The global problem of money laundering requires a global solution, says Mike Ward, executive chairman of Armalytix, a fincrime compliance provider.
In today’s interconnected world, money laundering is a global problem. Data from the Financial Action Task Force (FATF) shows a continued decline in the effectiveness of anti-money laundering systems globally, with effectiveness scores dropping from 30% to 28% over the past two years. The negative effects of money laundering are far-reaching, making even this small decline a significant issue. It’s in everyone’s interest to understand what is working and what isn’t in order to reverse it.
The money-laundering business is a global titan
Money laundering has been described as the world’s third-largest business. The United Nations Office on Drugs and Crime (UNODC) estimates that 2%-5% of global GDP is laundered every year. Money laundering enables criminals to reap the rewards of their crimes, including corruption, tax evasion, drug trafficking, theft or migrant smuggling. These criminal activities not only pose human rights offenses but also undermine global economic stability. It can also create volatility on an international scale and ultimately erode trust in governments and institutions.
Corruption and tax evasion divert money away from things like infrastructure and maintaining public services. Meanwhile, criminal activity squeezes out legitimate economic activity and can create asset bubbles in markets like property, a common money-laundering vehicle.
The pitfalls of a national-only strategy
Money-launderers exploit regulatory loopholes and weak enforcement in and between different jurisdictions, meaning inadequate anti-money laundering (AML) frameworks in certain countries attract illicit activity from overseas. In these countries, opportunities tend to be limited, inequality high, poverty rampant, resources misused and environmental concerns secondary. All this makes it vital to have an international AML approach on top of national efforts.
In the UK, there has been an increase in the amount of information gathered and checks conducted before certain financial activities, such as opening bank accounts. This has allowed for better monitoring to stop money laundering. However, there is still a challenge for many products and services on top of overseas money flowing into the country. There are areas in the UK’s financial institutions where money laundering can seep through. For instance, the property conveyancing sector has implemented stringent rules on establishing the source of funds, but mortgage lenders do not impose similar levels of checks on lump-sum mortgage repayments.
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Read moreCoordinating better global AML regulations
Global AML regulations are complex and constantly evolving. These regulations often include stricter customer due diligence requirements, enhanced reporting obligations for financial institutions and increased penalties for noncompliance.
But challenges and gaps remain. For instance, money launderers are becoming more sophisticated, exploiting weaknesses in regulatory frameworks and leveraging emerging technologies to evade detection. Discrepancies in AML regulations and enforcement practices among countries create opportunities for criminals to exploit. To close these loopholes, we need better-coordinated global AML laws and standards both across countries and industries.
The European Union has recently taken further steps to harmonize its AML framework for member states. The approach aims to foster greater cooperation in the EU business landscape by providing a single rulebook and setting out minimum rules that member states must implement through national legislation.
New technology taketh away, new technology giveth
Part of the highlighted global challenge is the use of technology by criminals to hide money laundering and exploit loopholes in areas like digital financial systems, cryptocurrencies and others. As it so frequently seems to be nowadays, the solution to the problem of this new technology is new technology. The financial industry needs to rethink its over-reliance on manual processes. Firms often view checks as a back-office compliance issue and therefore don’t allocate the necessary resources to compliance. In addition, understanding the regulatory world and its systems often requires specialist expertise, which many firms do not have in-house. With concerns that further checks can create barriers to reaching new customers, firms need a solution that balances compliance without losing people and money.
To combat global money laundering we need a targeted and multi-faceted approach that addresses regulatory challenges, improves international cooperation and embraces technological innovation. By working together, we can collectively combat the tide of global money laundering, safeguarding the integrity of financial systems and promoting a safer, more transparent world.
Mike Ward is executive chairman of Armalytix, a financial crime compliance platform.
