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Financial governance and organised crime - understanding and tackling money laundering



The project aims to investigate the policy processes surrounding attempts to regulate national and transnational illegal activities and money laundering in the financial system. The study will examine cooperation among public authorities and between public and private institutions and will assess the impact of the impetus to curtail terrorist finance following the events of September 11, 2001. The main themes of the analysis are the public-private nexus in financial governance and the issue of private responsibility in the implementation of public policy goals.

There are numerous obstacles to the detection and suppression of illegal financial activities. In the domestic sphere, there is a tension between the cost of dealing with money laundering (mostly self-policing by financial institutions) and the benefits of containing financial crime. The incentives for the private sector are not substantial, which makes attempts at cooperation between the public and private sectors problematic. There is an additional detection problem; to a large extent, financial activities follow regular procedures; it is the way in which the funds are generated and used that may be irregular.

International cooperation on money laundering is, in turn, complicated by the various domestic pressures on regulators and governments. Despite some high level initiatives, such as the work of the Financial Action Task Force, which operates in the framework of the Organisation for Economic Cooperation and Development, it is difficult for different legal jurisdictions to always cooperate effectively. Public authorities are required to look after the interests of their constituencies, which explains why many ‘suspicious’ financial centres are in the developed world. In large centres like London and New York, how reasonable is to expect that all dubious transactions can be discovered, and far can authorities go without hampering the competitiveness of these centres? Another factor is the emerging category of ‘losers’. Offshore financial centres are central to any far-reaching solution, as are more established economies such as Luxembourg and Switzerland. These countries will be keen to participate in a wider effort to combat financial crime but may also demand some kind of compensation in return for their support.

Any systematic attempt to tackle financial crime is also hampered by the very nature of the financial system. Global financial integration has translated into immediate access to a plethora of markets and is characterised by increased speed and transnational activity. There is thus an added complication in distinguishing legal from illegal transactions.

These problems add up to a central dilemma for policy making. There are difficulties in achieving cooperation on detection and in maintaining a sustained understanding between the public and the private sector. What is the perceived pattern of incentives and how might it be improved? The second issue is the setting of rules and standards on the topic of money laundering. Who is involved in the decision-making process, how is the cost structure determined and how does it affect participants (both public and private actors)? Finally, what is the input of the private sector in this process, who is in charge of implementation, and how is compliance to be monitored?

Currently, the private sector, domestically and transnationally, has few incentives to radically change its practise in order to curtail money laundering. Yet the responsibility for addressing the issue in practical terms lies essentially with financial institutions. Recent events have put terrorist threats at the centre of policy agendas, which may go some way into establishing money laundering as the opposite of a ‘public good’. Nevertheless, private firms need further motivation to see it in their self-interest to actively combat financial crime.