Today I wasted another half hour providing very personal details to a financial institution to justify continued access to MY funds. All in the name of Anti Money Laundering (AML), that compliance procedure that has few demonstrable results despite its huge costs, but which certainly drives people out of the banking system.

The cost of compliance for banks ($274 billion annually) is more than a hundred times the money recovered by AML. Imagine the real cost if you counted the time people and businesses spend globally. It’s one thing if AML actually worked. But it is ineffective.

In Europe, people have migrated from using banks for international payments to using the Wise or Revolut apps. They are much cheaper and less complicated. Or used to be until you leaned on them to enforce AML more strictly. Their AML procedures are now at least as aggressive as the banks.

Fear of losing access to funds leads some people to migrate to cryptocurrencies where self-custody is possible, albeit risky. And since cryptocurrencies have stricter AML, users will migrate to the following. Outside of the banking system.

The motivation is stress and the fear that they might end up without paying their rent or mortgage, or even a business payment to staff or vendors. Not for lack of money but because access to money might be restricted.

These are law abiding citizens.

AML affects the little ones more than the bad ones

The little one is disproportionately affected because he is an easy target. The dubious money launderer has the funds and time to set up schemes to bypass the system. And the more a financial institution is fined for flirting with criminals, the tougher they’ll take on the little guy to show they’re up to ‘something’.

This is not paranoia. It happened to me five years ago due to a monumental mistake by one of the world’s largest banks that hastily introduced a new AML system without the proper staff, training or processes. This was after he received a multi-billion AML fine. The result was that it clumsily blocked the bank accounts of hundreds or thousands of small companies that traded internationally, preventing those SMEs from paying staff and suppliers. The bank did not have enough trained staff to process responses to their inquiries in time to meet its own deadlines.

Perhaps you have never had a problem with AML. It is generally not a major problem for those who do not transact abroad. But it can be a nightmare for any law-abiding person doing international transactions or living in a country with a less-than-stellar reputation.

Recent research by MIT on central bank digital currency (CBDC) and financial inclusion found that personal control over money was a key requirement for the financially excluded. In other words, they trust cash because they can control it themselves. They don’t trust anyone else to hold their money.

Please note that AML is a subset of a compliance regime that aims to broaden the tax base.

However, AML also kicks people out of the financial system and blocks access.

That reduces the tax base as people turn to the black market. This has a double impact because some may fraudulently claim government benefits because they have no demonstrable income.

In addition to the impact on the tax base, AML suppresses economic activity because some people find it too difficult to participate in international trade. Plus, there’s the cost of time lost in compliance by productive people.

As the world’s financial authorities despair over the high costs of cross-border payments, particularly for low-value remittances, AML is a massive contributing factor.

AML: public servants or public masters?

In recent months there has been a lot of talk by politicians about the need to maintain political capital. In other words, the need to preserve the goodwill and trust of ‘the people’.

AML reduces a person’s sense of control over their own money.

There is this concept that the government is run by public servants. But if they limit their access to their money, then they turn from public servants into public masters.

And that shift in perception can have a devastating impact on political capital and the perception of democracy.

While banks and other payment companies can sometimes be clumsy in their AML procedures, they are simply implementing the government’s demands.

Canada is a great example. Last year, the government forced banks to use rules meant for AML to prevent truckers protesting COVID from accessing their bank accounts.

Who is the next one? It could be you?

AML is an affront to civil liberties.

It is a matter of time before many people realize that AML is largely ineffective at enormous cost. Fix it or get rid of it.