[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
that's
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
authoritarian
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]