Cornell University Press

The Antidote to Dirty Money Déjà Vu

Return to Home

Three months ago, the Pandora Papers sent a tiny shockwave into global finance. The disclosure that world leaders were, once again, hiding property and evading taxes, launched a frenzy of activity.

Ecuador began investigating its president for tax fraud. The European Parliament called for audits of leader finances. Even the US Congress jumped on the bandwagon, introducing a new bipartisan bill, the ENABLERS Act, to crackdown on legal gaps that allow South Dakota and Delaware to operate as America’s own illicit money hubs.

It’s hard not to feel like the anti-money laundering campaign is always too little, too late.

Yet as 2022 begins, it is hard not to feel like the anti-money laundering campaign is always too little, too late. Back in 2016, the Panama Papers ended political careers and even led to a small war. Twitter was collectively outraged. The US Congress finally passed the Corporate Transparency Act, which banned anonymous shell companies. Yet five years later, it was dirty money déjà vu.

This feeling of falling short is somewhat unavoidable. Policymakers seeking to stop illicit flows are trying to outmaneuver highly capable, well-resourced individuals and organizations. Legal change in a handful of countries might disrupt low-level terrorists or small-time traffickers, but more powerful criminals adjust and adapt.

Yet if déjà vu encourages despondency, the same policy area actually contains one of the most impressive cooperation success stories of the last thirty years. Since the late 1980s, the United States has worked through a little-known international body called the Financial Action Task Force (FATF) to set global standards on keeping illicit flows out of global finance. This 39-member organization, with its tiny secretariat and no binding treaty, has transformed how policymakers around the world approach the problems of money laundering and terrorist financing.

Today, nearly every country in the world has criminalized money laundering and terrorist financing.

My new book The Bankers’ Blacklist showcases the FATF’s remarkable success. Twenty years ago, few countries had strong laws or regulations on illicit money. Today, nearly every country in the world has criminalized money laundering and terrorist financing. Banks across the globe are expected to know their customers and screen for suspicious transactions. Failures can lead to significant penalties.

What explains such a widespread impact? The FATF laid the groundwork for global policy change in the early part of the 2000s. It developed credible, technical recommendations and improved the objectivity of compliance monitoring. It even experimented briefly with explicit market coercion, which forced non-members to pay attention to the standards, although this process ultimately proved unsustainable amid severe diplomatic pushback. Finally, the FATF worked to enhance democratic legitimacy by giving greater voice to regional affiliate organizations and countries.

The FATF has drastically transformed international finance in both deliberate and unintended ways.

The FATF’s most transformative impact, however, has occurred through its non-complier list. Three times a year since 2010, the FATF has published a list of countries that are failing to comply with its recommendations. Officially, the list has few consequences for most countries. But listing carries a financial subtext. Banks around the globe use the list as a focal point for identifying potential illicit financing risks. A bank or firm in a listed country may experience higher costs and payment delays; occasionally, financial channels disappear entirely. This process, which I term “unofficial market enforcement,” is effective because it shifts domestic political incentives. Suddenly banks and firms are demanding their governments adopt new FATF-compliant laws and regulations in order to stem such consequences.

The FATF story offers a window into the power and peril of globalized finance. In a policy area where setbacks dominate news cycles, this little-known organization has drastically transformed international finance in both deliberate and unintended ways. Global shifts in cross-border banking make it more difficult for criminals and terrorists to access the formal financial system; they also, however, create new barriers to trade and development. By revealing the FATF’s wide-ranging impact, The Bankers’ Blacklists offers important lessons for policymaking in the 21st century.    

*Featured photo: Hard cash in a briefcase. Credit: Pixabay

Cover image of The Bankers’ Blacklist.
Read more about this book.

Julia C. Morse is Assistant Professor of Political Science at the University of California, Santa Barbara. Follow her on Twitter @JuliaCMorse.

Book Finder