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Sunday, October 24, 2021

A new study finds that dirty money remains easy to hide

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Banks and corporate-service providers barely differentiate between clean and risky clients


A BOOK PUBLISHED in 2014 shook the world of offshore finance. “Global Shell Games” exposed the ease with which ne’er-do-wells could launder money or dodge tax using bank accounts held by anonymous shell companies. The book, NGO activism and numerous leaks—the latest, earlier this month, being the Pandora Papers—have since pushed governments to increase corporate transparency. Britain and other countries introduced public registers of company owners. America passed a law ending shell-company anonymity.

But to what end? The book’s authors are putting the finishing touches on a study that suggests little has changed. The banks and corporate-service providers (CSPs)—firms that set up companies for others—meant to be in the front line of the fight against financial crime do a terrible job of differentiating between legitimate would-be clients and those waving red flags.

The three academics behind the study—Jason Sharman of Cambridge University and Daniel Nielson and Michael Findley of the University of Texas at Austin—undertook what they call a “mystery shopping expedition”. They registered shell companies with varying risk profiles and then sent more than 30,000 emails to banks and CSPs in every country of the world to set up bank accounts. The riskiest-looking of these brass-plate firms were domiciled in places with a high corruption risk, such as Papua New Guinea or Pakistan. The safest-looking were from Australia or New Zealand. In between were shells from havens of offshore secrecy like the British Virgin Islands. In some missives the authors and their team posed as legitimate businessmen; in others as dodgier-sounding supplicants or actual miscreants, such as people on sanctions lists.

The global anti-money-laundering (AML) system that has evolved since the 1980s under the Financial Action Task Force (FATF), a multilateral agency, relies heavily on the private sector to weed out dirty money. Banks must follow “know your customer” rules and identify a would-be client’s real, or “beneficial”, owner.

This “risk-based” regime is broken, suggests the study. The authors found that the varying risk profiles made “almost no difference” to banks’ willingness to open an account; CSPs were even less sensitive to risk. (One Singaporean bank, however, deserves credit for smelling a rat, replying “Hey, you’re the Global Shell Games guys!”)

The study shows that the grunt-work of AML is being “pushed onto a private sector which can’t or won’t do it,” says Mr Sharman. “Banks are unable or unwilling to make the fine-grained risk judgments the system demands, because they use standardised, generic procedures.”

Although the conclusion fits broadly with previous research by the authors, Mr Sharman says he was surprised by the level of risk-insensitivity, because “some of our approaches were ridiculously dodgy”. Other experts will also be taken aback: scholars surveyed by the authors before they went shell-shopping predicted that the study would show the system to be working much better than it was before the transparency reforms of the past five years.

The FATF knows the system is far from perfect. Last year its chief, David Lewis (who has since resigned), admitted that national AML laws were rarely being used effectively. He also implored bankers to “stop just ticking the boxes”. Even before this study the agency was reviewing its approach. More than tinkering is in order.

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This article appeared in the Finance & economics section of the print edition under the headline “The shell games go on”

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