their terms to strengthen rules and implementation.

Notes

[1] van der Does de Willebois, E., Halter, E. M., Harrison, R. A., Park, J. W. and Sharman, J. C. (2011), The Puppet Masters: How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It, Washington DC: World Bank.

[2] See FACT Coalition (2019), ‘FACT Sheet: Anonymous Companies and National Security (May 2019)’, 17 May 2019, https://thefactcoalition.org/fact-sheet-anonymous-companies-and-nationa…; and Fuller, C. R. (2019), ‘Financial transparency is not only about rule of law but also national security’, American Enterprise Institute, 12 March 2019, https://www.aei.org/publication/financial-transparency-is-not-only-abou….

[3] For a discussion of progress towards beneficial ownership transparency, and the challenges that remain, see Adam Smith International (2019), Towards a Global Norm of Beneficial Ownership Transparency: A scoping study on a strategic approach to achieving a global norm, https://issuu.com/adamsmithinternational/docs/towards_a_global_norm_of_….

[4] Sorensen, M. S. (2019), ‘Estonia Orders Danske Bank Out After Money-Laundering Scandal, New York Times, 20 February 2019, https://www.nytimes.com/2019/02/20/business/danske-bank-estonia-money-l…; and Danske Bank (2018), ‘Findings of the investigations relating to Danske Bank’s branch in Estonia’, press release, 19 September 2018, https://danskebank.com/news-and-insights/news-archive/press-releases/20….

This essay was produced for the 2019 edition of Chatham House Expert Perspectives – our annual survey of risks and opportunities in global affairs – in which our researchers identify areas where the current sets of rules, institutions and mechanisms for peaceful international cooperation are falling short, and present ideas for reform and modernization.