The International Anti-Money Laundering and Combating the Financing of Terrorism Regulatory Strategy: A Critical Analysis of Compliance Determinants in International Law

Beekarry, Navin | January 1, 2011

Concerns about the risks money laundering (ML) and terrorist financing (TF) present to the stability of the international financial system have resurfaced in the context of the liquidity problems faced by financial institutions as a result of the recent credit crisis (2008). Because ML and TF evolve with new criminal activities and methodologies, ML and TF present systemic threats to the stability of the financial system. Addressing new developments in ML/TF and their associated risks requires a sufficiently flexible and adaptable international regulatory strategy. In this paper, I examine the international anti-money laundering and combating the financing of terrorism (AML/CFT) regime based on soft regulation and institutions and how it has shaped countries’ compliance with the Financial Action Task Force’s (FATF) AML/CFT international standards. The origins of the AML/CFT regime are located in the dual consequences of globalization, both the rapid economic growth resulting from increasing financial and capital liberalization and negative externalities undermining the financial system, and the changing pattern in global governance toward new, softer types of international regulation and institutions as alternative regimes to address issues of global concern. Compliance with the AML/CFT international standards is examined using the assumption that states’ behavior, or misbehavior, regarding their international obligations can be analyzed in terms of causality with different variables. Inspired by regime and managerial approaches, I argue that compliance is a function of specific determinants of which the regime is made acting on their own but more often with greater impulse arising out of their interaction. The present analysis relies on a mixed analytical-empirical methodology to analyze selected variables such as the soft law nature of the AML/CFT normative regime, its institutional design, compliance monitoring and sanction process, and legitimacy.