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RETHINKING THE GLOBAL ANTI-MONEY LAUNDERING REGULATIONS TO DETER CORRUPTION

Published online by Cambridge University Press:  20 April 2018

Sungyong Kang
Sungyong Kang*
Affiliation:
Inspector of the Korea National Police University/Korea National Police Agency, S.J.D., Attorney at Law, skang25@fordham.edu.
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Abstract

While ‘global anti-money laundering (AML)’ regulations aim to detect and deter corrupt ‘politically exposed persons (PEPs)’, they have caused tremendous collateral damage to many innocent PEPs, particularly foreign PEPs. Due to the significant compliance costs of identifying and managing accounts of foreign PEPs coupled with an increased risk of serious fines against compliance failures, financial institutions have voluntarily terminated the accounts of foreign PEPs. Global AML regulations could avoid the collateral damage while maximising the deterrence of corruption if high degrees of coordination along two dimensions are satisfied, namely, transborder coordination and coordination between public enforcement entities and private actors. This study illustrates a cornerstone change made in 2012 to fulfil the first dimension and offers policy recommendations to build on this cornerstone by pursuing coordination along the second dimension.

Keywords

accountabilitycorruptionglobal anti-money laundering regulationspolitically exposed personsprotection of privacy of PEPspublic–private cooperation
Type
Articles
Information
International & Comparative Law Quarterly , Volume 67 , Issue 3 , July 2018 , pp. 695 - 720
Copyright
Copyright © British Institute of International and Comparative Law 2018 

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References

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3 See Financial Action Task Force (FATF), ‘FATF 40 Recommendations’ (2003) 5; FATF, ‘Countries’ <http://www.fatf-gafi.org/countries/>.

4 A quasi-public organization (eg Basel Committee on Banking Supervision) and a private organization (eg Wolfsberg Group) came up with their own AML/PEP standard. See Basel Committee on Banking Supervision, ‘A Brief History of the Basel Committee’ (July 2013) 1; The Wolfsberg Group, ‘Global Banks: Global Standards’ <http://www.wolfsberg-principles.com>.

5 U.S. Code Title 31 Part 5318 (2012).

6 Braithwaite et al. (n 1).

7 ibid.

8 See TS Greenberg et al., ‘Stolen Asset Recovery, Politically Exposed Persons: A Policy Paper on Strengthening Preventive Measures’ (World Bank 2009) 7, 17.

9 ibid, xv.

10 See FATF, ‘International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation: The FATF Recommendations’ (February 2012) 16.

11 See Greenberg (n 8) 18–19, 27–9 (illustrating discrepancies between international PEPs standards in defining to what extent the family members and close associates of PEPs, military officers, judiciary and diplomats should be categorized as PEPs).

12 Academic scholarship does not usually deal with problems of PEP regulation. Much of the academic debate relates to problems of PEP regulation in a broader context, lacking a profound analysis on PEP regulations. See Gordon, RK, ‘Losing the War Against Dirty Money: Rethinking Global Standards on Preventing Money Laundering and Terrorism Financing’ (2011) 21 DukeJComp&IntlL 503Google Scholar; Gordon, RK, ‘Trysts or Terrorists? Financial Institutions and the Search for Bad Guys’ (2008) 43 WakeForestLRev 699Google Scholar. Even literature specifically focusing on PEP regulations tends to repeat the argument—variance among approaches between international standard setters—made by the reports of standard-making bodies or their affiliates. See Lee, PL, ‘A Renewed Focus on Foreign Corruption and Politically Exposed Persons’ (2010) 127 BankingLJ 813Google Scholar. Professor Matthew Stephenson navigated the possibility of a public registry of PEPs by contradicting the comment of David Lewis, the Executive Secretary of the FATF, who disregarded such possibility. However, his suggestion was merely to open a discussion in an informal setting. Stephenson, M, ‘Should There Be a Public Registry of Politically Exposed Persons?’ The Global Anticorruption Blog (7 June 2016)Google Scholar.

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19 International Monetary Fund, ‘Anti-Money Laundering and Combating the Financing of Terrorism Inclusion in Surveillance and Financial Stability Assessments-Guidance Note’ (14 December 2012) 5–6.

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23 U.S. Code of Federal Regulations Title 31 Part 1010.610 (b).

