How Financial Surveillance Threatens Our Democracies: Part 2

2 July 2024

Undemonstrated Effectiveness and Efficiency

I’m not aware of any study establishing the effectiveness of KYC measures in combating money laundering. And it’s not for lack of searching.

Conversely, there are numerous studies tending to conclude the opposite. Ronald Pol, a researcher at La Trobe University in Melbourne, synthesized in a research paper published in 2020, many works: Anand 2011; Brzoska 2016; Chaikin 2009; Ferwerda 2009; Findley, Nielson, and Sharman 2014; Harvey 2008; Levi 2002, 2012; Levi and Maguire 2004; Levi and Reuter 2006, 2009; Naylor 2005; Pol 2018b; Reuter and Truman 2004; Rider 2002a, 2002b, 2004; Sharman 2011; van Duyne 2003, 2011; Verhage 2017.

The main finding of this research paper is captured in a more than eloquent title: “Money Laundering Control: The Least Effective Public Policy in the World?”

What do we learn?

That KYC and AML procedures allow the recovery of approximately 0.05% of global criminal money, meaning $1.5 billion out of the $3 trillion in crime money circulating worldwide each year. And this is assuming that 50% of the recovered money is through these procedures, whereas an empirical study in New Zealand showed a different reality, where 80% of seizures were made through conventional means, and only 20% through KYC and AML procedures.

The author of the paper summarizes it as follows: “if the impact of three decades of money laundering controls barely registers as a rounding error in criminal accounts and “Criminals, Inc” keep up to 99.95 percent of the earnings from misery, and reasonable prospects for better outcomes remain persistently unexplored, the harsh reality is that the current policy prescription inadvertently protects, supports and enables much of the serious profit-motivated crime that it seeks to counter. In any event, the anti-money laundering experiment remains a viable candidate for the title of least effective policy initiative, ever, anywhere (Cassara 2017, 2).”

A Europol study in 201636 yields similar figures: criminals would retain nearly 99% of their profits.

That’s effectiveness covered.

What about efficiency, meaning what resources are mobilized to achieve this result?

The answer is once again confusing.

Studies vary widely in estimating the compliance costs imposed on businesses, particularly financial ones, ranging in 2018 from $304 billion annually according to LexisNexis, to $1.28 trillion according to Thomson Reuters37, without even considering the costs imposed on states and public services, as well as indirect costs (productivity losses, frictions, etc.).

Even by a low estimate, for every euro extracted from crime, 200€ were spent. The situation is so absurd in Europe that compliance costs (€144 billion) exceed the total money (€110 billion) generated by crime each year!

Faced with such poor results and the magnitude of their costs, any sensible person or company would take some time to reflect on the sustainability of such a system. But we are dealing with a religion here, and asking for evidence and reasoning can make one suspect of complicity with money laundering and terrorism.

This industry has also become extremely lucrative for a range of actors who have developed a wide range of services: compliance-specialized lawyers, consulting firms, as well as startups offering dedicated tools, even named RegTech. Interestingly enough, with nearly $4.3 billion in penalties imposed on financial institutions in 2018, and $8.1 billion in 2019, the business also proves lucrative for states, which earn more in fines than they recover from criminals…

Totalitarian regimes dreamed of it, liberal democracies did it: financial surveillance and its consequences

With the imposition of these procedures on the financial system, new or existing risks take on major proportions.

The first is censorship, linked to the drastic reduction of online anonymity. The second is arbitrariness in the application of decisions and sanctions. The third is the theft of sensitive information.

Financial censorship as a political weapon for democratic asphyxiation

The risk of censorship is often perceived as a distant problem in Western democracies. And yet, living in a democracy does not prevent the temptation of censorship that prevails in human beings, and examples abound.

The Democracy Index published by the British newspaper The Economist ranks Canada 13th, the United Kingdom 18th, South Korea 22nd. All are classified as “full democracies,” ahead of France (23rd). India, the world’s largest democracy, ranks 41st, not far from our Belgian (36th) or Italian (34th) neighbors.

And yet, these countries have a story to tell about censorship related to customer knowledge procedures and KYC.

In Canada, for example, as recently as 2022, as truckers’ protests intensified, the Ontario government and then the Canadian government declared a state of emergency and imposed financial coercion measures on the protest movement, bypassing the usual democratic and legal processes. It was the first time in Canadian history that such a state of emergency was imposed.

