Corruption, KYC and the Cost of Compliance by Jarrad Hope | Devcon SEA

[Music] session of the day well done I think you guys should all give yourself a round of applause for making it to the day three last session well done awesome my name is Mark Englishman living in New Zealand we got any kiwis here no kiwis no they've all gone home okay last session we've got we're going to talk about corruption kyc and the cost of compliance so Jared hope co-founder of status and logos welcome [Applause] [Music] Jared cool all right well yeah thanks for making it to the end I'm sure you're hungry I'm sure you're tired I am too um so I'm here to talk to you about corruption kyc and the cost of compliance um and I mean I think a lot of people in intuitively don't like kyc when it's applied to them um but don't really have never really kind of looked into it or maybe some other alternate narratives uh so I'm here to give you another narrative form so uh let's Ryme back the clock back to September the 10th 2011 pay attention to this date it might look familiar to you right Donald Rumsfeld the defense secretary of um the United States uh had held a press conference in which he admitted that $2.3 trillion um of like of the uh uh pentagon's budget was completely unaccounted for had no idea what it was spent on right in fact in that press conference he went to say that the the the adversary wasn't terrorists in fact it was closer to home it was the Pentagon bureaucracy now the following year Jim miny uh took it on himself uh to track down just $300 million of this right he traveled all over the United States um and unfortunately couldn't find it uh he said his own quote saying we know it's gone but we don't know what they spent it on kind of a problem right now fast forward to 2015 right Katherine Austin Fitz who is the assistant secretary for the Housing Department of Housing and Urban Development um looked into her own Department as well as uh the Department of Defense and found for the year of 2015 $6.5 trillion was uh known as unsupported adjustments right this was $54 times the actual approved spend for the the dod um authorized by Congress which was 122 billion um now uh okay Mark Skidmore not sure why he's not appearing there but he's he has a face um thought that this might have been some kind of typo right uh surely it can't point six and uh 6 and a half trillion dollar surely Katherine meant 6 and a half billion so he got together um with with Katherine and uh they really dove into it um what they found is uh through through their research is that there was actually $21 trillion unaccounted for uh between the period of 1998 and 2015 right oh okay there he is um now none of this would have been this is old new old news uh for Franklin spinny right he was a a 1983 military whistleblower um who had already come out in Time Magazine trying to alert the public of this kind of spending right he's on quote saying the books are cooked routinely year after year so this isn't something that happened just that that period it's been happening for a long time in fact it's still happening right so here is something that's from this year where 8. billion of improperly valued material went to Ukraine right again no idea what that material was it just the money got spent um and here is uh Senator Chuck Grassley of 2024 unquote saying that when it comes to catching fraud the Department of Defense internal controls are a complete failure we've known it for decades and he's looking quite grumpy about it and the reason for that is because he's basically made uh most of his term uh tracking down this kind of spending uh so he's found a gas station that was created in Afghanistan that should have cost half a million doar actually went for $43 million right he's found soap dishes that cost $17 right hammers $400 pliers $1,000 right forks and spoons $57 each I hope they were plated in gold right but the most comical one is probably toilet seat lid covers and maybe youve remember this maybe you heard about it it's happened a few times um once in the military where they were going for roughly $640 per toilet seat just the the lid right like not the entire thing just the top part right in the Air Force recently it's gone for $10,000 for each lid it's a hell of a lid so how does this happen how on Earth can you spend 54 times your allocated budget for in a single year right well it's actually because of the oldest living program that's still in operation today this is called mocus right it's written in cobal um I think it was deployed uh in 19558 right um now what its purpose is for is for uh tendering right procurement and so on uh but what it also happens to do is it finds unspent money or funds in other programs that have kind of gone stale right this is completely illegal to do um for any other governed department but uh here apparently everyone seems to look the other way now just to give you a sense of proportion going into this right on the on the left hand side here we've got the the unaccounted adjustments I've just been talking about right this $1.2 trillion on average uh for that's being spent per year according to that time span of 6 and a half trillion right adjusted for inflation that might be around two and uh 2 and a half trillion let's say right on the the other side we've got the United Nations estimates for elicit Financial flows on a given year right it's somewhere between uh two to uh they estimate two and 2% to 5% of uh Global GDP um so that's the 1.