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29 See FB Deringer, ‘Anti-Bribery and Corruption: Global Enforcement and Legislative Developments 2017’ (2017) 2; Trace International Report, ‘Global Enforcement Report 2016’ (2017) 8.

30 See Pt I.

31 UNCAC art 52.1.

32 FATF, ‘FATF 40 Recommendations’ (2003) 17; FATF, ‘Countries’ <http://www.fatf-gafi.org/countries/>.

33 FATF, ‘International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation: The FATF Recommendations’ (February 2012) 16.

34 Greenberg (n 8).

35 ibid, xv.

36 FATF (n 10).

37 Organization for Economic Cooperation and Development, ‘ADB/OECD Anti-Corruption Initiative for Asia and the Pacific’ (9 September 2009) 2.

38 Though scope and perspective of analysis is different from this article, a prior research analysing diverse domestic laws criminalizing a failure to report crime from a traditional criminal law perspective—culpability analysis—suggested several principles, one of which is provision of governmental information to private actors with a reporting duty, to be respected for justification of those laws. Kang, S, ‘In Defense of Duty to Report Crime’ (2018) 86 UMKC Law Review 392Google Scholar.

39 Braithwaite et al. (n 1).

40 ibid.

41 ibid.

42 UNCAC art 52.1.

43 FATF, ‘FATF Guidance Politically Exposed Persons (Recommendation 12 and 22’ (2013) 3.

44 The cost of compliance with overall AML regulations, including PEP regulation, is available. See M Butler, ‘A More Effective Approach to Combatting Financial Crime’ (FCA 21 September 2016) (‘The BBA has already estimated financial crime compliance costs its members some £5bn a year. We know credit institutions filed around 318,000 suspicious activity reports in 2014–15. So we can say with some confidence that the average cost of a SAR runs into the thousands.’; see also Saperstein, L, Sant, G and Ng, M, ‘The Failure of Anti-Money Laundering Regulation: Where is the Cost-Benefit Analysis?’ (2015) 91 NotreDameLRev Online 4–5Google Scholar ‘International banks spend enormous amounts on anti–money laundering compliance. HSBC recently estimated it now devotes $750 million to $800 million per year on compliance—an amount equivalent to one quarter of the operating budget of its entire U.S. operations—to fight against financial crime. Between 2012 and 2015, the bank added around 5000 additional staff—about $300 million in salary—to work in compliance alone.’) (citations omitted). In regard to an increased risk of serious fines for compliance failures, see Butler ibid (‘Since 2012, we have fined 7 banks and 1 Money Laundering Reporting Officer for AML failings.’); Anello, R, ‘Financial Institutions: How Much More Will You Have to Spend on Anti–Money Laundering Programs to Avoid Criminal Prosecution?’ Forbes (24 October 2012)Google Scholar (‘Rather than focusing on money laundering that results from substantive criminal violations, such as mail or wire fraud, drug crimes, or corruption, federal prosecutors are looking instead at weaknesses in the internal procedures employed by financial institutions to prevent laundering.’); WilmerHale, ‘AML and Sanctions: 2017 Trends and Developments’ (27 April 2017) 25. (‘At the start of 2017, all of the five largest U.S. banks by asset size had been subject to public regulatory actions relating to BSA/AML or sanctions deficiencies at some point within the past five years. Public disclosures also reflect that regulators and law enforcement remain active in these areas of enforcement, with a number of the largest financial institutions disclosing ongoing inquiries at the end of 2016. In 2015, we saw record-setting penalties imposed, at times approaching and exceeding the billion-dollar mark. While the frequency and size of enforcement actions in 2016 was lighter than in the prior year, 2017 has seen a noticeable uptick in the announcement of significant enforcement actions that suggests the larger trend remains in the direction of very high regulatory expectations and continued enforcement.’)

45 See D Artingstall et al., ‘Drivers & Impacts of Derisking’ John Howell & Co Ltd (February 2016) 7, 11.

46 See R de Ruig, ‘The New Step by Step Approach to Client Screening’ Dow Jones Watchlist (2008) 3 (explaining people cost for financial institutions to carry out general watch-list client screening using vendor services). The people cost will be much higher for financial institutions not using vendor services, as additional human resources are required to carry out the services that they buy from the vendors.

47 Greenberg (n 8) 46 (‘the entire package of services—the database, software, and staff to review the hits—can became quite a costly venture’).

