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The Failure of Anti-Money Laundering Regulation: Where Is the Cost-Benefit Analysis?

December 4, 2015
By Lanier Saperstein, Geoffrey Sant, Michelle Ng

This paper, published by Notre Dame Law Review, examines how state and federal financial regulations have been enacted to pursue unrealistic standards of ideal banking policies, instead of using policies and cost-benefit analyses to solve actual problems.

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This paper, published by Notre Dame Law Review, examines how state and federal financial regulations have been enacted to pursue unrealistic standards of ideal banking policies, instead of using policies and cost-benefit analyses to solve problems without harming consumers.

Lanier Saperstein, Geoffrey Sant, and Michelle Ng write that Operation Choke Point, a federal inter-agency financial crackdown initiated in 2013, is an example of how cost-benefit analyses could stop bad financial policy-making,

“Last year, a report by the House Committee on Oversight and Government Reform revealed that the Department of Justice was attempting to ‘choke[] off’ legitimate companies and businesses considered ‘high-risk’ or otherwise objectionable, despite the fact that they are legal businesses,” Saperstein and the authors write. “The report noted that senior government officials pressured banks to deny services to money-service businesses because the money-service industry was considered ‘high-risk.’ The staff report noted that the regulators’ delineation of high-risk businesses ‘had no articulated rationale’ and was based on "spurious claims. Even fellow regulators recognized that Operation Choke Point incentivized banks to act on ‘perceived regulatory risk, rather than in response to an assessment of the actual risk of illicit activity.’”

Big government regulatory crackdowns fuel the “too-big-to-fail” syndrome, Saperstein and the authors write.

“The regulatory crackdown also propels the trend towards ‘too-big-to-fail’ banks,” Saperstein and the authors write. “After all, smaller banks lack the economy of scale needed to implement massive anti-money laundering programs. In addition, increased regulation fragments the global financial system by denying banks in some regions access to other regions. U.S. regulators appear to assume that a massive increase in compliance spending by banks will reduce financial crime without any negative side effects. In fact, spending on safety always involves trade-offs.”