6 trillion and the 4 trillion bounds now the 3.1 trillion that's on on there this sort of middle bracket is the um an estimate of list at Financial flows for last year according to nasdaq's Global crime uh Financial crime report that came out this year right just to give you a sense of proportion right this is just one government agency the entire planet's elicit Financial flows okay so going back to that press conference if you recall at the beginning of this right the day after 911 happened right tragedy absolute tragedy uh and as those Towers fell and hit the ground um the world changed right not only in terms of the surveillance uh in terms of like uh our our Communications uh but also the deployment of financial surveillance around the entire planet right in just one month uh the financial action task force issued out the eight of their nine special recommendations uh and actually the uh with the installment of the Patriot Act uh they have basically a whole bunch of Provisions for kyc and AML uh specifically around sections uh 311 326 351 and 352 um so the 311 is about uh giving the Secretary of Treasury authority to Target specific uh money laundering and terrorist financing risks um 326 is about establishing uh minimum standards for financial institutions so like this is why you have to like hold your passport up and take a photo of yourself whenever you sign up for an exchange or so on um 351 is immunity for anyone likes to squeal right so reporting and if there's any issues around reporting they're kind of immune if it's in the name of this particular goal and uh 352 is basically the mandate to uh for financial institutions to implement the program right now I say this goes around the globe because uh it was felt in Asian Banks right so uh according to the Lexus nus resolutions the true cost of uh anti-money laundering compliance survey in 2015 um even though local regulations were CIT as the most frequently as having the greatest impact it was known that the US regulation embodied by the Patriot Act which was actually what enforced the these particular uh implementations of policy now we've established agency elicit Financial flows just to give you a sense of proportion right now we've also seen that it was implemented in the name of terrorism can you see on here the amount that has gone to terrorism yet maybe oh there we go right 11.5 billion doll have gone to terrorism financing according to the latest NASDAQ Global Financial crime report um that's what we sold out our civil liberties for just to give you just to give you an idea of that right now of course you might look at that and go well you know it's been two and a half decades since then surely we've solved terrorism well actually if you roll back the clock and look at some of the the estimates of what that terrorism financing looks like uh the World Bank and the IMF basically viewed the uh terrorism financing organizations for the entire year of 2001 to be less than half a billion dollars right just to give you a sense of proportion here um in 2005 Rand found that al-qaeda's annual budget was between 30 $ to $50 million in 2015 uh the Department of Treasury estimated that Isis generated roughly a billion dollar and in 2016 europol estimated that that was doubled to to $2 billion now in contrast to to that um we have this great report from the Simpson study group on counterterrorism spending right uh and they believe that uh according to that report that between the period of 2002 and 2007 uh this came to a total spend of $2.8 trillion or $186 billion on average per year so this this spending on counterterrorism is 16 times larger than what the our estimates are for ter expending that goes towards terrorism right that's a pretty good margin if you're playing both sides um anyway so I mentioned this notion of ilicit financial flows right what are they well there isn't really an agreed um consensus on on the definition but generally speaking uh it comprises of tax evasion multinational tax avoidance the theft of State assets the laundering appr proat of crime uh and they Co they cover a broad range of market and Regulatory abuses such as corruption drug smuggling and and human trafficking right um and it is important like I'm not trying to to dismiss this at all right so don't get that from me I'm just trying to give you a sense of proportion uh on on this right I it is important because Donato uh believes that um for every dollar that's spent on uh invest uh that goes towards crime gets reinvested in crime and therefore you get more crime right um perhaps a better analysis of this is actually bjor lomberg who got some of the top economists in the world uh together and um tried to rank the United Nations sustainable development goals on a dollar for dooll spend right um and they found that you know addressing elicit Financial flows is a top priority so why is this important why is addressing uh ifs important well they're basically associated with ineffective State functioning uh legitimate use of state power and uh they're kind of an international problem because even though you might solve it within your own state or within your own country that Capital will probably flow to other countries that uh that um that supported in some way right um at the end of the day it results in Lost GDP which means there's lost tax revenue and the argumentation is that that leads to poor governance right and you know higher quality governance is is is obviously well is desirable so what exactly are ifs and well that depends just like the definition so there's a mirror of different methodologies um and it's unclear exactly um what comprises ifs and this is kind of part of the problem because