AML implementation issues
Someone we know pointed out that we had been saddled with the rather onerous Sarbanes Oxley not because companies were bad at record keeping, but because companies had been engaging in fraud and theft. As is almost always the case the legislation that came out of this over-reacted: All Sarbanes Oxley really needed to say was that auditors could no longer act as corporate consultants.
What we end up with is a vicious circle of theft and fraud on the part of corporate managers followed by onerous regulation that makes for an unpalatable business climate here, inducing companies to go offshore. In the past there were other options available to deal with these issues. As an example, at one point shareholders could intervene. However, Justice Powell effectively quashed this remedy, so that shareholders are no longer a concern for managers.
Another possibility would be better monitoring of existing regulations. Some find it comforting to know that inspectors are making sure that food processors are being watched to make sure that the food we buy won’t kill us, that airlines are being inspected to make sure that planes won’t fall out of the sky because of improper maintenance, and that corporations are being audited to make sure that they are not engaging in theft and fraud. However, lobbyists have been extremely effective in cutting down inspectors in all government agencies, and it is a safe guess that if the SEC again tried to make substantive inspections, their budget would be slashed.
Note that inspection is designed to induce compliance. Enforcement comes after the breach of trust and fidelity. Compliance –not engaging in theft and fraud –comes before. Further, while there no doubt that an increased budget for the SEC would result in increased compliance, does the increased vigilance translate in to increased opportunity for the economy, or a disincentive to use the US? If inspection induces compliance it is good. If it is merely punitive it is bad. If companies leave the US because of a hostile environment it is bad. If they leave because they feel they can more easily engage in theft and fraud in another jurisdiction it may well be good.
This balance is something we keep in mind when implementing AML programs, particularly in developing nations. On the one hand, we want to be compliant. Often this is the only interest of the hiring agency, particularly in the US. On the other hand, we also wish to actually cut down and detect money laundering: This is, in theory, what AML is about.
Money laundering is an event used to gather funds from crime to support both criminals and the reinvestment of those proceeds into additional activities that are antithetical to government and the needs of the general population. Failure to prevent money laundering is economic fertilizer for the enemies of state and the common good. On the third hand, we do not want to create an environment that is hostile to business, and hinder economic growth rather than help it. It can be an uncomfortable balance until the gatekeepers get the real importance of what they are to do.
Trying to get all three of these elements in place is a challenge, particularly if the only desire is to meet some minimal level of compliance – activity over substance – and then go back to business as usual.