48 See World Council of Credit Union, ‘Re: Consultative Document: Sound management of risks related to money laundering and financing of terrorism (bcbs 252)’ (27 September 2013) 2.

49 Greenberg (n 8) 46; FATF (n 43) 17.

50 Greenberg (n 8) 45–6.

51 US Senate Permanent Subcommittee on Investigations of Committee on Homeland Security and Governmental Affairs, ‘Keeping Foreign Corruption out of the United States: Four Cases Histories’ (2010) 3.

52 S Brown-Hruska, ‘Developments in Bank Secrecy Act and Anti-Money Laundering Enforcement and Litigation’ (June 2016) Nera Economic Consulting 2.

53 ibid 7–8.

54 ibid 10.

55 Nicolaidis, K and Shaffer, G, ‘Transnational Mutual Recognition Regimes: Governance without Global Government’ (2005) 68 LCP 268Google Scholar.

56 ibid 269.

57 See Panteli, N and Sockalingam, S, ‘Trust and Conflict within Virtual Inter-Organizational Alliances: A Framework for Facilitating Knowledge Sharing’ (2005) 39 Decision Support Systems 599CrossRefGoogle Scholar; Dirks, KT and Ferrin, DL, ‘The Role of Trust in Organizational Settings’ (2001) 12 Organization Science 450CrossRefGoogle Scholar; Zand, DE, ‘Trust and Managerial Problem Solving’ (1972) 17 AdminSciQ 229Google Scholar.

58 Herbert, AL, ‘Cooperation in International Relations: A Comparison of Keohane, Haas and Franck’ (1996) 14 BerkJIntlL 226Google Scholar.

59 Brookes, M and Wahhaj, Z, ‘Global Public Goods Arguments for Collective Action’ International Council on Human Rights Policy (2001) 1Google Scholar. See Section II.A. and Section II.B.1.

60 Goldsmith, JL and Posner, EA, ‘The Limits of International Law’ The American Enterprise Institute for Public Policy Research (2005) 3Google Scholar.

61 See generally Nzelibe, J, ‘Strategic Globalization: International Law as an Extension of Domestic Political Conflict’ (2011) 105 NWULR 635Google Scholar.

62 Agrawal, R and Terzi, E, ‘On Honesty in Sovereign Information Sharing’ in Ioannidis, Y et al. (eds), Advances in Database Technology - EDBT 2006 (Munich 2006) 255Google Scholar.

63 See (nn 96 and 97).

64 See Guzman, AT, ‘A Compliance Based Theory of International Law’ (2002) 90(6) CLR 1860–71Google Scholar.

65 A critic argued that FATF sanctions violate United Nations Charter and the Vienna Convention of 1988. See Doyle, T, ‘Cleaning up Anti-money Laundering Strategies: Current FATF Tactics Needlessly Violate International Law’ (2002) 24(2) HousJIntlL 279Google Scholar. However, this may not be a valid argument. First, a collective sanction not backed up by the Security Council or General Assembly does not necessarily breach international law. See WM Reisman, ‘Sanctions and International Law’ (2009) Yale Law School Faculty Scholarship Series. Paper 3864, 11 (‘When [military, economic, diplomatic instruments and propaganda] are used by individual states without the authorization of an international organization, the states using them try to appropriate the word ‘‘sanctions’’, but in fact these are forms of intense unilateral violence. This does not mean that the action is therefore unlawful: that is a different question.’). Second, the FATF sanctions do not seem to breach the principle of non-interference and sovereign equality. The FATF sanction requires Member States only to apply higher due diligence against transactions involving NCCTs. See FATF (n 67). Even if it does interfere with the sovereignty of NCCTs, it could be regarded as a lawful coercion based on its necessity, proportionality and differentiation. See Reisman ibid (‘all intense uses of coercion should be subjected mutatis mutandis, for purposes of the evaluation of their prospective lawfulness, to the [necessity, proportionality and differentiation] tests’). Lastly, the critique may not be valid, as rightly pointed out by the critique itself, in the current era where most States are required to adopt AML regulations by various international treaties. See Doyle ibid 299 (‘The Convention, which will become international law once it is ratified by 40 countries, ostensibly eliminates the present conflict between the FATF's Blacklist and the sovereignty of states.’).

