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Via Maryland Today / By John Tucker
Attempts to Intercept Crime Money Often Harm Innocent Accountholders, Scholar Says in Landmark Study
Two summers ago, Alida, a retiree from Western Maryland, was buying groceries when her card was declined. On the phone, a bank official explained that $10,000 had suspiciously been deposited into her account under her name, and that it was being closed as a result, she recalled.
“They said, ‘Lady, you’re a criminal,’” recounted Alida, whose last name is being withheld.
As she fought the bank for a year, Alida watched her credit rating sink until she found a lawyer, who determined that she was a victim of identity theft, and likely of money laundering.
Her case is not isolated. With increasingly diverse ways to launder dirty money—1980s-style drug dealers approaching tellers with cash-stuffed duffel bags have lost ground to electronic malfeasance—jittery banks are deploying aggressive countermeasures that can harm innocent accountholders, freezing their assets without explanation.
That’s one takeaway from a University of Maryland study published last month in Crime and Justice exposing banks’ stunning failures to thwart money laundering. Co-led by criminologist and Distinguished University Professor Peter Reuter, the study analyzed reams of financial documents and news articles to produce the first empirical assessment of the world’s anti-money laundering system since Reuter coauthored a similar study in 2005.
Among the study’s many other conclusions, Reuter found that banks’ policing efforts have become more sophisticated, expensive and intrusive, but there is no evidence that money laundering has declined since 1989, when the oversight system was established. Countries that pushed to create it—particularly the United States—haven't implemented critical elements of the plan, and while some banks overreach on enforcement tactics, others turn a blind eye to dubious transactions.
“The results of the global effort to control money laundering are somewhere between disappointing and wretched,” said Reuter, who has a joint appointment in UMD’s School of Public Policy and Department of Criminology and Criminal Justice.
The study is also co-led by Mirko Nazzari, a postdoctoral research fellow at Università degli Studi di Sassari, Italy, and described by University of Cambridge politics professor Jason Sharman as “a landmark in the broader study of money laundering.” It challenges scholars and policymakers to ramp up scrutiny: “This is a critical area of study that criminologists, economists and political scientists can no longer afford to ignore.”
Chief among the authors’ findings is the high cost of modern surveillance tactics. Each year, banks spend hundreds of billions of dollars to intercept money deposited by drug traffickers and other criminals, but less than 5% is ultimately recouped, leaving trillions unaccounted for. The cost is borne by bank accountholders, said Reuter.
Banks’ self-protection methods often ensnare innocent foreign nationals, said Reuter, using the hypothetical of a Russian studying at an American university and receiving money from home. “Banks say, ‘Let’s make our lives easy and close his account,” and then they send him a check, he said.
Conversely, many non-U.S. citizens are blocked from sending money to their native countries, the UMD study found: “A Somalian refugee wants to help his family, and his bank says, ‘We can’t tell if this money is going to terrorist operations, so we won’t facilitate the transfer,” Reuter explained.
“These mandates to constantly monitor customers and report anything suspicious should be troubling to the courts,” said Jeff Rowes, a senior attorney for the Institute for Justice, a Washington public interest firm, who represents business owners running money-transfer operations near the Mexican border. Bound by federal law to obtain the identities of customers who make even modest transactions and report them to the government, his clients are losing business, Rowes said.
While many banks take extreme precautions against illicit deposits, others simply ignore them, the UMD study concluded, using the example of TD Bank, which last year agreed to pay $3 billion for allowing drug traffickers and other money laundering networks to move $670 billion through their books over several years.
Banks may choose to risk such penalties for a variety of reasons: Federal regulations lack teeth, criminal prosecutions are rare, and investigations take time, allowing executives to transfer jobs in the interim.
To be sure, banks’ crackdowns aren’t without some benefit, as many transaction flags have helped law enforcement apprehend drug dealers, the study noted.
For banks taking overaggressive self-protection measures, people like Alida are caught in the dragnet.
On the back of the $10,000 check deposited into her account in Maryland, her name was neatly typed out, rather than signed, alongside her account number. She later recalled a months-old IRS notice warning of possible identity theft, but the bank ignored her pleas, she said.
Her account contained just a few dollars, but its freezing blocked her from receiving her social security funds. No other bank in Maryland would accept her, forcing her to borrow from her daughters for a month. “I didn’t have a cent,” she said.
Her case was taken up by Maryland Volunteer Lawyers Service, which convinced the bank to drop the red flag report and remove her name from two consumer agencies that track fraudulent activity. After the 16-month battle, the bank never explained its actions, said Alida’s attorney, Courtland Merkel.
Because Alida’s name might be on other blacklists and her identity was compromised, “this will most likely follow her for the rest of her life,” Merkel said.
According to the UMD study, the United States is likely the largest destination of laundered money and has led global efforts to fix the system.
But “if a bank decides you’re a money laundering risk and doesn’t tell you why you’ve been kicked out, that’s un-American,” said Reuter.
