This is a topic that fascinates me. I have an initial question: what are you going to assume, or how are you going to think, about information flows to the regulator / enforcer function? In the financial-crimes area existing enforcers have excruciatingly imperfect information about the success of their efforts (e.g., how much money laundering is actually going on in their jurisdiction, which is the thing you would want to minimize from an overall design perspective) and tend to focus on metrics like number and size of enforcement actions and fines to show success. To the extent they get feedback from the political system it tends to be very crude (e.g., "show that we're tougher on big banks" or "do less to antagonize the crypto industry"). To assume that problem away risks creating a fantasy, but taking it head-on seems like a real problem for applying your methods. I'd be happy to be proven wrong though!
this is kind of going to be the subject of the Friday post but I think you will probably still be dissatisfied as I am only focusing on one question of institutional design rather than the broader one of resources and feedback.
This was a huge issue relevant to tax evasion/avoidance/minimisation/planning (note the euphemism cycle). Tax lawyers and accountants wanted certainty, which meant allowing dodges until they were detected, then patching them. This was facilitated by courts and particularly the Chief Justice in the 1970s, Garfied Barwick, whose literalist rulings made taxpaying optional for those with good lawyers.
Eventually the state responded with a series of measures which roughly matched "Do you feel lucky"
* A general anti-avoidance provision (this existed, but had been read down to insignificance by the Barwick court).
* Changes to the Acts Interpretation Act, explicitly telling the courts to follow the announced intention of laws, rather than their own literal interpretation
* Retrospective legislation: When a scheme is discovered, it's declared illegal retrospectively
Lawyers hated all of these, but the net effect has almost certainly been to increase certainty about what is legal and what is not.
«Lawyers hated all of these, but the net effect has almost certainly been to increase certainty about what is legal and what is not.»
In civil law the deleterious effect of all these horrible things are less deleterious than in criminal law, and in practice they also happened in criminal law.
Rather than better funding for investigative work and taking more care in writing laws, the thatcherite governments and their thatcherite voters have found it cheaper to alter the rules to ensure that prosecutors can win more often with less effort.
«anti-money laundering regulation works on a “law enforcement” model – they try to find the people doing the crimes and then to put them in jail. [...] Compliance officers [...] want a definite list of required due diligence, such that they can be sure that if the checklist is followed, nobody will go to jail. Which is the thing that the law enforcers can’t give them [...] mainly because the whole concept of a safe harbour is alien to the culture.»
Interesting discussion but I suggest a different perspective: that the critical technical difference is that criminal law is (was) based on the notion of "intent" ("mens rea") which is a matter of substance and most importantly of (often presumed) subjective mind state while compliance officers want something that is a matter of process and most importantly of (usually written) document based situation. Very technical note: in philosophy this is the difference between "modal" and "extensional" logic (related to the difference between material implication and ordinary implication).
«as soon as you set up a standard of what must be checked, you are implicitly creating a negative template of things which will never be checked.»
If "checked" means "the criminal law" that is exactly how it works already: it does not work by analogy, anything that is not explicitly listed as a crime is never a crime. The criminal law is supposed to follow the logic of "creating a negative template of things which will never be" a crime.
Related to the that and the difference between intentions and documents there is a devastating political issue:
* A much larger group of voters are thatcherites (rentiers) and are older (and fearful) and want two opposite things: absolute safety and the lowest possible taxes.
* The solution provided by thatcherite politicians has been to provide the appearance of absolute safety, at any cost to someone else. This has been achieved in part by making it easier to convict the "someone else" (that is disfavoured categories) in part by two technical means: 1) making many more crimes "objective" instead of "subjective" by dropping the "intent" requirement, 2) greatly weakening the principle that anything that is not explicitly a crime is never a crime by defining many crimes in very wide and ambiguous terms.
Put another way the large minority of "Middle England" voters want more authoritarianism with more arbitrary repression, and compliance officers have been swimming against that tide. Fortunately the bosses of the compliance officers understand well how political will to enforce actually works.
«asked a deceptively straightforward question: What did Cameron think of the anticorruption work of the SFO — an agency set up precisely to investigate and prosecute high-level corporate crime?
Cameron, a genteel Etonian with more than his share of the erudition required for high office in the U.K., was somehow tongue-tied.
