Tuesday, June 22, 2021

A short and lukewarm defence of anti-money laundering standards

These days it seems that everyone is a critic of anti-money laundering rules. In this post I want to try and defend our current approach to anti-money laundering.

I'm writing from the perspective of an outsider. That is, I'm not a regulator. Nor am I a member of the growing anti-money laundering industry. Mine is a lukewarm defence. I'm not terribly wedded to my views.

First, a quick definition. What I mean by anti-money laundering rules are the set of standards that banks and other financial institutions have to follow to prevent criminals from using them. For instance, a cryptocurrency exchange is required to verify ID before it can open a new account. For international wires, a bank must follow the travel rule and send their customer's personal information to the recipient bank. This is just a sample. There are hundreds of rules.  

I want to start waaay back at the beginning with first principles.

1) Should money laundering be a criminal offence?

Society has criminalized money laundering. But we could also imagine living in an alternative universe where money laundering is perfectly legal. In this parallel world a criminal could walk into a bank with $1 million in cash, announce loudly that they had stolen it, and the banker could casually accept the criminal's deposit without ever having to worry about being indicted for laundering money.

But we don't live in that world. It's illegal for the banker to knowingly accept a $1 million deposit of dirty money.

When I think about money laundering I put it in the same category as fencing. Criminalizing money laundering makes sense to me for the same reason that fencing is illegal.

A fence is a third party who specializes in providing burglars and thieves with a market to re-sell stolen property. The fence knows full well that they are contributing to the process of facilitating property theft. They may have an explicit relationship with the thief, or they may only have a pretty good idea that the goods they are buying are stolen. But they partake anyways. And so like the original thief, they are guilty of hurting innocent victims.

A banker who launders money is like a fence. They specialize in providing fraudsters and mob families with a venue for depositing and converting stolen money. Because they are knowing participants in this transactional chain, these bankers abet the original crime, just like a fence does.

We could decriminalize the acts of money laundering and fencing. But I think this would be a mistake. Any financial intermediary who deliberately specializes in serving a criminal clientele is engaging in the very same act as the criminal themselves. It's wrong and deserves to be made illegal.

2) Should we have anti-money laundering standards?

If you accept my premise that money laundering should be criminalized, I think that you should also accept that we need an anti-money laundering standard. That is, you should agree that we need a minimum set of anti-money laundering rules that all financial institutions are required to implement.

Consider Jack, a banker. He specializes in providing financial services to criminals. If money laundering is declared illegal, Jack can avoid prosecution for money laundering by following a policy of don't-ask-don't-tell or ask-but-don't-check. That allows him to continue serving his criminal clientele while not explicitly running afoul of society's prohibition on laundering money.

To close these don't-ask-don't-tell and ask-but-don't-check loopholes, we need a standard, a minimum set of anti-money laundering rules that Jack and all his banking competitors must implement. Without a standard, the criminalization of money laundering is meaningless. We'd be letting the Jacks run rampant, and that equates to living in a world where money laundering is "illegal" but is actually permitted.

Put differently, if you don't support anti-money laundering standards, then you effectively support a decriminalization of money laundering.  

3) Is our current standard the right standard?

You may agree that money laundering should be criminalized, and you may also agree that we need to augment this with a standard set of rules to prevent folks like Jack from exploiting loopholes. Which gets us to our third and last point: is our current standard the right one?

Our current standard involves requiring every bank to set up strict know-your-customer (KYC) procedures, thus (hopefully) keeping criminals out of the system.

KYC comes at a cost. First, it is expensive for financial institutions to implement, favoring incumbents. Second, KYC shuts those who lack ID out of the financial system. Lastly, according to the UN, privacy is a fundamental human right. Universal KYC sacrifices this right by forcing everyone to give up their valuable personal information to an assortment of financial institutions.

Privacy advocates are appalled at the costs of KYC. On the other hand, calling for the abolition of KYC requirements on human rights grounds would be tantamount to endorsing the decriminalization of money laundering. After all, without KYC we would be allowing dirty bankers like Jack to operate with impunity. One of the two ideals, either the criminalization of money laundering or privacy as a fundamental human right, inevitably has to give.

For now, we accept the costs or KYC as the unfortunate by-product of our original choice to make money laundering illegal. It's not an easy compromise, but we're plowing ahead with it.

