Anti-money laundering efforts could become more effective by introducing a European whistleblower reward program and possibly by more strictly monitoring the use of non-disclosure agreements for employees as well as longer cooling off periods during which staff members quitting regulatory agencies are not permitted to be recruited by any financial firm they have previously monitored. These are recommendations presented by the authors of the new SNS report Money Laundering and Whistleblowers.
Money laundering is estimated to annually amount to between 2 and 5 percent of global GDP. In addition, less than 1 percent of proceeds laundered via the financial system are seized and frozen by regulatory and law enforcement agencies. This is highly problematic since money laundering has significant adverse effects on society.
“Money laundering enables criminals to enjoy the proceeds of crime, thus creating a basis for further illegal activities. Furthermore, it facilitates government corruption and plays an essential role in funding terrorist organizations,” says Giancarlo Spagnolo, professor of economics at SITE, Stockholm School of Economics, and author of the SNS report Money Laundering and Whistleblowers.
The Financial Action Task Force (FATF), the global money laundering and terrorist financing watchdog, has since 1990 issued recommendations on how to combat money laundering. Despite lacking any legal standing internationally, the FATF has managed to achieve broad compliance among its over 180 member countries. However, its effectiveness has been called into question by some previous evaluations mentioned in this report.
Spagnolo and his co-author Theo Nyreröd, Ph.D. candidate at Brunel Law School, suggest following the United States’ lead by introducing whistleblower reward programs that effectively take advantage of already informed employees to reduce the information gap between, on the one hand, financial institutions and, on the other hand, supervisory authorities and law enforcement agencies. The authors review both experiences from using reward programs in the United States as well as evidence from academic research to highlight the cost-effectiveness of this supervisory tool.
“Evidence suggests that whistleblower reward programs do increase the number of claims received by enforcement agencies and that these programs are cost-effective,” says Theo Nyreröd.
Spagnolo and Nyreröd propose introducing a centralized EU-wide supervisor to manage the whistleblower reward program in potentially severe cases. Minor cases of greater local relevance, on the other hand, could be handled by local supervisors in coordination with the EU-wide supervisor.
The authors also point out the risk of abuse of non-disclosure agreements with employees, and the so-called revolving doors between supervisory agencies and financial institutions as a problem.
“Even though there may be some benefits—such as maintaining regulators’ staff expertise—it is necessary to consider potential negative costs in terms of regulatory incentives and enforcement effectiveness,” says Giancarlo Spagnolo.
Hence, he and Nyreröd recommend considering an increase in current cooling off periods during which regulatory staff who leave cannot take positions in regulated entities.