it's actually hard to understand what they are by due to their nature um so Raymond Baker here basically view uh views that uh 65% goes towards trade misinvoicing trade misinvoicing is like when a multinational corporation will do say for example natural resource extraction in in like one country um but Mi misprice the cost of extraction and the value of uh uh resource that's extracted and then when moving it to another country uh changes those numbers right um 30% towards criminal activity and 5% towards in corruption uh the cardamone uh view is that 80% goes towards trade misinvoicing so this same problem and 20% towards corruption and uh the NASDAQ Global Financial crime report uh focuses more on the humanitarian aspects of listed Financial flows so 25% towards drug drug trafficking and uh 12 to human trafficking with 63% just towards other which is corruption crime and so on um so even though you imp uh we had uh the financial action task force and the Patriot Act implementing these regulations it wasn't really until uh 2015 uh sorry 2005 that elicit Financial flows as an argumentation came onto the scene as a public policy issue right and this is actually uh through Raymond Baker's book capitalism's Achilles heel right um the issue is is that um he was he pushing a model and uh this idea that isn't really well substantiated and uh Peter rudo is quite a critical of it in 2015 where we didn't really know much more about the issue 10 years Beyond right um and in fact uh there's more people who also feel the same way right even though we use different measures and models to use to estimate money laundering there is actually no model that can be used to quantify uh and accept it globally even the financial action task force own methodology for assessing compliance with the uh the FTF recommendations and effectiveness of AML systems is completely vague right it relies on um on the general use of crime sta ICS anecdotal evidence and subjective conclusions and this is part of the nature of like what makes ifs so difficult to to deal with um now to the to their credit there was a uh there is an ongoing pilot program by the United Nations that is trying to provide the highest quality data around iffs um but uh yeah I mean it's it's largely focused on drug traffic in developing countries and you know it's you know roughly $1 billion do with we're talking about as some of the bigger ones so are follow the money methods effective well according to the financial action task force own admission uh last year less than 1% of global elicit Financial flows is recovered right uh Ronald F Paul believes that less than 0.1% of um of uh criminal finances is impacted by follow the money methods uh and according to the UN this is roughly 0.

2% in other words 99.8% of criminal proceeds are completely unaffected by all of the kyc that we've implemented so what can we measure we can measure the cost of implementing compliance right uh and according to the Lexus Nexus resolutions report um for the uh United States Banks alone this is roughly 26.4 billion annually that's double the amount that's going towards terrorism financing in the us alone uh in fact Ronald Li Paul believes that compliance costs exceed recovered criminal funds more than a 100 times over uh and the banks and the taxpayers and ordinary citizens are penalized more than criminal Enterprises that's you and me in fact this has been known at the OCD uh and B20 uh for several years in fact the all of those costs get passed on to us and in in particular when it comes to traditional trade Finance uh 50 to 60% of the uh um sorry of the the these costs uh or more than half the price of your trade is charged to clients and a large portion of that is associated with compliance now so why why am I talking about this well there's another inverse way to think about this and there's a great uh thing that we understand in institutional economics that if we can reduce transaction costs in the abstract uh sense by 0.1% this enables a country to be able to quadruple that wealth that's the difference between Argentina and Switzerland right so we can actually create better and more efficient institutions that lower transactions and and I mean like you know when you like line up in the DMV or if you're filling out a that's like associated with transaction costs in this in an Institutional sense right if you can reduce that by using like say smart contracts or smart paper or whatever um we can enable more wealth and which will probably lift a lot more people out of uh it just make a higher quality of life in fact Michael Levy basically says that no one could rationally think that AML controls in general or financial investigation in particular will solve organized crime completely or eliminate high level offending right for that even to be a chance to achieve that there would need to be a step in change in transparency and effective action against high level corruption Al along all possible Supply chains right it's a huge problem why is that a huge problem well before I get into that Amnesty International uh created a report called weaponizing counterterrorism I highly recommend you read it um but they basically showed how the Indian uh government has been exploiting uh the 2010 uh and 2013 ftfs assessments um to Target you know human rights activists journalists students um uh academics and so on right and so this is one of the issues with these kinds of recommendations what happens is that if you don't Implement them on time uh you can be excluded from the economic system right you can be excluded from member states and so this leads to rushing bad law through their parliaments and when they're in are in place