Mafia bonds, crime and banks
A conclusion you should draw from reading the news is that the world is so complicated that nobody knows what will happen.
Nobody knew that a set of small pneumonia infections in Wuhan, China would lead to a global pandemic.
And I guarantee you, the makers of this obscure law that mandated that European state owned companies should pay interest on unpaid invoices, thought that it would be used by the Mafia to fund organized crime. From the FT:
Under EU law, overdue invoices owed by state-connected entities incur a guaranteed penalty interest rate. This makes them attractive for special purpose vehicles, which place them into a large pool of assets and issue bonds backed by the expected cash flows from the future settlement of the invoices. Most of the assets securitised in the deals were legitimate but some were from companies later revealed to be controlled by certain ’Ndrangheta clans, which had managed to evade anti-money laundering checks to take advantage of international investor demand for exotic debt instruments.
So here is how it worked:
Some people sold to a state owned company and got an invoice from them.
They bundled a lot of these invoices into a Special Purpose Vehicle.
The SPV then sold bonds.
Banks bought these bonds
But the problem was that some of those some people in Step 1 were criminals. They were part of the ’Ndrangheta clan in Italy.
AML is the basis of all law and order
I only slightly exaggerating when I say that Anti Money Laundering is the basis of all law and order. One way of containing organized crime and terrorism is the traditional way. A country hires many police, lawyers and SWAT teams. They go after organized crime by doing the usual things of fighting them, suing them in court and occasionally getting into wars with them.
Or, you could financially ostracize them by not allowing any financial institution to work with them. That doesn’t solve all the problems, but it does solve some of them. For one, they can’t finance all their crime with money from the rest of the world. They become disconnected and it becomes harder to do crime. This is what the broad set of regulations concerning money laundering and financial crime indicate.
In the real world there is no choice between these two proposals. All countries have some version of these two in different quantities of each.
And that is why the Mafia bond financing issue was so big as to hit the front page of the FT, CNBC and Bloomberg.
The very premise of Anti Money Laundering regulations is that nobody gives access to the people ostracized. Even if there is one leak in the chain, everyone else’s efforts go to waste.
And that is why this is such a big deal. One slip up can cost decades of hard work by banks, regulators and the entire financial commnunity [1]
[1] Another viewpoint to take on this is that AML is a low ROI investment. If 30 years of work can be undone by one small mistake, what use is this technique?