
Detecting Money Laundering - arshakn
http://conf.startup.ml/blog/aml
======
Hermel
The direct and indirect cost money laundering regulation has reached a point
where it far outweighs the benefits. Thousands of clients have to jump through
cumbersome hoops just to increase the chances of catching one single money
launderer by 1% or so. Even the IRS estimates the implementation costs of
Fatca at 100 billion worldwide. In reality, it is probably much higher and far
exceeds the amount of additional tax 'income' it generates. We really need to
start to discuss the negative externalities of overzealous regulations.

~~~
unabridged
With the possible rise of cryptocurrencies its only going to get worse. I
believe governments should back off from income and profit taxing, its going
to become more futile then the war on drugs.

Governments should be focusing their taxes and revenue on tangible things that
cannot be hidden or evaded, like property. This would solve so many problems
in places like London or Vancouver where foreign money floods the market. Why
waste time tracking endless trails of shell companies when you can just tax
the wealth when it appears in public?

Plus I see income and revenue as non-zero sum, one man or company making more
money doesn't preclude someone else from creating wealth. Taxes on this are
just a friction on the economy. But property is zero sum, every piece of
coastline bought up by rich people as 4th or 5th homes means entire
neighborhoods of normal families can only see water when they are on their 2
weeks of vacation.

~~~
rayiner
Ease of collection is just one of the goals of a tax system. Others include
fairness, and not distorting the underlying economy more than necessary.
Taxing only tangible things might make collection easy, but may not be fair
(it'll generally tax higher income people at a lower rate than lower-income
people), and may also create artificial incentives to engage in activities
that result in non-taxable wealth rather than taxable wealth.

~~~
yummyfajitas
It will only tax higher income people at a lower rate if those higher income
people don't receive any tangible benefits from high income. That's a good
thing - the person who receives a lot from society will pay high taxes, while
the person who receives a little will pay low taxes.

In contrast, with income taxes, the person who _produces_ a lot for society
will pay high taxes.

It's well accepted by economists that a consumption tax is the least
distortionary tax.

~~~
tptacek
Your argument depends on a stipulation of the definition of "fairness" where
the persons most easily associated with production are entitled to the most
favorable tax treatment. Without that assumption, all you're saying is that
just as there is a suboptimal tax system that is least expensive to collect,
so too there's a suboptimal tax system that is least distortionary to the
economy.

There are notions of fairness that aren't premised on the idea that tax rates
aren't a point score system for rating people, and it can be rational to
accept some degree of distortion so long as it's not so powerful that it
prevents the economy from serving its purpose (and so long as that distortion
is buying us something).

~~~
yummyfajitas
I'm making two arguments. One is based on the economic concept of distortion -
people making choices they wouldn't make absent the taxes. That's a strictly
positive claim and it's not based on cost to collect.

The other is the normative one. My premise is that people should pay in
proportion to the benefit they receive from society. Do you disagree with this
claim?

~~~
tptacek
I agree with your positive claim. Some tax systems are more distortionary than
others. I think it's likely that consumption taxes are less distortionary than
income taxes.

I don't think I agree with your normative claim. I think _ceteris paribus_
that it's a virtue of a tax system if people pay in proportion to the value
they get out of society. It sounds like you think that virtue is controlling.
I think there are other virtues as well.

~~~
grinnbearit
People get value out of a society by consuming goods and services, income is
how we as a society measure the value a person provides.

Income Tax taxes value provided, Consumption Tax taxes value consumed.

\-- Consumption taxes can also be scaled/slabbed with the amount consumed,
they don't have to be regressive.

------
jcoffland
Financial institutions are not interested in being good at catching money
laundering operations. They are interested in avoiding expensive fines. False
positives are really bad for customer relations.

~~~
msdos
When a bank loses money they pay for it. It happens often, for millions, says
a friend who works in fraud analysis.

~~~
mifreewil
You are talking about fraud (I'm assuming wire fraud, chargebacks, stolen
accounts, etc.) which I would put in a different category of risk for a
financial institution than money laundering. These activities would lead to
direct losses, whereas money laundering would not.

I assume allowing laundered money through your institution is of less concern,
since it would not lead to a direct loss to the institution. This is assuming
you are not knowingly allowing the laundering to occur and you are following
all AML and KYC regulations meant to prevent money laundering. If these
standards are not met, it may lead to fines and having regulators watch your
institution more closely.

