“I think in the longer view, corruption used to be treated like bad weather. It was something you could complain about, but it was just something that was always going to be there and it was pointless to even try to stop it. You just had to accept it. I think now corruption is increasingly seen as a problem that can and should be addressed.”
Jason Sharman – Professor of Politics, Cambridge University
Jason Sharman will speak at the Leaders in Finance AML Europe event in Brussels on 22 September 2022. Please go to the website for more information and to register.
Jeroen: Jason, thanks for taking the time. I’m very happy to talk to you. First, I’d like to know a little bit about your background and how you got into this topic. When I say into ‘this’, I know you’re busy with different research topics, but I’m obviously focused on money laundering, corruption, tax havens, and so forth.
Jason: Sure. My background is that I studied international politics rather than rural economics or the other ways that you could get an interest in these subjects. And very simply, my interest was aroused by whether small countries can annoy big countries and get away with it. And by studying international relations, international politics, I got interested in really small states. And then more or less by accident, I ran across a copy of a 1998 OECD report on harmful tax competition, so called. And here was an issue in international politics where you had a lot of small states on one side, offshore centres, what were then called tax havens, and of course the predominantly big states to the OECD. But I got kind of interested in this area as a kind of power, as influence. And then I was lucky enough to be able to travel to about a dozen offshore centres, knowing at that stage almost nothing about them. And I had a series of meetings that were very educational for me, I’m not sure they’re educational for the people I spoke to. And that was maybe twenty years ago, and since then initially I had an interest in international tax questions and then in money laundering, and then most recently in international corruption. Both the politics of that and what works, questions of effectiveness too. That’s kind of the short version of where I started in this issue.
Jeroen: Given you’re an academic, is there a strong theoretical base for the work you do? Or is it a lot of exploration?
Jason: It’s both. One of the reasons that I like studying and researching this area is because there are practical bits that I find really interesting. Stopping crime, things that we all care about, but also some quite big picture questions about the nature of politics, about globalisation, and about the way the international economy works. So it’s a nice connection of abstract big issues, big picture stuff. The academic side of it, together with some things that are not only very practical in a policy sense, but in a personal sense. You go and open a bank account, you try to get a mortgage, you’re going to be affected. We’re all affected by these sorts of regulations too, directly or indirectly. So it’s a nice one for me, but it spans a whole series of interests.
Jeroen: Arguably, the hardest question: do you have any numbers that you can share on money laundering, specifically how large the problem is, not in qualitative but quantitative terms?
Jason: Sure. There are tons of bad numbers out there, so I can share bad numbers all you like. But I think that the question really is: Do we have a sense of how big money laundering is? Can we put an exact figure on it? And my answer is, sadly: no. I think the FATF tried to do this a while ago, a long time ago now. I think at the time they decided it was impossible. I think that’s probably the right answer today as it was then. The demand for numbers creates a supply, so there are numbers out there, but I think they don’t really tell us what we want to know. And in some ways, they may actually mislead in that they suggest we’ve got a better idea of what’s going on than we really do.
Jeroen: Just to show how big the problem is, for example here in the Netherlands there’s this rough estimation based on police files of 20 billion, if I’m not mistaken. But again, it depends on how you measure and you know much more about it. But is there some rough figure of the sheer size of the problem? Is there a number you use, normally, if people ask you that don’t know anything about it?
Jason: No. So I say “Big” or “Really big.” But I think for academics and for others, if you don’t know the answer to a question, you should say “I don’t know” or “We don’t know.” The most common figure that people use is 2-5% of GDP and that’s an IMF-figure that’s maybe twenty years old; it has absolutely no evidence behind it. It was just pulled out of thin air, but if it helps people sleep at night, then maybe they can think of 2-5% of GDP. But as I said, that’s kind of an evidence-free figure. So that’s just a number because it stops people being nervous.
Jeroen: In terms of all the regulation, globally speaking, we’re not talking about the effectiveness of it or whether it gets enforced, we’ll get to that, but purely from a regulatory perspective, if you look at the last twenty years or whatever number you like to pick, has the regulation increased? Has it become better? Is it the same? And obviously, I understand this is globally different from country to country, but generally speaking, has it become better?
Jason: It’s certainly become bigger. And I think this is a generalization that’s relatively easy and it holds for I’m pretty sure every single country in the world. Maybe not North-Korea, but just about every country in the world. So there is a lot more of this regulation around than there was ten years ago, certainly twenty years ago. And that impacts banks and big firms, but also individual consumers, anyone who uses financial services. That’s actually a pretty easy question. The logical follow-up to that one is: Has it made much of a difference, do we have better regulation in terms of effectiveness? That one is quite a lot harder.
