European Think-Tank Leader Warns Against Excessive Money-Laundering Regulation

Tax-News.com, Brussels

10 October 2001

Flavour of the month among legislators is for greater intrusion into individual's financial affairs in the pursuit of criminal or terrorist activity, but liberal voices are being raised against excessive snooping and mountains of self-defeating disclosure regulations.

Last week, echoing the Government's calls for stricter reporting rules for financial transactions, the UK's National Criminal Intelligence Service (NCIS) warned that international initiatives to combat money laundering, tax evasion, and terrorist activity will fail unless greater cooperation between financial institutions and the intelligence services is achieved. But president of the European Financial Forum Graham Mather says in an article for the Times that yet more layers of information-gathering rules are not the answer; he also takes a swipe at the notion fashionable in some government quarters that 'tax haven' = 'money-launderer'. Here is Mr Mather's article:

TONY BLAIR’S crackdown on money-laundering has massive potential for good. But his plans — specifically directed at known or suspected criminals — have been launched during a highly confused debate. The wrong targets could easily be hit in a jittery policymaking version of “friendly fire”.

The World Trade Centre outrage is having important policy effects in the fields of the fight against money-laundering and the pressure against low-tax and offshore financial centres. It is important to unscramble some of the issues, or confusion can set in, policy mistakes can be made and the fight against terrorists and criminals compromised by well-intentioned mis-steps.

To apply a tourniquet to the funds of terrorist groups and their supporters, actions by the authorities need to be highly professional, focused and targeted. In the more humdrum areas of metropolitan crime, for example, massive breakthroughs have been made when police switched from waiting for crimes to happen and reacting case-by-case to applying more effort to identifying, pursuing and apprehending known criminals.

In the same way the battle against money-laundering needs more focus on the criminals. The criminals are not, on the whole, banks, lawyers or professionals. They are mafias, drug dealers, vice gangs and terrorist groups.

Sifting through millions of financial transactions or placing onerous burdens on banks, accountants and lawyers to report “suspicious” activity is of questionable efficacy in the fight against money-laundering. It makes the obligation of public authorities passive: in this model they await reports from bank managers, accountants, lawyers and other professionals, rather than taking active steps to deploy crime-fighters to identify, pursue and indict criminals.

Although the passive approach is easier it doesn't work. Criminals are adept at avoiding money transmission routes where the transmitters are likely to file reports on their transfers. A handful of rogue professionals do not file reports of “suspicious” transfers. Worse, the passive approach eventually overloads the system in a wealth of fruitless and ineffective reporting.

In the United States itself, plans to require banks to report on a mass of financial transfers at $10,000 or above generated hundreds of thousands of complaints from innocent citizens who would be caught up in the system. One official put it: “know your customer became kill your career”, and Congress dropped the proposal.

While the passive approach clogs systems with information and reports, it also interferes with the legitimate privacy of honest citizens. In making it less likely that criminal activity will be spotted, lost in the tidal wave of paper and data reports, it makes it more likely that honest citizens will be alienated by hoops and hurdles in performing the simplest financial transactions.

To change the details of an account with a financial service firm with which I have banked for 20 years, I must submit a copy of a passport, a utilities bill and stay at home in the evening for a security telephone call. Countries which place a high premium on privacy have also recognised that it can survive only if complaints of criminal conduct are addressed immediately and vigorously. Switzerland has dramatically stepped up the personnel working in its anti-money-laundering teams.

Corrupt dictators, as well as doubtful business figures, have found that the Swiss have been punctilious in co-operating with requests for information from national and international authorities.

In Liechtenstein, following demonstrably unacceptable delays and constipated court procedures, the Government and private sector have acted with legislation and the creation of a powerful Institute for Compliance and Quality Management to certify and develop best practice.

There is a danger from a second fault-line. Low-tax countries are not prima facie money-laundering centres. An attack on money-laundering that stamped out tax competition would be economically damaging as well as politically misplaced.

When tax information is needed by revenue authorities around the world it too should be focused and targeted against suspected criminals, rather than taking the form of generalised fishing expeditions or the automatic exchange of information about the transactions of honest citizens.

Paul O’Neill, the US Treasury Secretary, put it well when he said that exchange of information must be precise and subject to judicial procedures. But now officials are trying to go back on these principles, saying that they are “re-evaluating” their policy on low-tax centres.

The OECD itself, in its much criticised campaign against “harmful tax practices”, has emphasised that its project envisages information exchange “only ‘on request’ in connection with a specific tax investigation or examination. Automatic exchange of information is not contemplated”. Yet the EU, apparently egged on by the Inland Revenue, contemplates making every citizen’s savings details available to every EU tax authority without any judicial control or procedural safeguard.

It would be a bitter irony if lack of clarity about the way to fight money-launderers let them off the hook while damaging the drive to lower tax burdens and creating a confused debate on privacy and human rights.

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