~~~
PeterisP
Wire fraud and stolen account schemes generally get eliminated/caught because
of laundering issues, not because of how they do the actual fraud; and for
large cases of fraud / large stolen accounts, the laundering capacity limits
the total amount.

Good AML provisions help reduce your fraud losses, even if you decide to make
some "exceptions" for your VIP customers.

------
rando18423
Wow. Since when is every regulation supposed to pay for itself? Do police?
SWAT?

I highly suggest reading Steve Randy Waldmann's analysis of the Baltimore
riots and altruistic punishment. He is an actual economist, whereas this
thread is as if he came in here and was telling you your code sucked.

For those curious, his blog is called interfluidity.

~~~
mhuffman
I just followed your advice and read Steve Randy Waldmann's analysis of the
Baltimore riots and altruistic punishment.

It is very clear that he is biased in his analysis. He is also wrong about the
Baltimore riots being "altruistic punishment", at least according to the
strict definition here[1], as the people rioting claimed to be directly harmed
by the existing law enforcement structure that they were rioting against.

Finally, why do you think that simple economic concepts can not be understood
by developers? Why do you think there there are not lots of people on here
with business degrees or backgrounds in economics?

[1][https://en.wikipedia.org/wiki/Third-
party_punishment](https://en.wikipedia.org/wiki/Third-party_punishment)

~~~
rando18423
I think his point is that the idea that knowing you will be retaliated
against, even if it's a "net loss" in some ways for those retaliating against
you, is an extremely powerful force for good in our society. Do you disagree?
I think that because I'm a quant and I see people making pretty basic mistakes
here, or making fallacious assumptions about other fields assuming they follow
the same logic as software, quite often, and that seemed to be happening in
this thread. I maintain that developers are usually not qualified to talk
about economics in much beyond the most basic sense, because they haven't
actually studied advanced economics beyond how it pertains to the tech
industry. They just make linear extrapolations and are shocked (shocked!) when
their narrow (and admittedly unique) model of the world breaks down.

~~~
mhuffman
> I think his point is that the idea that knowing you will be retaliated
> against, even if it's a "net loss" in some ways for those retaliating
> against you, is an extremely powerful force for good in our society. Do you
> disagree?

If you have taken anything beyond economics in the most basic sense, then you
know the answer to any economic question is, "it depends."

So in this case, I do not think that the riots did anything to the city
government's or local police force's sensibilities, because it doesn't cost
them anything...they get to use the house's (the citizens) money. It is the
same reason lawsuit settlements do not seem to have an effect on police
misconduct -- they don't care, it doesn't really cost them anything. So to
your direct question, regarding the Baltimore riots, no I do not think it was
a net good. The people protesting got nothing, businesses and private property
got trashed, and the city paid costs with taxpayer's money, and nothing
changed. There was nothing good that came of that, or the threat of that.

I do take your point about armchair economists seemingly having the solution
to nuanced macroeconomic problems that stymie experts, and I agree we have
seen a lot of that recently with Brexit.

However, I do not think that people can't have an opinion on something because
their eduction level in that specific area is not elite enough, better to
explain why they might not be right, if you have a better answer.

Maybe you could make them one of today's lucky 10,000.[1]

[1][https://xkcd.com/1053/](https://xkcd.com/1053/)

~~~
rando18423
Hold on you really don't think the Baltimore police will back off or hesitate
before they do what they did again? The only thing that influences their
decisions are if it cost them money or not????

~~~
mhuffman
And to be more clear, yes, if penalties came out of their pensions instead of
taxpayers pockets, they would change their behavior long-term.