“The SFO, yes, I do support its work,” he stammered, pausing for several seconds. But there seemed to be a but, and Cameron began to hedge. “As prime minister, you do feel a responsibility for wanting British business to get out there and win orders and succeed,” he said, adding, “so sometimes there are frustrations and worries and concerns.”
To anyone unversed in the folkways of official Britain, the Green-Cameron exchange would seem strange. It’s hard to imagine a U.S. president, Donald Trump aside, being asked if he supported the FBI — let alone responding that it ought to think about the commercial damage when it goes after suspected criminals.»
«Government ousts UK competition watchdog chair [...] At the time, Reeves said she wanted regulators to "tear down" red tape. "Every regulator, no matter what sector, has a part to play by tearing down the regulatory barriers that hold back growth. I want to see this mission woven into the very fabric of our regulators through a cultural shift from excessively focusing on risk to helping drive growth," she said. Last year, Prime Minister Sir Keir Starmer told a gathering of investors: "We will make sure that every regulator in this country - especially our economic and competition regulators - takes growth as seriously as this room does."»
«anti-money laundering regulation works on a “law enforcement” model – they try to find the people doing the crimes and then to put them in jail. [...] the compliance officers will absolutely spam the Suspicious Activity Report system with anything whatsoever that might possibly look bad»
Another difficulty is that "money laundering" is by now largely an euphemism for "supporting political crimes" or "funding the enemies of the state" that is a very large spectrum of "money laundering" legislation is about "deviant" political causes. This has created many more risks... (there was a really amusing case where someone in the UK was prosecuted for supporting terrorism for donating to a welfare charity in Syria part of a political faction which also had a military organization, the case collapsed when the defendant produced an article from "The Times" reporting that MI6 had been donating arms and funds to that military organization).
I spent 20+ years in anti-financial crime roles in financial services, at Tier 1 banks - before jumping ship to work on the consultancy side. I bought your book because I immediately recognised some of the subjects you touched upon as reflecting my own experiences, both in large Compliance teams, but also more generally in the way that big banks operate. I'm intrigued that you've written on AML enforcement elsewhere: where might one find these pieces?
This post calls to mind the knots that the FCA sometimes ties itself in, distinguishing between a 'risk-based' and a 'Principles-based' approach etc. In the US, they still seem very rules-based to me, yet still manage to hand out the largest AML fines by a considerable margin (TD being a recent example). When I worked in compliance, this clout was always felt to be driven exclusively by them holding the ultimate trump card of 'threatening to cut off access to the dollar'...
«In the US, they still seem very rules-based to me, yet still manage to hand out the largest AML fines»
Not many culprits worry about fines for financial crimes, they are just a cost of doing business. From the point of view of business people most fines are "how much the government charges to let me get away with that".
Maybe this is overly obvious, but it has struck me that one of the problems with process and systems in relation to financial crimes is that it seems that what makes it a crime has little or nothing to do with the process itself.
That is, it seems to me that the same process - say, passing funds through a series of shell companies or cutouts in order to mask the origin and/or destination of the funds - may be criminal or not, depending on whether the source or destination of the funds is proscribed. But the point of the process is to make the source and/or destination opaque, whether this is for the purpose of tax "planning" or profit redistribution (both "legitimate") or "laundering" of funds from criminal activity or providing funds to proscribed entities (both "illegitimate").
Prudential supervision uses an intermediate approach. Its standards are very fuzzy: "unsafe and unsound practice." The supervisors have a lot of interpretive latitude. They try for consistency, but it's not guaranteed. But it works okay, because enforcement is only a last resort. When supervisors see something they don't like, their attitude is at least initially: "go and sin no more." The banks can live with this. Supervisors only bring the enforcers in for repeated noncompliance, or when they scent moral turpitude.
I'll grant that AML is much more enforcement-oriented than prudential supervision, but I'm not sure the main problem is there.
The dignified term for "money laundering" is "private banking:" an extremely profitable activity. Skating close to the edge can be very profitable--until your bank is caught and has to cough up a few billion dollars. I don't think that any other regulatory dodge can be quite as lucrative. From the private banker's perspective, a compliance officer's job is to stay out of the way and serve as fall guy if the bank is caught. At least in America, it's very hard for a person making $250,000 to push back against a person in the same firm making millions.
