Closing Today’s Illicit Finance Loopholes
America has bolted the front door to illicit financial activity but left the back door wide open.
The United States has developed a reputation as the country with the toughest anti-money laundering regime and the most aggressive policies to combat illicit finance in the world. Large fines against banks act as a deterrent and spur investments in compliance. Strong criminal law enforcement efforts result in investigation and prosecution of money launderers. Americans would need to look back a decade to the exploitation of HSBC’s U.S. and Mexico operations by drug cartels, or even earlier to the infiltration of the Bank of New York by Russian money launderers in the 1990s, to identify a truly massive money laundering scandal. The strict treatment of banks in violation of anti-money laundering policies has established deterrence and keeps everyone invested in a culture of compliance.
But this narrative is incomplete. If the banks are the well-guarded front door to the U.S. financial system, electronic payments companies, private investment funds, and, to a lesser extent, securities firms are the back door left open—and the opening grows wider as these business models grow in importance. Electronic payments companies, while still relatively small, seem likely to dominate e-commerce and potentially all payments one day, as Facebook’s announcement of Libra coin may presage. Hedge funds, private equity, and venture capital have gone from a niche segment to a colossus. And securities firms, while long-established players, continue to be subject to less vigilant oversight than deposit-taking banks. This back door is a tempting entry point for illicit actors such as organized criminals, corrupt officials, or foreign governments attempting to interfere in the American political process.