Jeroen: Yeah, I’ll get to that in a second. The driving forces behind more regulation, a lot of people tell me it started and is largely being driven by the US and then followed by FATF, is that true or are there other major drivers behind this growth in regulation?
Jason: I think the US and the FATF, amongst other internationalizations, are a big part of the increased regulations. But I think there is almost a kind of self-reinforcing dynamic of that you have a little bit of regulation and it doesn’t achieve the result you want, so then you add some more and then maybe the result is still not what you want, so then you add more regulation too. I think the second one may be that we have an increasingly large compliance industry as well. And although the compliance industry can’t explain the birth of this regulatory regime because it wasn’t there, there are obviously increasing numbers of people who benefit with more and more regulation because someone in the public sector, but even more so the private sector, there are now lots of jobs, lots of software, lots of things to be done. A regulation generates employment and in some sense money.
“Interestingly the FATF has been increasingly public, talking about a problem of so-called box-ticking in bank compliance where you’re just going through the motions, you’re doing your accredit things, you’re filling out the form just for the sake of filling out the form, not because it makes any difference in keeping dirty money out of a system and not because it helps catch money launderers.”
Jeroen: I’ve also spoken with Oliver Bullough (linked to the interview) about this, but I’m really curious about your opinion. I think, generally speaking, there has been a time when corruption was approached as something, you’re on a list of most or least corrupted countries in the world, but it was not always that much about the ‘Butler to the world’, to use his phrase. Is it correct that there has become more and more attention for the enabling role that the OECD countries are playing in the whole money laundering problem?
Jason: I think there are two answers to that. I mean, there are two big changes, or one and a half. The first is that I think up until around 25 years ago, international corruption wasn’t spoken about very much at all. It was a taboo subject, so it was just not on the agenda. And that’s obviously changed in a big way. I think more recently, there has been something of a change, but less complete. Whereby international corruption was seen as basically a problem of and for poor countries, whereby rich countries were innocent and, in some sense, morally superior. And I think something that’s changed, although it hasn’t changed as much as it should, is exactly the point you make and Oliver Bullough makes, that in fact in order for international corruption to exist in poor countries, they need the help of people and institutions in rich countries. And so, there’s very much a symbiotic relationship there and the claims of moral superiority by rich countries are really not justifiable. I think there has been some change of an opinion there, but still not as much as there should be.
Jeroen: Do you think the war in Ukraine could play a role where this changes faster?
Jason: I think it already has played a role, it’s given more political impetus to look at things like grand corruption and kleptocracy. And I think you have things like the British government now very interested in new legislation when it was notably uninterested in that same legislation for about five years before. And of course, we have all the stories in the news about big yachts and planes being frozen. I think it’s mainly good, the exception would be that corruption is seen as just a problem of Russians or Russians in the west. And of course, international corruption is a pretty equal opportunity pursued. So in fact, Russia is just one of many countries whose wealthy individuals use western financial centres to launder the proceeds of their corruption. So again, I do worry to the extent it is seen as just a Russian problem, whereas in fact it’s much more general.
Jeroen: I don’t know to what extend you know about this, but here in the Netherlands we have now over 12,000 people working at the banks and it’s obviously a small country of 17 million people. 12,000 people in the banks are focused on transaction monitoring, KYC procedures etc. And they’re purely working on the fight against money laundering, if you will, or complying with regulation if you’re a bit more cynical about it. Is this a trend everywhere, that we are adding a lot of people to check transactions, for example?
Jason: Yes. It really is a general trend. So what’s happening in the Netherlands is happening in pretty much all rich countries, but I think increasingly in developing countries too. And I have mixed feelings about that development in rich countries and I really worry about that development in poor countries because it scares people with valuable skills, and it employs them in an area where I’m not sure it’s the highest priority for developing countries. But the short answer is yes, that’s a general trend.
Jeroen: Because the question that’s asked to an increasing extent is whether that’s effective, so people that are a bit cynical about it say “It leads to a lot more notifications to the FIUs and there is no capacity to deal with it.” I’m not saying that’s my opinion, I’m just saying that’s what the narrative often is. Could you say something about that?
Jason: I’d be happy to. I am sympathetic to those views and I noticed that interestingly the FATF has been increasingly public talking about a problem of so-called box-ticking in bank compliance where you’re just going through the motions, you’re doing your accredit things, you’re filling out the form just for the sake of filling out the form, not because it makes any difference in keeping dirty money out of a system and not because it helps catch money launderers. So I think surprisingly I’m on the same page of the FATF here, which has been making pretty similar criticisms about the lack of effectiveness. What have we got to show for those 12,000 people in Dutch banks multiplied by however many thousands of people doing similar functions in other countries? And I think it’s really hard to argue with the proposition that the results have been disappointing so far.
