Compliance and reporting issues arising for financial institutions from money laundering regulations: a preliminary cost benefit study
| Pages | 333-346 |
| Date | 01 October 2004 |
| Published date | 01 October 2004 |
| DOI | https://doi.org/10.1108/13685200410810047 |
| Author | Jackie Harvey |
| Subject Matter | Accounting & finance |
Compliance and Reporting Issues Arising for
Financial Institutions from Money Laundering
Regulations: A Preliminary Cost Bene®t Study
Jackie Harvey
INTRODUCTION
A study by Gill and Taylor
1
found that `there is still
very little information on cost bene®ts in anti-
money laundering work and this is an area ripe for
research'. This paper draws from ongoing research
into the costs and bene®ts of money laundering com-
pliance and attempts to shed light on the concern
expressed by ®nancial institutions over the increasing
costs of anti-money laundering compliance.
2
It is
hypothesised that these costs may be in excess of the
bene®ts accruing to these institutions, and that, in con-
sequence, they do not view themselves as `stakeholders
in upholding the integrity of the ®nancial system'
3
but
rather as its unpaid policemen.
This paper reports indicative ®ndings only; these
will be re®ned as more data become available, and pre-
sents some ideas as to future work in order to produce
a full cost bene®t study. The research has been con-
ducted through interviews with compliance sta in a
range of ®nancial institutions, with the regulatory
body and with other interested parties. A pilot ques-
tionnaire has been carried out and some initial results
from that survey have also been incorporated. It is
intended that a major study be undertaken in 2004 if
there is sucient support from the industry for this
to proceed.
The starting point for the analysis is to look at the
problems of not being able to de®ne the volume of
money laundering activity that is taking place,
noting that as a result, empirical data on the overall
magnitude of money laundering activity is limited
and for the time being an adequate measure of the
extent of money laundering remains elusive. In conse-
quence a second best input approach is used that
focuses on the requirement for compliance with sys-
tems and procedures to prevent money laundering
activity and the paper identi®es the private and
social costs and bene®ts associated with this, drawing
from previous studies in the area. Interim ®ndings
are reported on the basis of emergent themes before
identi®cation is made of further work that could use-
fully be carried out.
ATTEMPTS TO MEASURE MONEY
LAUNDERING
The economic analysis of money laundering is an area
fraught with diculty; by its very nature money laun-
dering occurs outside the normal range of economic
statistics and remains unobservable. In the absence of
hard statistical data, studies to date have had to
employ indirect methods of estimation.
`These studies have tended to employ two dierent
types of information Ð inference based on avail-
able macroeconomic data and direct information
collected by law and tax enforcement agencies.
Both approaches have problems and neither is
particularly robust.'
4
The micro approach to estimating the magnitude of
money laundering uses detailed information about
expenditures and prices involved in reported crimes
that has been collected in the course of law enforce-
ment and criminal investigations. Obviously,
reported (ie investigated) crimes will only comprise
a subset of all crimes (the size dierential varying in
accordance with the eciency and eectiveness of
the crime prevention agencies), thus it might be
assumed that one of the problems with this approach
is that it will underestimate the real magnitude of
money laundering.
This methodology was employed by the Financial
Action Task Force (FATF)
5
in 1989, for its ®rst
attempt to produce a global estimate of money laun-
dering. Some eight years later, the FATF requested
member countries to provide some rough estimates
of the amount of money laundering thought to be
occurring in their countries and had to comment
that `the vast majority of FATF members lack su-
cient data to support any credible estimate'.
6
Although
such sampling and survey approaches oer a means of
extrapolating to otherwise unobservable aspects of
money laundering, the data produced to date has
tended to be marked by wide variability over time
and between countries. As a result, the existing data
Page 333
Journal of Money Laundering Control Ð Vol. 7 No. 4
Journalof Money Laundering Control
Vol.7, No. 4, 2004, pp. 333± 346
#HenryStewart Publications
ISSN1368-5201
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