Please Avoid Unintended Consequences When Designing New Anti-Money Laundering Policies

August 26, 2016

A recent flurry of legislative activity has seen the introduction of four bills that aim to crack down on the financing of terrorism. While it is very important to combat money laundering and the financing of terror, the actions can result in unintended negative consequences for poor countries as well. We like some things in these new bills, but they also leave a lot to be desired.

What are these bills?

In July, Senators Bob Casey (D-PA) and Johnny Isakson (R-GA) introduced legislation (S.3125) creating a new designation for ‘jurisdictions permissive to terrorism financing’ and a set of sanctions to be applied to such jurisdictions. On the other side of the Capitol, three bills have emerged (H.R. 5607, H.R. 5594, and H.R.5469), that are informed by the House Financial Services Committee’s Task Force to Investigate Terrorism Financing. (CGD’s Clay Lowery testified in March to this Committee.) These three bills aim to reorganise how Treasury deals with countering the financing of terror (CFT), require the establishment of a national strategy for CFT, and require the IMF to fund technical assistance to increase CFT capacity, respectively.

What we like

Safeguarding remittance flows: H.R.5607 [sec. 5(a1-2)] proposes that Treasury launch a pilot study to assess whether technical assistance for Money Transfer Organizations (MTOs) servicing the Somali community in the United States enable remittance flows to be more transparent and easily monitored.

Improving and certifying MTO compliance: H.R.5607 [sec. 5(a3)] asks Treasury to study the impact of MTOs sharing their information with depository institutions and credit unions to meet their CFT obligations.

Streamlining bureaucratic complexity: H.R.5594 [sec. 4(a6)] encourages international and intergovernmental cooperation among federal, state, and local entities to combat illicit finance, though there is no description of what this might look like, and no discussion of data sharing.

What we do not like

No evaluation: None of the bills make any mention of an evaluative framework for their legislation. As we documented in our working group report, CFT legislation has had unintended consequences. Continuing to pass laws that pile further layers of complexity onto existing regulations without a framework for evaluating effectiveness and unintended consequences is not the path to an efficient and effective global CFT system. H.R.5594 calls for the new national CFT strategy to include a ‘comprehensive, research-based, long-range, quantifiable discussion of threats, goals, objectives, and priorities.’ This is clearly very useful, but should be accompanied by a request to assess the costs and unintended consequences of the CFT system, including for security. In this way, good, efficient, and effective regulation can be identified and built upon.

No data: In addition to our own, report after report has noted that enhanced international data sharing is essential for a well-targeted CFT system. The United States could and should take the lead on clarifying how that data sharing could take place across the public and private sector while respecting data privacy rights and laws.

What is still needed

A global stock-take: In our report we called for a global stock-take in which the Financial Stability Board, with the support of the governments of the US, UK, and developing country partners like Mexico, takes responsibility for evaluating the unintended consequences of CFT legislation and proposes a path toward a more efficient, effective system. This effort needs to be underpinned by sufficient data collection and data sharing to allow it to be based on fact, not conjecture. We are pleased to note the Financial Stability Board has created a working group to study whether correspondent banking relationships for poor countries are affected by AML/CFT regulations.

Lowering the costs of compliance: H.R.5594 [sec. 4(a14)] calls for an analysis of ‘current and developing ways to leverage technology to improve the effectiveness of the fight against the financing of terror.’ But it should also call for an analysis of how technology can lower the costs of compliance, as these costs partly drive business decisions to terminate services for MTOs and respondent banks in poor countries. The United States should ensure that it maintains a permissive regulatory environment to facilitate experimentation with blockchain and other fintech technologies that could help lower the costs of compliance and create the cheaper, more transparent international payments system needed for financial transactions that will make the United States and the world both safer and more prosperous.


CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.