Financial intelligence agencies around the world may be good at producing suspicious transaction reports, but they are next to "useless" when it comes to actually preventing money laundering and terrorism financing, claims an American academic.
Speaking at the University of New South Wales on Monday, University of Hong Kong law professor Douglas Arner called into question the aims and the efficacy of anti-money laundering and counter-terrorism financing regulatory bodies.
“Is the point of [anti-money laundering agencies] about producing suspicious transaction reports? Not really,” he said. “It's about reducing the criminal and terrorist use of the financial system.”
He said that producing reports was only an attempt that had “developed over time” to reduce criminal and terrorist activity, but that it “doesn’t really work very well”.
“But it ends up, for a number of jurisdictions, with warehousefuls of suspicious transaction reports which regulators will typically only look at after something happens,” he said.
“They are completely useless from the standpoint of prevention. They are only useful from the standpoint of ex post facto (with retrospective action or force) pursuit.”
Mr Arner also pointed to potential improvements to regulatory system design, citing China as an example.
“If we think of a payments system which is producing, as in China with Alipay or Wechat pay, hundreds of millions of transactions, one should design a reporting system that delivers those payment details to the central bank in a way which is useable from the standpoint of monitoring both economic activity as well as conditions throughout the economy,” he said.
“That's a design function. If we think about designing systems to reduce the criminal and terrorist use of the financial system, if we build databases in the same way that Mastercard or Visa have built fraud databases, we will be able to do a much better job of achieving the regulatory objective.”
It is no longer sufficient for regulators to react to a crisis, Mr Arner added.
“It's really not much of an option for a regulator just to sit back and wait until something goes wrong, because the scale of what can go wrong can go grow very, very quickly,” he said.
“It's only a matter of time until some problem seriously goes viral on a global basis.
“And if regulators are waiting until after that to try to understand what to do, they end up overreacting and also in many cases they've already let the problem happen.”
Moving forward, industry and regulators would need to work in “close contact” to ensure co-operation at both a regional and global level to identify where regulatory harmonisation would be “essential”, he concluded.
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