Money Going Underground? Maybe Overregulation Is Your Problem

Printer-friendlyPrinter-friendly EmailEmail
Date: 
June 9, 2016
Author: 
Meaghan Newkirk

The global war on terror has “successfully degraded two very important funding streams,” powerful private donors and state sponsors, said Michael Braun, Managing Partner of SGI Global, LLC and a former DEA Chief of Operations, during his testimony at the June 8 hearing of the House Financial Services Committee’s Task Force to Investigate Terrorism Financing.  As a result, many terror organizations have had to resort to “alternate means . . . to keep their operations flowing.” The focus of the hearing was the now-prevalent concept that terrorist groups are looking to organized crime, like drug trafficking, as newer sources of funding. 

The hearing, the eighth held by the task force, was entitled “The Enemy in our Backyard: Examining Terror Funding Streams from South America” and included one South American representative, Mariano Federici, President of Argentina’s Financial Intelligence Unit (FIU). Federici, a member of the new Argentine government in office since January of this year, decried the sad state of Argentina’s financial system generally, and its anti-money laundering and countering financing of terror (AML/CFT) efforts in particular, under the previous administration.

Among the steps the new administration is taking to strengthen the integrity of its financial system, Federici highlighted an in-depth regulatory reform process in that country. This work is intended to roll back the more than 70 regulations promulgated by the Argentinian FIU over the last five years, regulations that the new government considers to have created “excessive regulatory pressure” and to have “obstructed the functioning of the financial system.” It is this obstruction to which the government partially attributes the increase of funds moving into underground channels. 

According to Federici, the Argentinian government estimates that an amount almost equivalent to the country’s GDP (upwards of $500 billion USD) is currently held outside of its formal economy. While he ascribed this problem to a number of factors, including economic instability, inflation, and devaluation, he specifically focused on overregulation as one factor the government is seeking to address. 

Many countries have imposed complex financial regulations in an attempt to disrupt terror financing. Unfortunately, too often these regulatory changes have led banks and other entities to be overly risk-averse and have ultimately contributed to the global de-risking crisis. That crisis has particularly affected nonprofit organizations working in global hotspots as they cannot access the funding necessary to provide relief to the people who need it most. It is also forcing money into less-transparent informal and cash channels, an ironic result given that the laws were intended to curb illicit transactions.

Argentina’s recognition of the risks posed to the lowest segments of society and to others forced out of the formal economy by excessive regulation is admirable. So too, is its dedication to the implementation of a risk-based approach to AML/CFT supervision. Though Federici noted that Argentina would look to the U.S. for support in adopting such an approach, maybe we will have something to learn from its example.