Regulatory arbitrage

No, that’s not the name of a minor – probably dastardly – character in a Mills and Boon novel: it is what happens when differing standards of regulation allow criminals to wriggle their way through the system by exploiting those differences.  It’s the sort of thing that the European money laundering directives were intended to eliminate, by creating the much-vaunted “level playing field” – although perhaps, as we watch the slow-mo collapse of FIFA and all who sail in her, we should avoid football metaphors when suggesting fair play…

Reg-arb (will that catch on, do you think?  Inventing a nifty phrase may be my best shot at immortality.  Look what it did for the chap who coined “wifi” – whoever he is…) is on my mind because an MLRO in the Isle of Man has contacted me to highlight a (small but potentially significant) difference that has opened up between the now-accepted best international standards and his island’s interpretation of them.  He puts it very well, so I shall quote from him: “The Department for Home Affairs has recently finished a consultation on the [local AML legislation].  I had little to say about this save two points: (1) the Isle of Man is planning to include dealers in high value goods and services (so going further than the Fourth Directive) – good.  (2) The point at which you become a high value dealer is being set at €15,000, which is €5,000 higher than the Fourth Directive – bad.”

Unlike the UK, the Isle of Man is under no obligation to transpose MLD4 as it stands – it can pick and choose.  But this very picking and choosing can create openings for the naughty.  A drug dealer who needs to launder his cash might decide, for instance, to set up (or take over) a car dealership in Douglas rather than in Doncaster, realising that he can pay in 50% more cash through the former before he has to ‘fess up to being an HVD and then register for all that AML palaver.  On the services side of things, of course I wish that they had made it through the MLD4 drafting process – I’ve seen enough examples of laundering through universities and clinics and consultancies to know the criminal potential of service businesses.  But even I question the wisdom of a jurisdiction so closely allied with – and doing so much business with regulated entities in – the EU choosing to vary the now-accepted definition in this way.

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4 Responses to Regulatory arbitrage

  1. Roy McCarthy says:

    There’s no need for criminals to use the offshore centres at all Susan when lack of effective policing on the UK mainland allows them to saunter in and out perfectly freely http://www.bbc.co.uk/news/magazine-34445201

  2. You’re preaching to the converted, Roy! In so many “leading” jurisdictions, it’s a case of “do as I say, not as I do”!
    Best wishes from Susan

  3. Kerry O'Connor says:

    There will always be loopholes. However, our professional aim should be to attain and surpass the highest or ‘best practice’ AML requirements, not merely scrape through the minimal standards.

    • Thank you for your comment, Kerry, and welcome to the blog. I agree completely with you, of course, but I am often told that governments are wary of “gold-plating” the minimum legal standard through fear of putting their jurisdiction at a commercial disadvantage. It’s a tricky balancing act, that’s for sure.
      Best wishes from Susan

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