Banks' Provision of State Capacity: Reframing the Baseline of Banks' Anti-Money Laundering Obligations

23 Wake Forest J. Bus. & Intell. Prop. L. 295

Money laundering is the process by which illegal funds and assets are converted into legitimate funds and assets; it can be understood as a process for concealing evidence in which a person seeks to evade responsibility for the ownership, origin, or use of funds. The AML regime, including the institutions and organizations involved, aims to reduce the activities that shield legal funds and protect the integrity of the financial system. The primary purpose of AML is to prevent the establishment of shell banks or companies from disguising the funds or revenues from illegal activities. Money laundering investigations are most frequently the only way to locate the stolen funds and restore them to the victims when criminal funds are derived from robbery, extortion, embezzlement, or fraud. Money laundering and other financial crimes have become serious problems in recent years. According to online research, , approximately $300 billion is laundered through the U.S. each year, and up to $2 trillion worldwide. Between 2% and 5% of the world’s total GDP is lost to money laundering each year. While 91.1% of identified money laundering offenders are imprisoned, 90% of money laundering crimes go undetected. Thus, there is a high conviction rate of such crimes, but a low detection rate, In 2019, there were only 990 cases of money laundering crimes. This means that 15% to 38% of the money laundered globally is wrapped up in a small number of cases. It is hard to determine how many people are indirectly affected by these crimes since the amount of money being lost is staggering.

In the U.S., the AML laws include federal laws, mainly the Bank Secrecy Act (BSA) and the Patriot Act, as well as regulations issued by the Department of Treasury and federal banking regulators. AML laws require financial institutions to implement an AML compliance program that is reasonably designed to prevent money laundering and the financing of terrorism. Programs must include policies and procedures to verify their customers’ identities; verify the identities of beneficial owners of legal entity customers; conduct customer due diligence and enhanced due diligence on certain customers; and monitor for and report on suspicious activity. The problem with the current suspicious activity reports system is that many files are of low quality or contain unnecessary content. One reason for this issue is that banks have incentives to cover their backs instead of applying more effective risk-identification criteria. Thus, incentives for implementing the regulatory regime are misaligned.

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