What if it was possible to improve our current standard so we could reduce the aforementioned deficiencies while still catching the Jacks of the world? Dave Birch recently described a different sort standard. Instead of keeping criminals out, maybe banks should let them into the financial system (by setting up minimum KYC) and then use AI and analytics to catch them. (Presumably all of those good actors who formerly lacked ID can now get the financial services they deserve.)  

It's an interesting idea.

So to sum up, I'm tepidly in favor of current anti-money laundering standards. First, I support the criminalization of money laundering. And second, I accept that we need a minimum set of rules and standards to out the Jacks of the world. Third, I'm not sure if our current standard is the best. Maybe it is, maybe it isn't. I'd like to learn more. If we can squeeze out a bit more privacy while still catching the same number of money launderers, I'm all for it.


  1. There are two key points which I think need to be fleshed out in the discussion.

    1. Are banks common carriers? Banks in the US are not considered to be and most if not all don't want to be but in Canada I would argue Section 448 of the Bank Act imposes a Common Carrier type requirement on banks.

    2. Should common carriers be subject and are subject to AML rules? Interestingly in Canada more so than there is strong claim that common carriers are explicitly subject to the criminal prohibition on money laundering under Section 462.31(1) under the Criminal code of Canada. In fact I would read the criminal offense of money laundering in Canada not just to apply to monetary instruments but also stolen good/property i.e. fencing being transported by a carrier.

    However, this has to be squared with Section 8.1(3) which states that Canada's criminal law system should be implemented with reference to English Common Criminal Law rules and principles(of which there are a lot of relating to common carriers). Along these lines something notable about Canada money laundering offense is that very few criminal cases have been brought based on violations of it.

    In conclusion banks and AML regulators in the US have both seem to have a common interest in common carrier type principles not being introduced into US law(Although the OCC's fair access proposal was very common carrier-ish). I know you JP in the past haven't really liked the idea of Common Carrier's from a legal and economic standpoint so this might be an area you want to look more closely at.

    1. Thanks Tim, you bring up some good points. I must confess I don't know much about common carrier law. But the law you point to, Section 462.31(1) sounds like it would apply all sorts property, not just money, and to a broad variety of economic actors, not just financial institutions.

      I was interested to see that Section 462.31(1) was recently updated by adding language about recklessness:


    2. Thanks JP,

      After I wrote my comment I actually went and looked up the part of Canada's criminal code dealing with Fencing(it is the section right after the one dealing with tampering or destroying motor vehicle VIN numbers) numbered section 354(1). It is actually pretty similar textually to 462.31(1) to the point I wonder if some money-laundering cases or vice versa could also be prosecuted as "fencing" cases. A criminal lawyer in Canada would probably have to explain this difference better.

      "Possession of property obtained by crime

      354 (1) Every one commits an offence who has in his possession any property or thing or any proceeds of any property or thing knowing that all or part of the property or thing or of the proceeds was obtained by or derived directly or indirectly from

      (a) the commission in Canada of an offence punishable by indictment; or

      (b) an act or omission anywhere that, if it had occurred in Canada, would have constituted an offence punishable by indictment."

      To my earlier mention of damaged and destroyed motor vehicle VIN numbers the next part of the criminal code says that owning or possessing a car with a damaged or destroyed VIN can be used as evidence that the vehicle was stolen and "fenced." I question I would have is under what circumstance can a common carrier transport a car for example with a destroyed or damaged VIN without being liable.

    3. "It is actually pretty similar textually to 462.31(1) to the point I wonder if some money-laundering cases or vice versa could also be prosecuted as "fencing" cases."

      You'll find this case interesting:


      The defendant is being charged with breaking both Section 462.31(1)(a) and Section 354(1)(a). As you suggest, they seem to be somewhat interchangeable.

      (Also, they were charged with Trafficking in Property Obtained by Crime in Section 355.2 of the Criminal Code.)

      "...can a common carrier transport a car for example with a destroyed..."

      I suppose if that carrier does so in a knowing way, then they'd be liable.