This is a topic that fascinates me. I have an initial question: what are you going to assume, or how are you going to think, about information flows to the regulator / enforcer function? In the financial-crimes area existing enforcers have excruciatingly imperfect information about the success of their efforts (e.g., how much money laundering is actually going on in their jurisdiction, which is the thing you would want to minimize from an overall design perspective) and tend to focus on metrics like number and size of enforcement actions and fines to show success. To the extent they get feedback from the political system it tends to be very crude (e.g., "show that we're tougher on big banks" or "do less to antagonize the crypto industry"). To assume that problem away risks creating a fantasy, but taking it head-on seems like a real problem for applying your methods. I'd be happy to be proven wrong though!
this is kind of going to be the subject of the Friday post but I think you will probably still be dissatisfied as I am only focusing on one question of institutional design rather than the broader one of resources and feedback.
This was a huge issue relevant to tax evasion/avoidance/minimisation/planning (note the euphemism cycle). Tax lawyers and accountants wanted certainty, which meant allowing dodges until they were detected, then patching them. This was facilitated by courts and particularly the Chief Justice in the 1970s, Garfied Barwick, whose literalist rulings made taxpaying optional for those with good lawyers.
Eventually the state responded with a series of measures which roughly matched "Do you feel lucky"
* A general anti-avoidance provision (this existed, but had been read down to insignificance by the Barwick court).
* Changes to the Acts Interpretation Act, explicitly telling the courts to follow the announced intention of laws, rather than their own literal interpretation
* Retrospective legislation: When a scheme is discovered, it's declared illegal retrospectively
Lawyers hated all of these, but the net effect has almost certainly been to increase certainty about what is legal and what is not.
«Lawyers hated all of these, but the net effect has almost certainly been to increase certainty about what is legal and what is not.»
In civil law the deleterious effect of all these horrible things are less deleterious than in criminal law, and in practice they also happened in criminal law.
Rather than better funding for investigative work and taking more care in writing laws, the thatcherite governments and their thatcherite voters have found it cheaper to alter the rules to ensure that prosecutors can win more often with less effort.
«anti-money laundering regulation works on a “law enforcement” model – they try to find the people doing the crimes and then to put them in jail. [...] Compliance officers [...] want a definite list of required due diligence, such that they can be sure that if the checklist is followed, nobody will go to jail. Which is the thing that the law enforcers can’t give them [...] mainly because the whole concept of a safe harbour is alien to the culture.»
Interesting discussion but I suggest a different perspective: that the critical technical difference is that criminal law is (was) based on the notion of "intent" ("mens rea") which is a matter of substance and most importantly of (often presumed) subjective mind state while compliance officers want something that is a matter of process and most importantly of (usually written) document based situation. Very technical note: in philosophy this is the difference between "modal" and "extensional" logic (related to the difference between material implication and ordinary implication).
«as soon as you set up a standard of what must be checked, you are implicitly creating a negative template of things which will never be checked.»
If "checked" means "the criminal law" that is exactly how it works already: it does not work by analogy, anything that is not explicitly listed as a crime is never a crime. The criminal law is supposed to follow the logic of "creating a negative template of things which will never be" a crime.
Related to the that and the difference between intentions and documents there is a devastating political issue:
* A much larger group of voters are thatcherites (rentiers) and are older (and fearful) and want two opposite things: absolute safety and the lowest possible taxes.
* The solution provided by thatcherite politicians has been to provide the appearance of absolute safety, at any cost to someone else. This has been achieved in part by making it easier to convict the "someone else" (that is disfavoured categories) in part by two technical means: 1) making many more crimes "objective" instead of "subjective" by dropping the "intent" requirement, 2) greatly weakening the principle that anything that is not explicitly a crime is never a crime by defining many crimes in very wide and ambiguous terms.
Put another way the large minority of "Middle England" voters want more authoritarianism with more arbitrary repression, and compliance officers have been swimming against that tide. Fortunately the bosses of the compliance officers understand well how political will to enforce actually works.
https://www.bloomberg.com/news/features/2018-03-01/britain-s-white-collar-cops-are-getting-too-good-at-their-job
«asked a deceptively straightforward question: What did Cameron think of the anticorruption work of the SFO — an agency set up precisely to investigate and prosecute high-level corporate crime?
Cameron, a genteel Etonian with more than his share of the erudition required for high office in the U.K., was somehow tongue-tied.
“The SFO, yes, I do support its work,” he stammered, pausing for several seconds. But there seemed to be a but, and Cameron began to hedge. “As prime minister, you do feel a responsibility for wanting British business to get out there and win orders and succeed,” he said, adding, “so sometimes there are frustrations and worries and concerns.”