~~~
rando18423
You don't think having to stand down rioters, have molotovs and stones thrown
at you by an entire community of people proclaiming they are fucking done with
dealing with you around, have shots fired at you, have officers shot in their
squad cars has any effect on long term behavior? Sorry I'm just sitting here
scratching my head.

~~~
mhuffman
I can't tell if you are being serious or not, but there is no mystery and this
should not be confusing to you.

Baltimore was far from the first "ethnic" riot[1] in this country and none of
them have ever caused a lasting change in police behavior. If anything, they
just reinforced the notion among police that militarization of police is
necessary. And I stick by this track record for my analysis of the situation.

Now, there is some very recent activity to support your analysis. Namely,
Baltimore has released a new "use of force policy" in reaction to the
Baltimore riots.[2]

I am not immediately conceding here, because it is common for local
governments to make token "changes" to placate the agitated after flareups,
mostly to save their next election. Furthermore, as the article points out,
this change has no teeth, meaning there is no external oversight, so these are
all more "recommendations" than anything else. The attorney for the ACLU
expresses the same skepticism that I have regarding the recommendations.

So will Baltimore be the first to cause lasting change in local police
behavior? It remains to be seen, but if it does, it will be the first. Showing
that historically, riots do nothing for long-term change.

[1]
[https://en.wikipedia.org/wiki/List_of_ethnic_riots#1978_to_t...](https://en.wikipedia.org/wiki/List_of_ethnic_riots#1978_to_today)
[2] [http://www.baltimoresun.com/news/maryland/crime/bs-md-ci-
pol...](http://www.baltimoresun.com/news/maryland/crime/bs-md-ci-police-use-
of-force-20160629-story.html)

------
dandermotj
There seems to be some bizarre skepticism by some HNers of financial
institutions' AML practices. But the thing is, AML is really difficult and
expensive for banks, hiring floors of consultants dedicated to AML. This is a
billion dollar problem (or more?). Whatever about training a CNN to classify
images, an effective ML model/pipeline to tackle AML will break the back of a
huge problem.

~~~
Kinnard
It may be a billion dollar problem but it's a billion dollar problem like tax
software, it wouldn't exist without the troll demanding his toll. The
resources could be used elsewhere like on curing disease or on educating
people: [http://www.americanbanker.com/bankthink/money-laundering-
is-...](http://www.americanbanker.com/bankthink/money-laundering-is-financial-
thoughtcrime-1058902-1.html)

It's a billion dollar problem that doesn't need to exist.

Many people will probably make cursory argument that taxes(and by analogy ML
regulation) are a necessary evil(They're now doing the troll's work for him)—
I'd argue they are not necessary and they short-circuit us working on better
replacements.

~~~
perlgeek
The troll is money laundering, not the regulation. And you can't ignore the
troll, or even get rid of it, so you must mitigate damage.

~~~
dublinben
"Money laundering" is an imaginary crime. If certain patterns of transactions
were not arbitrarily outlawed, there would be no need to enforce this law.

~~~
ellius
Only in the sense that all crimes are "imaginary." Crimes are acts made
illegal by law, which money laundering is. It's as illegal as murder.

~~~
awt
Certainly you're not comparing tax evasion to murder?

~~~
ellius
Insofar as the logical basis for classifying them as "crimes," yes, I am. Not
in terms of seriousness or morality, obviously. Also, conflating money
laundering and tax evasion shows a serious lack of understanding. Tax evasion
can involve money laundering, sure, but money laundering is often the
mechanism used to enable far more serious crimes, including, yes, murder.

~~~
awt
Many things "enable" murder, including cars, guns, bullets, knives, etc. In
any case this utilitarianism is a dead end. If it is not absolutely fungible,
it's not money, it's coupons, food stamps, tokens, but not money and will not
ultimately be used as such.

------
fiatmoney
There is zero incentive to recognize money laundering "too well", particularly
because it means essentially whatever FinCEN wants it to mean. It's an issue
for lawyers to hash out exactly what patterns must be recognized.

~~~
teemonasty
There may not be an incentive to recognize money laundering "too well" but
there is incentive to get better. FinCEN will continue to raise the stakes of
what is an acceptable AML program and staying ahead of the curve reduces the
probability of a future fine.

------
wallflower
I can't find the reference right now but someone once wrote that PayPal was,
at its core, one of the most sophisticated fraud detection engines ever
created.

In their early days, they almost went under multiple times because of the
millions in chargebacks (This is one of those impossible problems that Elon
Musk helped solve).

------
awt
There is no such thing as money laundering. There is such a thing as food
stamp fraud.

