Tuesday, 22 December 2015

AML Costs

New Zealand's Anti Money Laundering regulations sure do increase the fixed costs of being in business. Here's Josh Daniell in the NBR:
I’m one of the founders of Snowball Effect, a marketplace for curated private equity investment opportunities. We’re subject to AML regulations, and were recently spot reviewed by FMA (our AML “sector supervisor”) regarding our compliance with the rules. The review was thorough and competent. But it reminded us of how familiar the processes have become, yet how disconnected they are from any genuine risk.  We cannot think of a single genuine risk that has been averted from thousands of hours of process.
I'm pretty sure that the kinds of early-stage investments that Snowball Effect facilitates wind up being really rather illiquid. If you wanted to launder funds there, it would take rather a while to offload any sizeable investment. The absence of any sizeable risk didn't stop the Vogons from killing iPredict though.

Lance Wiggs shows up in the NBR's comments:
This is an excellent piece from Josh, and mirrors what we have also experienced with Punakaiki Fund and what I see across the early stage ecosystem. The chilling effect of the AML requirements lowers the appetite for investors to place funds with early stage companies (and investment funds), which is terrible for New Zealand.Meanwhile the compliance requirements for buying a house are ridiculously easy in comparison.
The big players will figure out how to navigate the AML mess. But it's going to kill potential new entry. Here's Mercatus on the effects of regulation more generally:
Regulation may be particularly detrimental to economic prosperity to the extent that it deters entrepreneurship. If larger existing firms can overcome the costs of complying with regulations more easily than new, small firms, such smaller entrants may never start their businesses in the first place. In a new empirical study for the Mercatus Center at George Mason University, economists James Bailey and Diana Thomas show that more regulated industries experienced fewer new firm births and slower employment growth between 1998 and 2011, and that regulations inhibited employment growth primarily in small firms rather than large firms. These results call into question the value of new federal regulations, because increased regulation seems to contribute to the declining number of new businesses and to slowing job growth. 

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