politicians can then use them for political gain um they've been used to uh suppress political opponents um it's not just Amnesty International talking about that it's also the Royal United Services Institute in the in the UK this is a 100-year-old Think Tank very well uh prestigious and well respected uh they focus on uh authoritarian regimes but as we just seen it doesn't apply just Toth regimes so who who is perpetrating it like are we really ones to blame uh Alex copham doesn't believe so in fact he says that ifs are likely to be by and large an elite phenomenon right so the the financial and political Elite um and the reason for this is because that's where the systems of abuse are likely to be strongest and where the capital is concentrated um they're the ones who make the rules uh and therefore they're the ones who can break them uh and to give an example of this you know I you might recall Jamie Diamond uh CEO of JP Morgan Trace is on record basically saying crypto is a tool for criminal drug traffickers and money laundering and tax avoidance and if he was the government he would shut us down there's a certain irony in that that uh basically uh the following year no following weeks I think after that statement um he was hit for a oh not him but JP Morgan Chase uh was hit for fines totaling roughly $39 billion for doing exactly those things uh this was part of the finsen files which basically shows it it's not just uh exclusively JP Morgan Chase but many major Banks now when it comes to financial secrecy you might think of like uh tax Havens in like nice Lush exotic Caribbean islands you might think of even Switzerland but I wanted to point out the financial secrecy index and particularly look at the global scale weight here the United States stands out at roughly 20 25% in contrast to the second position of Switzerland which is has it less than 4% right their policies are literally uh as rold said closer to home ptoa goes on to say asking a kleptocratic state to create an effective AML system is like asking the fox to create a better henh housee it is the governing political Elite that benefits the most substantially from the weakness of existing systems and controls and this is a problem because this C toy issue is real um according to this Bloomberg report trust in most us institutions has been withering across the board it doesn't matter where you look public you know Civil Society the public has is losing confidence this is not just happening in the US but is happening globally whether you look at the United uh the United Kingdom or in France um you'll see that uh trust is declining in fact if you look at the OCD reports the average public trust in governments is around just 41% we can do a lot better in terms of providing quality of governance in fact uh to corroborate the same uh the point Transparency International came out in 2023 saying that over two-thirds of countries score below 50 out of 100 strongly indicating that they have serious corruption problems now why is this important uh or another way to to view this cpto uh problem of kleptocracy is that government debt is growing in fact it's reached unsustainable levels um in many of the advanced emerging economies um and this is from the Peterson Institute in international uh International economics in 2011 um even though those was talking about two uh 25 years we're kind of already quite into that um and this is also evidenced by Foreign um foreign sovereigns not buying US debt um in fact uh since the 1800s 52 countries saw a debt to GDP ratio above 130% 51 of those have defaulted and today the United States is at 120% by 2033 they're going to be above 130 uh and that's according to the Congressional budget office uh in 2018 now the those challenges are also not unique to the United States according to the national International uh Council um they've projected very many uh governments of the OC many governments of the O countries uh are likely to experience the same economic difficulties um rning a little bit over time but uh so the financial action task force is also quite interesting in of itself right because it has a unique form of sovereignty as a non-governmental organization it has no legal basis um it enjoys this Sovereign me uh uh sovereign immunity granted to it by its member states right um it has no oversight uh even though it is based in Paris in the OCD building it is not the jurisdiction of the the French government neither um uh neither the OCD countries um so they they kind of can do whatever they want and have no real pressure to to reform unless all member states start participating in that um as I mentioned if you don't follow them you results in uh economic lockout of the the Global Financial system and there's no way to opt out so why does this matter because if we can start solving governing institutions um we can start unlocking trillions of dollars worth of value rather than just disappearing Into The Ether there's this great report called the uh from the World Bank called where is The Wealth of Nations uh and what they found is that human capital and the value of Institutions as measured by the rule of law actually constitutes the largest share of wealth in virtually all countries this is beyond natural resource extraction so at the end of the day what I'm trying to convey to you is that we should stop thinking from a scarcity mindset when it comes to follow the money methods and instead what we can actually do is improve our institutions if we can make them faster more efficient uh and maybe even develop them in parallel then we can actually create a much better and thriving world and a higher quality of life for for all thank you [Applause]