Jeroen: About your own sources of information, I’m really interested to learn a little bit more about it. I read in preparing for this that you also have been using private investigators, if I’m not mistaken, and all kinds of other sources. Could you tell me a little bit more about how you get to the truth as an academic to information, especially from countries where maybe information infrastructure is different from where you are based?
Jason: Sure. One of the reasons, and probably the main reason, why more academics don’t study this kind of thing is because it’s difficult getting information on it. Obviously, illegal activities and those conducted, I mean, if you’ve got a murderer and you’ve got a body, you can at least count things that are going on. In financial crime it doesn’t usually leave the same patterns, and if it’s successful and no one knows anything about it. So, that’s frustrating in lots of ways, it makes it hard to come to conclusions but it does also pull for some creativity in trying to get the least bad information that’s out there. And two of the approaches that I’ve used, one is working with really skilled and creative people, former law enforcement people, and thanks to open-source material, it’s actually – to me, at least – surprisingly easy to gather at least a fair bit of the information that we want. At least it occurs to me that anyone with an internet connection and Google probably has more investigatory capacity than the whole of the FBI in 1990. So each one of us just by the fact that there are leaks and data dumps in the internet, we’ve got these huge amounts of information. The second source is by in some sense trying to break the law and seeing what happens. And that’s the kind of mystery shopping expeditions so called, with my colleagues, Mike Findley and Dan Nielson, and that’s where we’ve tried to buy things online that are prohibited accordance to international standards. Particularly anonymous shell companies or untraceable shell companies and secondly attempting to access the international banking system without revealing our identity. So both of those are probably a little bit unusual for academics, but helpful in getting a handle on this otherwise tough problem.
Jeroen: I love the way you’ve phrased that! So you’ve been trying for example to set up a legal structure with a shell company in the Cayman Islands or the British Virgin Islands and then put yourself as a shareholder and making sure that nobody can follow your small transactions or something?
Jason: Yes. We’ve actually done thousands and thousands of e-mail solicitations basically saying “Hello, we write to corporate service providers, I’d like to set up a shell company. I don’t like people knowing my business, I don’t really want to send any documents. What can you do for me?” And if the rules are working as they should, those people should write back and say “Unless you send through identity documents to prove who you are, we’re not going to give you a shell company.” But of course, people don’t always say what they should say and they don’t always follow the rules and so we’ve got quite a lot of replies that effectively say “We don’t care who you are or what you’re doing, we’re happy to sell you a shell company for a relatively small sum of money.” And in some cases, I then got on to actually buy the shell company and set it up, just to prove it has been done. Sometimes in offshore jurisdictions like those you mentioned, but it’s actually much, much easier and cheaper to do so in onshore jurisdictions, particularly Britain and the United States, which have far less scrutiny and follow the rules far less well than the usual tropical islands at jurisdiction.
Jeroen: You never ran into legal trouble yourself?
Jason: Not yet. I should say we’re soliciting for products but we’re very careful to be truthful whenever we’re signing legal documents, so we don’t commit fraud and we approach banks in a different way than we approach corporate service providers because of different legal provisions about bank fraud. And the other thing that we do, as a part of university ethics, we make sure to delete the names of all the people we correspond with. So we can say that maybe we approached a hundred firms in the Netherlands and eighty of them did the right thing and twenty did the wrong thing, but we can’t give the names of the firms that did the wrong thing or any of the names of the people that did the wrong thing. And that’s mainly for ethical reasons, but it also protects us legally in terms of being sued for defamation or other problems like that.
Jeroen: Enforcement is a large topic we can talk for hours about. But to put it very simple, what is the biggest problem why it’s so hard to enforce existing regulation? Because I think it’s fair to say that if we – whatever country – would actually enforce everything we have written down, we would be in a completely different place.
Jason: Yes. I think if we just enforced even a tenth of the stuff we’ve written down, we’d be in a completely different place. But as you say, I think there are quite a few reasons. Maybe just to think about three.
One I think is the kind of crimes that we’re interested in are often international that involve more than one jurisdiction, sometimes many more. And criminal justice does not work well across the national boundaries, despite the fact we’ve had extradition treaties for over a hundred years and all that. The systems just don’t work very well. They’re slow, they’re inefficient, they take a lot of time, they fail a lot of the time.
The second one would be a question of incentives for those charged with enforcing the law. Often, police or prosecutors are rewarded for solving cases relatively quickly and relatively cheaply. That means that investigating big complicated time-consuming cases which you might fail to bring to a conviction are not the sort of cases you want to pay attention to. And that’s of course exactly the category that most financial crime fits into. So I think the police or prosecutors for law enforcement, there are often strong incentives not to investigate financial crime and instead do things that are simpler. Like mugging or a low-level drug sale or whatever it might be.
