24 June 2024

Bad rules are making banking more expensive


When the Financial Action Task Force was established by the G7 group of nations back in 1989, the national leaders at the time probably did not imagine that their rules for combatting money laundering would one day cost their citizens double the amount of money spent on the policing of all other crimes put together. Nevertheless, that is precisely the situation today in the UK, one of the founding G7 members.

A new discussion paper from the Institute of Economic Affairs provides some startling data. In 2021/22, UK banks were forced to spend £34.5 billion to comply with Anti-Money Laundering Regulations (AMLR). In contrast, the total cost of policing the entire country was £17.4bn.

The general public may be forgiven for believing that the enormous cost of AMLR compliance has nothing to do with them, as it is paid for by the banks. However, banks are mostly owned by private shareholders and are, therefore, for-profit enterprises. Consequently, the banks are obviously not going to simply accept a massive £34bn dent in their operating income due to government regulations, and they have little choice but to pass on those costs to their customers.

They do so by charging higher account maintenance fees and higher interest rates on loans and mortgages, and by paying less interest on deposits. Dividing up the £34.5bn costs of AMLR compliance in the UK, one arrives at a cost per bank customer of £220 annually.

Whether by accident or design, politicians have thus detached the state and themselves from the cost of financial policing. This is extremely convenient for the politicians, as the public tends to blame the bankers, already a much-maligned tribe, for the excessive AMLR bureaucracy and the corresponding costs that the banks burden their customers with.

In spite of the extreme costs, at least the AMLR protect the average consumer against unscrupulous criminals who could otherwise use banks for their nefarious activities – right? Probably not so much.

The single largest source of money laundering is the illegal drug trade. Between 1990, when the first AMLR were introduced, and 2021, the number of illegal drug users around the world is estimated to have increased by 60%, and the number of drug-related deaths to have doubled. In 2022, cocaine prices fell by some 30%. Probably not due to less cocaine use, given that its ubiquitous availability suggests an undimmed popularity, but more likely due to a greater supply of the drug.  As with any commodity, prices go down when the supply of it goes up, and the demand remains unchanged.

Apart from being very expensive and probably rather ineffective, the AMLR also have very unpleasant consequences for the large number of blameless individuals who have their bank accounts closed by the banks simply as a precautionary measure. About 170,000 individuals are being debanked in the UK every year due to the AMLR. By comparison, only some 1,000 individuals are actually convicted of money laundering. Thus, the remaining 169,000 individuals are done a very serious injustice as being without a bank account has profoundly negative consequences for most people. 

Again, overzealous AMLR are to blame since the cost of compliance for the banks is so high that they simply choose to debank certain categories of customers rather than spend time and money on finding out whether each individual customer has done anything wrong.

This leaves the question of whether the AMLR are fit for purpose and, if not, why they are not abolished or, at least, scaled back. The answer probably lies in the nature of popularity-seeking and risk-averse politicians who are loath to propose anything that can be construed as being controversial, however much sense such a proposal may make.

Which politicians would, in their right mind, send out a press release in which they propose the scaling back of the AMLR? Their political opponents would immediately pounce upon that and accuse them of wanting to facilitate crime in general and drug-fuelled money laundering in particular. And the public would probably have little appreciation for such a proposal, given that it does not understand the true nature of the current AMLR and their dire consequences.

How can that be resolved? The electorate needs to understand the scale of the costs of AMLR compliance: that they themselves are ultimately paying those costs, that the AMLR have little to commend them by way of crime-reducing results, and that the AMLR are causing vast numbers of innocent people to be debanked every year. Only then are the politicians likely to sit up and listen.

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Nicolai Heering is the Financial Freedom Fellow at the Consumer Choice Center and is a passionate advocate for smarter financial regulations to improve consumers’ lives. He holds an M.Phil. in European Studies from the University of Cambridge and has a B.A. in Business and Economics from Denmark and Hong Kong.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.