To anyone unversed in the folkways of official Britain, the Green-Cameron exchange would seem strange. It’s hard to imagine a U.S. president, Donald Trump aside, being asked if he supported the FBI — let alone responding that it ought to think about the commercial damage when it goes after suspected criminals.»
https://www.bbc.co.uk/news/articles/c2d3e6zklxgo
«Government ousts UK competition watchdog chair [...] At the time, Reeves said she wanted regulators to "tear down" red tape. "Every regulator, no matter what sector, has a part to play by tearing down the regulatory barriers that hold back growth. I want to see this mission woven into the very fabric of our regulators through a cultural shift from excessively focusing on risk to helping drive growth," she said. Last year, Prime Minister Sir Keir Starmer told a gathering of investors: "We will make sure that every regulator in this country - especially our economic and competition regulators - takes growth as seriously as this room does."»
«anti-money laundering regulation works on a “law enforcement” model – they try to find the people doing the crimes and then to put them in jail. [...] the compliance officers will absolutely spam the Suspicious Activity Report system with anything whatsoever that might possibly look bad»
Another difficulty is that "money laundering" is by now largely an euphemism for "supporting political crimes" or "funding the enemies of the state" that is a very large spectrum of "money laundering" legislation is about "deviant" political causes. This has created many more risks... (there was a really amusing case where someone in the UK was prosecuted for supporting terrorism for donating to a welfare charity in Syria part of a political faction which also had a military organization, the case collapsed when the defendant produced an article from "The Times" reporting that MI6 had been donating arms and funds to that military organization).
I spent 20+ years in anti-financial crime roles in financial services, at Tier 1 banks - before jumping ship to work on the consultancy side. I bought your book because I immediately recognised some of the subjects you touched upon as reflecting my own experiences, both in large Compliance teams, but also more generally in the way that big banks operate. I'm intrigued that you've written on AML enforcement elsewhere: where might one find these pieces?
This post calls to mind the knots that the FCA sometimes ties itself in, distinguishing between a 'risk-based' and a 'Principles-based' approach etc. In the US, they still seem very rules-based to me, yet still manage to hand out the largest AML fines by a considerable margin (TD being a recent example). When I worked in compliance, this clout was always felt to be driven exclusively by them holding the ultimate trump card of 'threatening to cut off access to the dollar'...
«In the US, they still seem very rules-based to me, yet still manage to hand out the largest AML fines»
Not many culprits worry about fines for financial crimes, they are just a cost of doing business. From the point of view of business people most fines are "how much the government charges to let me get away with that".
Maybe this is overly obvious, but it has struck me that one of the problems with process and systems in relation to financial crimes is that it seems that what makes it a crime has little or nothing to do with the process itself.
That is, it seems to me that the same process - say, passing funds through a series of shell companies or cutouts in order to mask the origin and/or destination of the funds - may be criminal or not, depending on whether the source or destination of the funds is proscribed. But the point of the process is to make the source and/or destination opaque, whether this is for the purpose of tax "planning" or profit redistribution (both "legitimate") or "laundering" of funds from criminal activity or providing funds to proscribed entities (both "illegitimate").
“another chance to work on my skills in terms of applying cybernetics to real-world policy issues”
Considering a consulting side gig? It’s occurred to me that Cybor House was in some ways the OG Old Rectory.
Prudential supervision uses an intermediate approach. Its standards are very fuzzy: "unsafe and unsound practice." The supervisors have a lot of interpretive latitude. They try for consistency, but it's not guaranteed. But it works okay, because enforcement is only a last resort. When supervisors see something they don't like, their attitude is at least initially: "go and sin no more." The banks can live with this. Supervisors only bring the enforcers in for repeated noncompliance, or when they scent moral turpitude.
I'll grant that AML is much more enforcement-oriented than prudential supervision, but I'm not sure the main problem is there.
The dignified term for "money laundering" is "private banking:" an extremely profitable activity. Skating close to the edge can be very profitable--until your bank is caught and has to cough up a few billion dollars. I don't think that any other regulatory dodge can be quite as lucrative. From the private banker's perspective, a compliance officer's job is to stay out of the way and serve as fall guy if the bank is caught. At least in America, it's very hard for a person making $250,000 to push back against a person in the same firm making millions.