The third one, if you’ve got international and then incentives, I think there would actually be good reasons why this is hard. I think first of that it is hard to put people in jail and it is hard to take away people’s property, both of those are pretty good. You don’t want it to be easy to put people in jail and of course you don’t want it really to be easy to take away people’s property. Although I am sad that enforcement doesn’t work better, and I think enforcement should work better, I’m also a little bit nervous about some of the ideas that people propose to improve enforcement. Because they tend to make it pretty easy of a state to take away people’s property. I’m not sure that’s always a good idea.
Jeroen: I think you have fairly recently published a book around NGOs as enforcers of the international law. Could you shortly give an overview what that is about?
Jason: Sure. When we think about criminal justice and the police, we think about the state, we think about the government. We pay taxes so that we have police and prosecutors and judges and prisons. So enforcement equals the state. This book is saying “Hang on, whether it’s the environment or human rights, but increasingly financial crime as well, there are other things that inform enforcement functions and some of these are NGOs. So some of the best detective work about financial crime, some of the best investigations are not done by law enforcement, they are done by NGOs.” And even some of the most successful cases that we have, like Obiang against France were not started by the French state; they were started by non-governmental organizations like Transparency International France or like Sherpa. So I think this is an increasing trend whereby NGOs are moving from complaining to the government in order for the government to do something, NGOs are increasingly doing things themselves. Particularly when it comes to tackling corruption from foreign sources. We can currently see this as well with the big data dumps from international consortium of investigative journalists, which are a part of both cause and effect of this greater involvement of NGOs. So it’s this idea of enforcement, if it’s going to involve the state or it doesn’t have to be limited to the state. In fact, because enforcement works pretty badly, the state needs all the help it can get.
Jeroen: My final two questions, one is: Do you have hopeful developments you see? Because I think it’s easy to become quite cynical in this field, because it’s slow, it’s hard, it’s difficult and it obviously never will be fully solved. So, it’s difficult, but do you have hopeful developments where you say “That’s something that inspires me?” And the other question is: What is the best way for you to be impactful and to add your part to the whole issue?
Jason: In terms of reasons for hope, first of all, I agree that it’s easy to become a bit depressed and cynical about this. But I think in the longer view, corruption used to be treated like bad weather. It was something you could complain about, but it was just something that was always going to be there and it was pointless to even try to stop it. You just had to accept it. I think now corruption is increasingly seen as a problem that can and should be addressed and it should be fought and ideally fixed. I think it’s easy to lose sight of the fact that 25 years ago, bribes were tax deductible in most European countries. That’s a really big change, and I think it’s easy to lose sight of that. So we’ve come a long way in terms of the moral climate and in terms of the acceptability or unacceptability of certain practices. A more applied one is, I think, we’ve now got these vast amounts of information about what used to be a very secretive subject, partly through official government channels with the rise of things like the automatic exchange of information, but partly through the big data dumps, things like the Panama papers and so on. Given that secrecy and ignorance has been a big part of the problem, the fact that we just got massive volumes of information that we wouldn’t have dreamt of having 12 or even 15 years ago is again another reason to be hopeful that big things change in a positive direction and that from that development, we can at least hope for further big positive changes in the future.
Jason: Yes, so for the impact one, first of all, it’s probably a common human characteristic to overstate one’s own importance and impact, so I think academics in some way, the impact is not much. But I think, first, one of the useful things about academics is – at least I feel like I can say something about the policies system without having a vested interest that might constrain both regulators and people in the private sector. So if you work for a regulator, it’s very hard for you to criticize the system publicly. And obviously, it’s at the very least embarrassing and it might make a big mess in your career. If you work in a bank or somewhere else in the financial sector and you complain about increasingly burdensome regulation, of course the objection is, “That’s what you would say”, you have invested interest in maximizing profit and minimizing regulation and associated costs. Although academics are relevant in a lot of sense, hopefully I and other academics can say things in a way that might not be dismissed so easily as just “That’s what you would say.” And maybe that degree of independence and relative objectivity might be useful there, particularly in a subject where often people are locked into particular teams but don’t like people stepping out of line. If you are an FATF plenary and you say “The AML system is a bit of a waste of time”, that goes down really badly. Academics have that freedom to speak their minds, which is a great luxury.
Jeroen: I agree, that’s a wonderful end. Thank you so much, there are a hundred thousand other things to ask, but this is really great. Thank you so much!
Jason: You’re welcome!
Jason Sharman will speech at the Leaders in Finance AML Europe event in Brussels on 22 September 2022. Please go to the website for more information and to register.