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Proceeds of Crime and GDP – Are We Comparing Apples to Oranges?

The Estimate for US Money Laundering – $300 billion a year, or 2% of GDP

The 2015 National Money Laundering Risk Assessment – available at 2015 NMLRA – estimated that the total amount of criminal proceeds generated in the United States was approximately $300 billion, or 2% of gross domestic produce (GDP). The report provided:

“United Nations Office on Drugs and Crime (UNODC) estimated proceeds from all forms of financial crime in the United States, excluding tax evasion, was $300 billion in 2010, or about two percent of the U.S. economy. [Footnote: United Nations Office on Drugs and Crime, Estimating Illicit Financial Flows Resulting From Drug Trafficking and other Transnational Organized Crimes, October 2011.] This is comparable to U.S. estimates. UNODC estimates illicit drug sales were $64 billion, which the DEA believes is a reasonable current estimate, putting the proceeds for all other forms of financial crime in the United States at $236 billion, most of which is attributable to fraud.” (citations omitted)

The figures of $300 billion in 2010 and two percent of the US economy are the midpoints of estimates based on a 2004 report. The UNODC report provided:

“… the criminal income in 2010 (excluding tax evasion) may have amounted to some US$350 bn in the world’s largest national economy [the United States]. This would probably be the upper limit estimate. A lower limit estimate – assuming that the nominal increases found over the 1990-2000 period continued unchanged over the 2000-2010 period, would result in an estimate of around US$235 bn for the year 2010 or 1.6% of GDP. A mid-point estimate would show criminal income of some US$300 bn (rounded) or 2% of GDP for 2010. (UNODC Report, page 20).”

A critical review of the UNODC report, and the reports that it relies on, suggests that these estimates need to updated. For example, the amount of criminal proceeds from illegal drug sales dropped by almost 50% from 1990 to 2010 from $97 billion to $64 billion, but the amount of criminal proceeds from all other crimes (excluding tax evasion), more than doubled in that same period, from $112 billion to $236 billion. And excluding tax evasion is meaningful: the 1990 estimate of tax evasion was $236 billion – dwarfing both drugs and other criminal proceeds.

$300 Billion in Criminal Proceeds – How Much is Reported by Financial Institutions?

We don’t know. But what is interesting about the 2015 National Money Laundering Risk Assessment figure of $300 billion in estimated proceeds of criminal activity, is that it may be reasonably close to the total amount reported in Suspicious Activity Reports. Although FinCEN has not (yet) provided total amounts reported in Suspicious Activity Reports and Currency Transaction Reports, some anecdotal evidence (based on off-the-record discussions with people in the industry) suggests that the average depository institution (bank and credit union) SAR reports approximately $250,000 in suspicious activity, and the average money services business (MSB) SAR reports approximately $35,000 to $40,000. And I’ll guess that all other filers’ SARs average $50,000 each. Using 2018 SAR totals:

Depository Institutions                 975,000 SARs @ $245,000       ~$239 billion

Money Services Businesses          875,000 SARs @ $35,000         ~$   31 billion

“Other” and all other filers          275,000 @ $50,000                   ~$  14 billion

~$284 billion

And if we assume that some of the activity reported in Currency Transaction Reports (CTRs) is, in fact, the proceeds of criminal activity, we could arguably add another $36 billion (18 million CTRs @ $20,000 each with 10% “dirty money”). The total reported by financial institutions in the US is then roughly $320 billion. So US financial institutions may be doing a pretty good job at reporting suspicious activity!

Total Suspected Proceeds of Crime Reported in the US: ~$320 billion. Estimated proceeds of criminal activity in the US: ~$300 billion.

Proceeds of Crime and GDP – Are We Comparing Apples to Oranges?

There is another flaw in comparing the amount of criminal proceeds to global (or national) gross domestic product, or GDP. GDP is a measure of the total final value of everything produced. Its components include personal consumption expenditures, business investment, government spending, and exports less imports (and there is nominal GDP and real GDP, with the latter factoring in inflation). A better measure of the effectiveness of the financial system in identifying, interdicting, and reporting criminal proceeds would be to compare the total amount of criminal proceeds flowing through the financial system to the total amount of funds flowing through the financial system.

The US Financial System – Two Quintilian Dollars A Year

The 2015 National Money Laundering Risk Assessment (pages 35 and 36) estimates that the total amount of FedWire, CHIPS, ACH, debit card, and cash transactions moving through the US financial system in a year is approximately two Quintilian dollars:

“The global dominance of the U.S. dollar generates trillions of dollars of daily transaction volume through U.S. banks, creating significant exposure to potential money laundering activity. The Federal Reserve System’s real-time gross settlement system, Fedwire, which is used to clear and settle payments with immediate finality, processed an average of $3.5 trillion in daily funds transfers in 2014. The Clearing House Interbank Payment System (CHIPS) is the largest private-sector U.S.-dollar funds-transfer system in the world, clearing and settling an average of $1.5 trillion in cross-border and domestic payments daily. CHIPS estimates that it is responsible for processing more than 95 percent of U.S. dollar-denominated cross-border transactions, and nearly half of all domestic wire transactions. The average value of a transaction on Fedwire and CHIPS is in the millions of dollars. The automated clearinghouse network (ACH), through which U.S. banks transfer electronic payments that are not settled in real time, processes more than $10 trillion in transactions annually.”

Converting those daily amounts to annual amounts gives us a total of approximately two Quintilian dollars. Of that, $300 billion is criminal proceeds. Therefore, criminal proceeds make up approximately 0.00000007% of the total amount moving through the American financial system.

The US Government’s National Money Laundering Risk Assessment believes that for every one billion dollars of money flowing through the US financial system, seven dollars is criminal proceeds.

The private sector participants in the US financial system are subject to a regulatory regime that requires them to have complex systems, processes, and programs that collectively cost tens of billions of dollars, if not hundreds of billions of dollars, to develop, operate, and enhance. And the administrative and criminal penalties for failing to have reasonably effective AML programs can be severe. As the 2015 NMLRA concludes (on page 36):

“This exposure to a daily flow of trillions of dollars in transaction volume from large value to small value payment systems requires banks to maintain robust safeguards to minimize the potential for illicit activity. Like any other financial industry, deficient compliance practices and complicit insiders are vulnerabilities, but the stakes are higher for banks given the volume and value of transactions that U.S. banks engage in daily. Preserving the integrity of the U.S. financial system requires that banks effectively monitor and control the money laundering risks to which they are exposed. To this end, banks are required to establish a written AML program reasonably designed to prevent their financial institutions from being used to facilitate money laundering and the financing of terrorist activities. The introduction of illicit proceeds into the financial system is the first and critical step in the money laundering process and banks are most vulnerable to being used for this purpose by criminals. Once illicit proceeds are placed into the financial system, the continued use of banks to move those funds both domestically and internationally can further obscure their criminal origins and facilitate their integration into the system. Therefore, establishing and maintaining an effective customer identification program (CIP) is a key control.”

The American anti-money laundering regime – which is now in its fiftieth year – has been built to identify and report the seven dollars of criminal activity out of every one billion dollars of total activity that flows through that financial system. It is critical that the public and private sectors continue to work together to not only make this regime as effective and efficient as possible; but perhaps because of the daunting task that the private sector has been given – to detect and report the 0.00000007% of activity flowing through the system that is criminal proceeds – the regulatory agencies that examine them for compliance with the regime’s rules and regulations should focus less on how those institutions comply with the rules, and more on how well those institutions provide actionable, timely intelligence to law enforcement.