66 See FATF, ‘High-risk and Non-cooperative Jurisdictions’ (2017) <http://www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/more/more-on-high-risk-and-non-cooperative-jurisdictions.html?hf=10&b=0&s=desc(fatf_releasedate)>.

67 In regard to FATF Recommendation 19 countermeasures, see FATF, ‘International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation: The FATF Recommendations’ (February 2012) 19 (‘Financial institutions should be required to apply enhanced due diligence measures to business relationships and transactions with natural and legal persons, and financial institutions, from countries for which this is called for by the FATF. The type of enhanced due diligence measures applied should be effective and proportionate to the risks. Countries should be able to apply appropriate countermeasures when called upon to do so by the FATF. Countries should also be able to apply countermeasures independently of any call by the FATF to do so. Such countermeasures should be effective and proportionate to the risks.’). In regard to effectiveness of such countermeasures in encouraging compliance, see Beekarry, N, ‘The International Anti-Money Laundering and Combating the Financing of Terrorism Regulatory Strategy: A Critical Analysis of Compliance Determinants in International Law’ (2011) 31 NwJIntlL&Bus 144Google Scholar (‘Supported by a delegation of its assessment mandate to regional groupings (FSRBs) and the Non-Cooperative Countries and Territories (NCCT) sanctions process, the FATF peer review mechanism developed into a credible compliance assessment process, analyzing both members’ and nonmembers’ compliance with its standards. … A good indication of countries’ changing behavior is their participation in the global AML/CFT initiatives and their willingness to adopt legislation. As of 2009, 127 countries had endorsed the FATF 40+9 AML/CFT Recommendations, and from 2005 to 2009, 123 jurisdictions—all either a member of FATF or a FSRB—have been assessed by the FATF and other regional and international organizations using the revised 2004 Methodology. This result is significantly higher than the 103 countries assessed under the previous Methodology from 1995–2003.’) (citations omitted).

68 See Section III.A.

69 ibid.

70 Lodge, M, ‘Accountability and Transparency in Regulation: Critiques, Doctrines and Instruments’ in Jordana, J and Levi-Faur, D (eds), Politics of Regulation (Edward Elgar Publishing 2004) 124Google Scholar.

71 Stewart, RB, ‘U.S. Administrative Law: A Model for Global Administrative Law?’ (2005) 68 LCP 75Google Scholar.

72 See Lodge (n 70); OECD, ‘OECD Guiding Principles for Regulatory Quality and Performance’ (2005) 5.

73 See U.S. Code Title 42 Part 16901-62 (2006).

74 US Dept of State, ‘Privacy Impact Assessment: Online Passport Lost & Stolen System’ (2008) 2.

75 Stewart (n 71) 69.

76 Kingsbury, B and Stewart, RB, ‘Legitimacy and Accountability in Global Regulatory Governance: The Emerging Global Administrative Law and the Design and Operation of Administrative Tribunals of International Organizations’ in Flogaitis, S (ed), International Administrative Tribunals in a Changing World (Esperia Publications 2008) 1Google Scholar.

77 Kingsbury et al. (n 20) 16–17.

78 Guild, E, ‘Moving the Borders of Europe’ Inaugural Lecture at the University of Nijmegen (30 May 2001) 26Google Scholar.

79 Nicolaidis and Shaffer (n 55) 278.

80 See Biersteker, TJ and Eckert, SE, ‘Strengthening Targeted Sanctions through Fair and Clear Procedures’ (2006) Watson Institute Targeted Sanctions Project 3, 21–2Google Scholar; Cameron, I, ‘Protecting Legal Rights: On the (In)security of Targeted Sanctions’ in Wallensteen, P and Staibano, C (eds), International Sanctions: Between Words and Wars in the Global System (Taylor & Francis 2005) 189Google Scholar.

81 UNSC Res 1267 (1999) UN Doc S/RES/1267.

82 See Dosman, EA, ‘For the Record: Designating ‘Listed Entities’ for the Purposes of Terrorist Financing Offenses at Canadian Law’ (2004) 62 UTorontoFacLRev 13Google Scholar.

83 UN Office of the Ombudsperson of the Security Council's 1267 Committee, ‘Office of the Ombudsperson to the ISIL (Da'esh) and Al-Qaida Sanctions Committee’ <https://www.un.org/sc/suborg/en/ombudsperson>.

