The Hidden Dangers of Money Laundering

If you were to ask financial institutions “why do you perform Know Your Customer (KYC), Anti Money Laundering (AML) and Countering the Financing of Terrorism (CFT) checks?”, invariably, the response would be “to remain compliant with regulatory and jurisdictional rules”.  

Although an accurate response, it fails to capture the deeper ‘why?’ behind the mandate to conduct customer due diligence assessments, and the importance and potential impact of these efforts within the financial services industry. These rigorous KYC and AML/CFT policies and procedures, and the means to effectively implement them, carry tangible real-world implications and are much more than just a ‘tick-the-box’ exercise imposed by the regulators. 

The Global Impact of Money Laundering 

At a recent Fenergo leadership event, a senior official from Homeland Security Investigations presented their experiences investigating and pursuing money laundering on a global scale. Beyond the techniques and tactics that law enforcement deploys in this fight, the officer also shared some of the brutal realities and impacts of money laundering. A clear and sobering message emerged: money laundering is a global epidemic, destroying lives and destabilizing economies all over the world. According to a recent report from Nasdaq, $3.1 trillion in dirty money entered the global financial system in 2023 alone.  

Financial crime activities, including money laundering, pose a pervasive threat with far-reaching consequences, impacting individuals, communities and global stability. Criminal entities employ money laundering tactics to bankroll nefarious endeavors like drug and weapons trafficking, often evading detection through untraceable funds.  

Successfully laundering funds allows those organizations to grow and expand their reach, putting more and more people in danger every year. The scope extends to facilitating other heinous crimes like human trafficking and smuggling, where laundered funds support solicitation, transportation and illicit transactions.  

Financial crime and money laundering are key components of terrorist organizations, providing financial support to recruit and train operatives and execute attacks. According to the Federal Bureau of Investigation (FBI), the 9/11 plot cost between $400,000-$500,000 of which “approximately $300,000 passed through the hijackers’ established bank accounts”. That money needed to pass through the system undetected for the attack to be a success.  

There are broader economic impacts of financial crime that also must be acknowledged. The US State Department views money laundering as a central dilemma in dealing with all forms of international organized crime: “money launderers negatively impact jurisdictions by reducing tax revenues through underground economies, competing unfairly with legitimate businesses, damaging financial systems and disrupting economic development”. Studies indicate that crime and corruption also impede economic development, hindering growth. This effect is particularly detrimental to developing economies with limited resources for combating illegal activities and enforcing AML regulations. 

Regulators are taking AML concerns seriously. A total of $6.6 billion in fines were issued in 2023, with US regulators issuing over $5 billion of those fines.  

Increase in Regulatory Scrutiny 

Global regulators are placing a growing emphasis on increasing financial prevention controls, including extending the scope of obliged entities which would be subject to these controls, as well as the levels of scrutiny. In the past year alone, we have seen the European Union’s proposal for an AML package which will, for the first time, exhaustively harmonize rules throughout the EU, closing possible loopholes used by criminals to launder illicit proceeds or finance terrorist activities through the financial system.  

In the U.S., the SEC’s Division of Examinations released a “Risk Alert” titled “Observations from Anti-Money Laundering Compliance Examinations of Broker-Dealers”, in July of last year, outlining significant findings from the SEC’s scrutiny of multiple broker-dealers and shedding light on key insights concerning their compliance with anti-money laundering (AML) regulations. In October, the same SEC division released its examination priorities for 2024, announcing increased scrutiny of investment advisors and continued focus on anti-money laundering programs. 

The Financial Crimes Enforcement Network (FinCEN) is the latest regulatory body to recognize these shortcomings and is aiming to address them with new rules proposed in mid-April. In the words of Andrea Gacki, Director of FinCEN: “the current patchwork of AML/CFT requirements creates regulatory gaps that criminals and foreign adversaries exploit to launder money, hide illicit wealth and compromise American innovation”.   

Conclusion 

Financial institutions are obligated to comply with a myriad of rules and regulations, across multiple jurisdictions. In the day-to-day grind of adhering to these requirements, it can be easy to become consumed by the bureaucracy and administration of compliance and forget why those regulations were put in place.  

Evidently, the importance of KYC, AML/CFT efforts extends far beyond complying with regulators’ reporting requirements; financial crime has a real, tangible impact on society and must be dealt with. Regulators act to protect consumers, ensuring that a financial institution does not engage with financial crime activity is the best way to highlight good compliance practice to the regulators. 

Effectively fighting money laundering has tangible, real-world results, saving lives, improving economies, hindering crime and helping to prevent terrorism. The ‘why’ behind AML/CFT and KYC compliance is not to satisfy the regulators, but rather a case of making the world a safer place for society. It is incumbent on all financial institutions to take every step and employ every method available to hinder money laundering.  

Get in touch with us to discover how your organization can help fight financial crime with Fenergo.