    4. JSA's mention of prostitution and drug sales below(which I will respond to after this) does make me think of the fact that there is a possibility of challenging both the anti-fencing and anti-money laundering statutes in Canada at least on the Constitutional/Charter basis of gross disportionality which has been used most recently in Canada as the basis of challenging the prostitution laws(Individual acts of sex for money have not ever been per say illegal but so-called third party activities such as pandering/procuring and living off the avails have historically been in Canada). The constitutional argument that I would make in Canada would be that anti-money laundering and anti-fencing laws drive at risk individuals in the margins of society(i.e. working in grey market sectors) out of the legitimate financial sector and into using instruments such as cash and "illegitimate financial providers" which in terms subjects these marginalized individuals to greater harms to such as robbery and fraud than the harms that anti-money laundering and anti-fencing laws are supposed to prevent.

      This would be a very complex case to make and would probably in Canada requires some of the best Constitutional lawyers, I would suggest someone like Alan Young or James Lockyer and this would also be a case unique to Canada(there is no way no how the US Supreme Court will ever throw out the AML laws) but if you see the lockout of certain sectors and people from the mainstream financial system as a human rights issue I would seriously think about challenging the AML laws in Canada as a violation of Canada's Charter of Rights and Freedoms.(There have been no such challenges that I have been aware of to date. The Charter of Rights and Freedoms only came into effect in 1982)

      This video below of Alan Young discussing his charter challenges of Canada's drug, obscenity, and prostitution laws basically lays out how it would work.


    5. Thanks, interesting video.

      I'm not saying anti-money laundering rules should be challenged. But if they were, I don't think they'd challenge Sections 462.31(1)(a) and 354(1)(a). They'd probably go after the Proceeds of Crime (Money Laundering) and Terrorist Financing Act:


      I don't see the case for gross disproportionality. Sure, AML has a tendency to push at-risk individuals in the margins of society out of the legitimate financial sector. On the other hand, over 99% of Canadians are banked. To boot, Canadian banks already face requirements to offer cheap universal accounts with fairly simple ID requirements.

    6. I largely agree with your point JP, I think you would have to provide solid evidence that Sections 462.31(1)(a) and 354(1)(a) were pushing at-risk individuals out of the legitimate financial sector and I simply don't think there is enough statistical social science evidence to prove this. Nor is there a Robert Pickton serial killer type figure that we know who is robbing and killing unbanked individuals en masse because they are carrying a lot of cash on there person. I do think if you had the evidence Canadian courts would be willing to listen to it in a way US courts would not(the US judiciary I think would basically say too bad).

      In terms PCMLTFA that too is interesting argument. First there are unrelated parts of PCMLTFA that I posted about last night in your previous blog entry about Bit-coin ransomware that are effectively the Canadian equivalent of section 311 of the US Patriot Act(although have never been used by the Minister of Finance to date).


      In terms of customer identification requirements of the PCMLTFA I personally view them in the same manner as the Canadian Aviation Security Regulations issued under the Aeronautics Act requiring airline passengers to pass security screening checkpoints and to show ID before boarding airline flights.


      I can see the Supreme Court of Canada hypothetically doing a lot of things but one thing I can't see them doing is saying you have a Constitutional right to board an airline flight without showing ID or going through security screening. There is also a similar set of regulations under the Railway Safety Act called the Passenger Rail Transportation Security Regulations although I don't believe this rules actually mandate passenger show identification(I would consider both of these regulation sets to be similar in effect to the PCMLTFA(i.e. Canada's equivalent to the US Bank Secrecy Act for the non Canadian here).


    7. Agreed, there is no Robert Pickton equivalent for money laundering, which Alan Young suggests was a galvanizing moment for his battle against anti-sex work laws.

      I suppose that all of the big data breaches of people's financial information might be considered to be a type of act of violence. But it's hard to pin this on AML per se, since even without AML obligations financial institutions would still be collecting and storing a lot of our information.

      The analogy to requiring ID for airplane passengers is interesting. AML goes even further since it requires not only the customers show their ID, but also that for certain transactions that data be stored for several years.

  2. Thought provoking post. One minor nit. Money that gets laundered is not always or even usually stolen. Drug sales and Prostitution are two big drivers of laundered money, and those tend to involve money that’s voluntarily paid.

    1. I agree with your point that drug sales and prostitution are the two big drivers of laundered money in the past 40 years far more than say automobile chop shops which is what historically the anti-fencing laws were targeted towards. In the US in particular the "modern" anti money laundering enforcement scheme that start to emerge in the 1960s and 1970s at both a political and legal level was very much directed towards drug sales and before the 1980s marijuana sales in particular. Which is ironic given how not just in the US but also in Canada and other countries there has been a big move towards legalization and decriminalization of marijuana in the past 10 years.

