Friday, December 2, 2011

A Skeptical Take on Money-Laundering

A new piece here for InSight:
Neither Mexico nor the U.S. government has adequately defined the goal of AML: is it to reduce the amount of revenues, or is it to dismantle existing gangs?

If it is merely to reduce the profits, it’s worth noting once again the tiny size of the amounts seized thus far. Is the legislation being proposed going to lead to exponentially larger amounts of dirty cash being seized? The seems an unlikely result. This doesn’t make stricter AML laws a bad idea, but government officials and analysts alike would do well to temper their enthusiasm and weigh the potential benefits against the costs to the legitimate economy.

If the primary goal is to dismantle existing groups, then the question becomes whether AML is successful where other law enforcement tactics -- infiltrating smuggling networks, electronic surveillance, etc. -- fail to bring about a criminal group’s demise. While there may be some isolated instances of this dynamic, they are the exception rather than the rule. In any event, no one arguing for stronger AML provisions is making this case.

An alternative argument for AML laws is that captured criminals and their families should be prevented from enjoying ill-gotten wealth. This may be valid, but it means that attacking dirty money is essentially an after-the-fact, punitive measure rather than the head of the law enforcement spear.

Many analysts point to crackdowns on terrorist financing as evidence of the AML’s potential for organized crime, but there is an important difference between the two: money is a terrorist group’s means to the end, i.e. launching terrorist attacks. Governments do not worry about terrorist groups having large bank accounts, per se, but rather about them being more able to carry out attacks on civilians. AML efforts reduce the ability of terrorist groups to kill civilians, even if they don’t necessarily lead to prosecutions.

The dynamic with organized crime groups is fundamentally different. A large bank account is the end in and of itself for a capo like Joaquin Guzman, alias "El Chapo." Therefore, attacking his assets doesn’t reduce his ability to harm society the way it does for a terrorist boss. If anything, in fact, it does the opposite; a capo could very well compensate for a marginal reduction in his profits by ramping up production of illegal drugs and flooding the market with more merchandise.

Also, Steve Dudley has an engrossing account of a virtual kidnapping.


Richard Grabman said...

Excellent article. What jumped out at me is the paltry amount of money coming back to Mexico as a result of the narcotics trade. Maybe I'm just reading what I want to read into this, but with the high overhead of narcotics exporters (weapons, hitmen, tunnel engineers, etc. don't come cheap) perhaps more energy (and media coverage) is focused on this one issue than is warranted.

Certainly, if there are huge amounts of cash floating around, they aren't coming back to the people who did the work (rural Sinaloa is not by any stretch of the imagination flush with cash) and I've always assumed the money is either invested or banked in the U.S. (or the Caymans or Panama or ...).

However, it's small Mexican businesses like mine that bear the brunt of AML rules. It's ridiculous that I can't spend more than 2000 pesos on any single purchase without creating a money trail ... i.e. writing a check (rather an inconvenience while on business trips. I had to break out my hotel bill for a week in Guadalajara into several different facturas). Nor, for a legitimate small business, especially one in a tourist area, economically sensible that our dollar payments are not able to be either spent nor do they draw interest, as they sit in the bank waiting to be cleared for several days.

pc said...

Thanks. I couldn't agree more there is no question that there is more energy focused on this than is warranted. I'm part of the problem, too, but there just isn't much interest in a whole lot in Mexico outside of security.

What you describe sounds irritating as can be. I dont know if this AML stuff, but if the conversation is unnecessary bureaucracy, I have been just shocked at how difficult it is to register with hacienda to be a freelance contractor. You need an f'n retina scan!!!! It's ridiculous. I imagine it's just to prevent fraud more than AML per se, but there's just no sense of cost vs. benefit or logic to so much of this. Not to mention the broader question of, Does this really do much to harm the criminal groups?.