One never knows what others might find interesting, and it so happens that a recent article of mine has unexpectedly generated a fair bit of attention on LinkedIn. The lovely people from AML Intelligence have asked me to provide a short summary for those who are curious about the paper’s argument but do not have the time or inclination to read the whole, international law jargon-ridden thing. It struck me as a good idea, and the result of it is now available here. What follows is a repost of the AML Intelligence piece.
With international standards such as the FATF Recommendations and the UN Convention against Corruption in place, what doubt could there be that international law prohibits states from facilitating money laundering? A new academic article argues that the answer to this question is far more nuanced, and complicated, than one might have expected.
From beneficial ownership registers to unexplained wealth orders, countries around the world enact ever more expansive measures aimed at addressing money laundering.
Despite the occasional setback, such as the European Court of Justice’s ruling that public access to beneficial ownership information in the EU was unlawful, there is an overwhelming political consensus that governments must clamp down on money laundering.
But to what extent is it reflected in international law?
This is the somewhat provocative question I set out to explore in an article recently published in the Leiden Journal of International Law.
Its starting point was sheer curiosity, prompted by two quotes separated by almost 30 years. In 1989, American lawyer W. Michael Reisman of Yale Law School was writing about what we now know as grand corruption, and what he then called ‘indigenous spoliation’.
Here is what he said about the role of international financial centres in facilitating the crime:
Because the spoliations cannot be accomplished without havens abroad, the exercise of the banking jurisdiction of another state in such a way as to conceal funds is effectively part of the delict.
It violates the international legal rights of the deprived states and may itself constitute an international legal wrong.
In 2017, Jason Sharman, Professor of Politics at Cambridge University, wrote in his wonderfully argued but misleadingly titled book The Despot’s Guide to Wealth Management that a moral and policy norm has emerged that ‘prohibit[s] countries from hosting money stolen by senior officials of another country’.
What I was keen to understand is whether a similarly categorical legal norm has crystallised, too: or, in other words, whether international law has come to embrace Reisman’s argument that hosting the proceeds of foreign crime is a self-standing international wrong.
There is no doubt that the international legal landscape has changed beyond all recognition since 1989.
That very year, the FATF was established. In Mark Pieth’s colourful account of the proceedings that gave rise to the initial version of the FATF’s 40 Recommendations, ‘no one believed they would survive the next three months’, yet of course they did.
The UN Conventions against Corruption (UNCAC) and Transnational Organized Crime (UNTOC) both entered into force in 2003, and both contain provisions requiring the criminalisation of money laundering, alongside a swathe of other offences.
Even putting aside the obvious point that the FATF Recommendations are not technically binding, there is a fundamental problem with all of those international instruments, and it is as follows.
As it turns out, it is perfectly possible to comply with all of them and host hundreds of billions of dollars in the proceeds of overseas crimes.
Consider the UK government’s own acknowledgement of the scale of its money-laundering problem, despite the glowing results of its most recent FATF review, second only to France. Or ponder for a moment Russia’s place near the top of the FATF’s review league table.
Likewise, the UNCAC and UNTOC require states to institute anti-money laundering regimes, but are silent on the matter of doing so effectively.
A helpful way of conceptualising this point is to think of a distinction, familiar to some continental European legal systems, between obligations of conduct and obligations of result.
The international law of money laundering, as reflected in the international treaties and FATF Recommendations, binds states with a thick web of obligations of conduct: criminalise money laundering, establish a financial intelligence unit, institute a regulatory and supervisory regime, etc.
Yet if none of this need result in anything in particular, are we really that far from the world Reisman described in 1989?
This is where another domain of international law comes into play, and where this piece is likely to lose most of its non-lawyer readers. It is known as customary international law, which constitutes one of the two main sources of international law, alongside international treaties.
The basic idea is that, to form international law, states do not necessarily need to have diplomats solemnly sign a piece of paper.
Sometimes their agreement is evident from the way they behave, known as state practice.
To amount to law, state practice needs to be accompanied by evidence of opinio juris, an indication of belief that international law requires acting in a particular fashion.
There are all manner of controversies surrounding the formation of customary international law, and perceptive readers might notice the circular logic it requires: state practice can give rise to a legal rule, but only if states engage in it because they believe they are already legally required to do so.
Theoretical points aside, though, the notion the states must not facilitate money laundering is a perfect candidate for a customary norm.
There is ample state practice, as well as a vast and ever-expanding body of acknowledgments that states must not host the proceeds of overseas crime, nor otherwise facilitate their laundering, for instance by allowing ‘professional enablers’ to design money-laundering schemes with impunity.
Of course, saying that something is customary international law is not a magic spell that can be used to make up international law where there is none. Therefore, a significant part of the article is devoted to establishing the validity of the claim.
Predictably, there is another challenge with customary international law. Since its rules are unwritten, it is not at all obvious what exactly they say!
Thus another objective of the paper is to consider the possible content of the proposed rule.
Clearly, for it to be meaningful, it has to be results-oriented. At the same time, however, it is impossible to postulate ‘acceptable’ or ‘unacceptable’ levels of money laundering.
States are differently situated, and amounts of money laundered will inevitably be greater in major financial centres. In view of this, and other considerations laid out more fully in the paper, here is the substance of the rule proposed:
First, a state must take measures against money laundering that are consistent with the magnitude of money-laundering risks it faces.
Secondly, these measures must meaningfully reduce the scale of money laundering that would otherwise occur.
Thirdly, unlike the FATF’s high-level objective, this rule is limited to the proceeds of overseas crime, due to the harm that hosting them wreaks on other states.
To conclude, I should say a couple of words about the potential impact of the rule. Here, too, it is best to quote from the paper directly:
The acknowledgement of such a rule can impart further momentum to the ongoing efforts to reframe the FATF’s Recommendations and domestic AML frameworks around effectiveness rather than processes.
In an area laden with rules and short on concrete law enforcement outcomes, the significance of this should not be overstated, but nor is it trivial.
Time and again since AML laws were pioneered in 1986, policy discourse has defined the evolution of international strategies against money laundering.
Now, more than 30 years in, it is time to refocus our attention on states that choose to benefit from money laundering rather than curb it, regardless of their ranking in the FATF’s assessment league table.
If any of this piques your curiosity, I would encourage reading the paper (and, before you make the understandable and wholly justifiable complaint about academic paywalls, please do consider emailing the author and asking for the text!).