      Prostitution is an even more interesting case. Obviously in the US whether intentional or not AML laws have been used as a hammer to go after "organized" prostitution like in the Heidi Fleiss case or the Elliot Spitzer Emperor's Club case however, there has never been consistency across the FATF of even whether prostitution should be illegal or not. Drug sales and auto chop shops are at least nominally illegally(or very highly regulated such as pot sales in Canada) in all FATF countries. Prostitution is not and never has been. Which also opens up questions like is an Australian bank(where prostitution is legal both on an individual or "organized" level i.e. brothels and escort agencies) committing money laundering if it also serves organized prostitution enterprises say in other jurisdictions where it is not legal like the US.

      Then in Canada for example the prostitution laws are right now and have been for a better part of 10 years been in a state of flux and Constitutional challenge(As that video in my previous comment discusses). Should banks and financial institutions be put in a position in Canada of trying to navigate and police these complex constitutional and legal issues that the very large and well equipped police departments in places like Montreal and Toronto are trying to avoid like a plague(and in many ways both Ontario and Quebec crown prosecution offices are trying to avoid too). (Pornhub is another example)

      **The US situation is more relevant as there is a history of Federal law enforcement going after prostitution enterprises even when local and state police and prosecutors have declined too often on the grounds of Federal money laundering violations. Whereas in Canada the Federal govt defers much more to the local police in places like Montreal and Toronto and as such for both local political preference reasons and legal/constitutional reasons organized prostitution is largely tolerated and accepted in Toronto, Montreal, Vancouver etc.

    2. "One minor nit."

      Yep, fair point. Money laundering applies not only to funds stolen, but also to property referred to as "profits" of criminal activity. And so it's much wider-ranging than laws criminalizing fencing.

      (Personally I'd prefer if most drugs were legal, same with prostitution. If so, a much larger proportion of the funds caught up in the money laundering dragnet would be fraud and theft-related.)

  3. I'm looking at this a little bit higher perspective. The most important question is: How can we prevent criminals getting away with money that is acquired by evil means?

    Stealing and cheating are destructive ways of getting money and societies should aim to prevent them. AML legislation is just one piece in the puzzle. The whole effect is what really matters at the end of the day. Can the society catch the criminals and return the stolen property to the rightful owners?

    This is the reason why I'm not a big fan of cryptoeconomies. They don't do anything to prevent criminal activity, so they are full of thieves and fraudsters.

    Cryptoeconomy is very anti-free market economy because in a real free market stealing and frauding are not permitted and the system takes action against people who try to do these things.

    In a cryptoeconomy, if you are able to steal from someone else, you totally can. Nobody will stop you. The blockchain will enforce your control of the stolen assets and the real owner does not have any way of getting the property back.

    That's why cryptoeconomies don't really have property rights. It's more like "a control right" - as long as you know the private key, you can control the assets. If you lose the key, you lose the right to control the asset. This is radically different from a traditional property right. If you lose your car key, you don't lose the ownership of the car.

    1. It's true that there's a lot of fraud in the cryptoeconomy. I suspect that it will change quite a bit over the next 20 years and become more like the regular economy, in terms of how theft and fraud are dealt with.

    2. Do you have any ideas how that could happen? So far I haven't heard anything plausible.

      Cryptoanarchy is fundamentally different from a free market economy. The whole paradigm of cryptoanarchy is based on censorship resistance and similar stuff, which means that it's fundamentally designed to give a lot of possibilities for criminals to do evil things and get away with stolen property.

      In order to have a well-functioning economy, you need to enforce property right and contract right. If you start doing that in a cryptoeconomy, it will become something else because the whole foundation is changed.

      So why shouldn't we just go straight to something else that actually works well and skip the cryptoanarchy altogether?

  4. I disagree : https://disruptive-horizons.com/p/kyc-aml-destroying-world

    When you see that the direct cost of AML and KYC is 100 times greater than the funds confiscated, that the indirect cost to society of this mass surveillance is even higher, and that it is estimated that less than 1% of criminal funds are identified, what's left to defend these regulations other than arguments so theoretical they become theological?