Under the pretext of wanting to know the origin of the funds financing the crowdfunding campaigns supporting the movement, the financial surveillance agency (FINTRAC) was involved. The two financial platforms GoFundMe and GiveSendGo were forced to freeze the funds. Even more worrying, the Canadian government invoked its emergency powers to freeze the individual accounts of nearly a hundred people involved in the protests. A real financial suffocation under a political pretext.

Whether one agrees or disagrees with the reasons behind the protests is besides the point. This state of emergency would later be deemed unconstitutional by the Federal Court of Canada in January 202438. But the damage is done: the protest has ceased, protesters have been financially choked, the rule of law and individual freedoms have been diminished.

In the United Kingdom, another case made headlines and caused quite a scandal: that of Nigel Farage. This Brexit supporter and leader, a client of the same bank for 43 years, announced in 2023 on Twitter39 that his accounts had been closed without explanation. Two days later, as the scandal erupted in the UK, he announced that his requests to open accounts had been rejected by 9 banks, under the pretext that he is a “politically exposed person,” a PEP, an acronym created by these customer knowledge regulations. However, other political decision-makers do not face the same problems in opening or maintaining bank accounts, raising questions about differential treatment based on political opinions.

The incident caused a stir in the UK, and the BBC confirmed that the account had been closed for political reasons40. Prime Minister Rishi Sunak had to address the issue41 and summoned the country’s major banks to ensure their respect of freedom of expression.

Even more recently in India, at the end of March 2024, the influence of the banking sector on the finances of economic actors was materialized into the country’s politics, enabling the ruling party to financially suffocate its rival, the Indian National Congress, the former party of Gandhi.

As the Human Rights Foundation recalls in its 17th Financial Freedom Report newsletter42, “The Indian government, led by Prime Minister Narendra Modi, froze the bank accounts of its largest political opposition party, the Indian National Congress (INC), citing allegations of tax evasion, just weeks before the upcoming election. According to INC statements on X43, ‘all our bank accounts have been frozen. We cannot carry out our campaign work. We cannot support our workers and candidates. Our leaders cannot travel across the country.’ A few days later, the Indian agency for fighting financial crime also arrested opposition leader Arvind Kejriwal44 in what is seen as a broader move to eliminate competition in the upcoming elections. These events highlight the growing need for a neutral and apolitical currency as a tool of democratic activism and for political campaigns.”

It is tempting to think that such things “do not happen here.” But the examples I have deliberately cited are democracies, most of which are better ranked in this regard than France.

And France has already shifted on similar issues.

An unfair system : selective enforcement of measures

Identity collection and counter-terrorism efforts in areas outside of finance have also shown that they can be widely diverted from their original purpose. One notable example is South Korea, the first country to attempt to combat anonymity on the internet, enacting a law in 2008 requiring identity collection by social networks to combat hate speech and misinformation.

In 2012, the Constitutional Court of South Korea abolished the law45, deeming it unconstitutional. It regretfully noted numerous pitfalls: the selective and arbitrary application of this law due to its overly vague criteria, the lack of evidence showing that the law’s enforcement had reduced the quantity of illegal content posted online, and the stifling of local economic actors, who had to comply with costly standards, to the benefit of foreign actors who continued to operate in the country, attracting South Korean internet users concerned with their ability to express themselves freely.

The Court concluded by affirming that identity collection had “a chilling effect on people’s expression of opinion itself,” which constitutes “an obstacle to the free formation of public opinions — a basis for democratic society.”

One doesn’t need to go to Asia to see the danger posed by this censorship and laws aimed at combating terrorism.

In France, certain political groups, especially on the left, had a rude awakening when, after supporting various laws aimed at limiting hate speech and the glorification of terrorism, they are now targeted for “eco-terrorism” or “promotion of terrorism.” The fight against terrorism often serves as a convenient pretext to restrict the expression of legitimate political opposition, which is serious and damaging in a democracy, in which the ability to disagree with the majority opinion must absolutely be preserved.

In this regard, the parallel with the identity collection by financial institutions is striking: no evidence of their effectiveness, drastic economic standards leading to sector concentration and benefiting foreign actors, and selective enforcement by authorities of the prosecutions to be initiated, among other things.

How else can we explain, as we saw in the introduction, that developers of a Bitcoin wallet are already in pretrial detention and face up to 25 years’ imprisonment for wrongdoings attributed to them in a fallacious manner, while certain financial institutions, crypto or otherwise, regularly avoid prison sentences for much more significant and serious offenses, sometimes committed consciously?

In 2012, HSBC was accused by the US government of money laundering for Mexican drug cartels and violating sanctions against countries like Iran. The laundered amounts would approach a billion dollars46. HSBC agreed to pay a record fine of $1.9 billion to US authorities.