84 UN Human Rights Council, ‘Report of the Special Rapporteur on the Promotion and Protection of the Right to Freedom of Opinion and Expression, Frank La Rue’ (2013) A/HRC/23/40, 8.

85 Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation) (2016) OJ L 119, art 23(1)(d).

86 Under the global AML regulatory body suggested in this article, domestic PEP lists of EU Member States will be processed through the global AML regulatory body by domestic and foreign financial institutions regardless of its location of establishment. Thus, the global AML regulatory body is required to guarantee that the personal data of data subjects who are in the EU—domestic PEP lists of EU Member States—will be protected as required by the EU General Data Protection Regulation. Without such protections, transfer of domestic PEP lists from EU Member States to the global AML regulatory body may not be justified. See EU General Data Protection Regulation, art 3(2) (‘This Regulation applies to the processing of personal data of data subjects who are in the Union by a controller or processor not established in the Union, where the processing activities are related to: 1. the offering of goods or services, irrespective of whether a payment of the data subject is required, to such data subjects in the Union; or 2. the monitoring of their behaviour as far as their behaviour takes place within the Union.’); EU General Data Protection Regulation, art 44. In addition, as Article 6 indicates, ‘the law of a non-EU country may not serve as the legal basis for processing’. EU General Data Protection Regulation, art 6(1)(C) and (3); see also Kuner, C, ‘The European Commission's Proposed Data Protection Regulation: A Copernican Revolution in European Data Protection Law’ (6 February 2012) Privacy & Security Law Report 5Google Scholar. Accordingly, UNCAC whose membership includes all EU members or FATF whose AML recommendations are adopted by more than 190 countries, or both, should incorporate the suggestions made in this article into its provisions. See UNODC, ‘UNCAC Signature and Ratification Status’ <https://www.unodc.org/documents/treaties/UNCAC/Status-Map/UNCAC_Status_Map_Current.pdf>; FATF (n 3). Such incorporation may also include ‘specific provisions to adapt the application of rules of [EU General Data Protection Regulation]’. EU General Data Protection Regulation, art 6(3). This article does not expand its research to another interesting subject of under which organization, UN or FATF, the global AML regulatory body needs to be established.

87 Int'l Ass'n of Fire Fighters, Local 1264 v Municipality of Anchorage (1999) 973 P.2d 1132, 1134 (Alaska).

88 Am. Jur. 2d, Privacy section 13 (‘It has been stated that the right of privacy is relative to the customs of the time and place, and is to be determined by the norm of the ordinary man … .’).

89 See World Bank and UN Office on Drugs and Crime, ‘Public Office, Private Interests: Accountability through Income and Asset Disclosure’ (2012) 84–93.

90 See US Code of Federal Regulations Title 5 Part 293.311; Alaska Statues 39.25.080; North Carolina General Statutes 126-23.

91 See Webb v Shreveport (1979) 371 So 2d 316, cert den (La) 374 So 2d 657 (La App) (information regarding a public employee's home/work address); Humane Soc. of U.S. v Fanslau (2008) 54 A.D.3d 537, 863 N.Y.S.2d 519 (3d Dep't) (information regarding the family income of a public employee).

92 See CBS, Inc. v Partee (1990) 198 Ill App 3d 936, 145 Ill Dec 30, 556 NE2d 648, 52 BNA FEP Cas 1534, 17 Media L R 2051 (1st Dist) (information concerning race); Delaware County v Schaefer ex rel. Philadelphia Inquirer (2012) 45 A.3d 1149, 40 Media L. Rep. (BNA) 1670 (Pa. Commw. Ct.) (information concerning full birth dates); Office of Governor v Raffle (2013) 65 A.3d 1105 (Pa. Commw. Ct.) (information concerning phone numbers).

93 See Section II.A.

94 Such decentralized domestic PEP data centres should be differentiated from the decentralized international PEP data centre discussed in the prior section. See Section III.B.2.

95 Due to their decentralization, decentralized international PEP data centres are not accountable to other States. See ibid.

96 The data centre is required to manage swift and secure access only to the authorized users of the information, which are domestic and foreign financial institutions. Thus, the data centre should continuously check and update its system to protect itself from unauthorized access, such as from cyber incidents, while providing requisite information in a timely fashion to financial institutions. Not all States are willing or able to manage data centres in such a manner.

97 This applies to a system of decentralized data centres, whether for domestic or international PEP data, which is managed by a State.