Coming clean

CRIME doesn't pay, or so we are told. But the truth is that it can, if crooks manage to transform tainted money into “clean” cash. Money-laundering has been the target of enforcement agencies for years, but they have redoubled their efforts since the September 11th attacks. Though money-laundering is in some ways the opposite of terrorist finance—one takes dirty money and tries to make it look clean, the other uses money that can be legitimate for illegitimate ends—the investigations that followed those attacks showed just how easy it was to use banks for improper ends.

Banks are the conduit through which much of this dirty money enters the legitimate financial system. The IMF estimates that an amount equivalent to 2-5% of global output is laundered annually; Celent Communications, a Boston consultancy, reckons that almost half of this occurs in banks. The authorities think banks should be at the centre of the fight against laundering, but are disappointed by the efforts of many of them. In recent months, Citigroup, ABN Amro and Riggs Bank have all landed in trouble over shoddy money-laundering controls. On October 8th Standard Chartered said it had agreed to tighten its systems in New York after regulators found “deficiencies” at the bank.

In most countries banks have to put in place anti-money-laundering (AML) systems. They should know who their customers are and where their money comes from, and watch out for “suspicious” transactions. The first bit, though far from simple, is easier than the second. Detecting suspicious activities is a daunting task. Unlike, say, insider trading, money-laundering is rarely a one-off event. “It involves finding patterns, a much harder task,” says Alan Mangelsdorf of Mantas, a company that specialises in AML software.

Banks are spending huge sums on the search for clues. Celent estimates that financial firms in Europe and America spent over $5 billion on tackling money-laundering last year. American firms accounted for $3.6 billion of this, up from $700m in 2000, in part because more were required to install AML systems under the Patriot Act, passed by Congress after the September 11th attacks. The bulk went on training, technology and reporting systems.

Money alone is not the answer. There is a lot of confusion surrounding rules for monitoring suspicious transactions. In Britain, banks and others must report activities where there are “reasonable grounds” to suspect money-laundering. But this is subjective. America has similar laws and similar problems, but these are compounded by the patchwork of different bodies responsible for regulating banks, each with different standards and policies. Heeding banks' worries, the government is trying to co-ordinate the regulators' approaches.

Meanwhile, banks in America and elsewhere are trying to cover themselves by filing ever more “suspicious activity reports”. Regulators are swamped with information. Alas, most of it is useless. “For banks, there is no downside in reporting too much,” says Adam Bates of KPMG, a consultancy. “But for the financial system there is. It defeats the whole purpose.”

Banks say that more information from intelligence agencies would help. In both America and Britain, authorities are already sending banks lists of suspected money-launderers. Not enough, say banks: they want more information on scams or patterns to watch for. Intelligence agencies counter that this would jeopardise investigations. Still, some middle ground might be found.

Sharing information is another big problem, because of privacy and data-protection laws. In America, the Patriot Act allows financial firms to share some information on suspected money-launderers with competitors by registering with the government. So far, 2,500 have done so, fewer than expected. The slow uptake is partly because of competitive issues; but it is also because of strict limits on the information that can be shared.

Co-operation across borders is harder still. The private sector is, of course, not privy to information that is passed between national governments and intelligence agencies. Even sharing information within a multinational bank is hard. For example, American banks are barred from handing on information received from intelligence agencies to their overseas branches. Launderers are presumably rubbing their hands with glee.