According to the United Nations, the amount of money laundered across the globe is estimated to be between 2-5% of the global GDP, which equates to between $800 billion – $2 trillion. Here we will discuss what forms money laundering takes, the risks to financial institutions and businesses, and how it can be prevented
Forms of Money Laundering
Al Capone, one of the most notorious gangsters of the 1920s New York, used cash-only laundromats as one of the methods to hide massive wealth obtained through multiple illegal activities, including gambling, and bootleg liquor. The infamous Al Capone method is one reason for the term still used today for this type of illegal activity, money laundering. However, forms of money laundering have been around for as long as trade itself. With technological advancement, including artificial intelligence, the global markets, criminals’ methods have become more complex and challenging to detect.
In 1986, money laundering officially became a federal crime in the United States. The term money laundering refers to any process that “cleans” illegally obtained funds of its “dirty” or criminal nature. The United Nations and The Global Programme against Money Laundering (GPML) provide a high level of assistance for countries to increase and strengthen anti-money laundering measures.
There are three fundamental steps to money laundering. Firstly placements, which is when illegally obtained funds are converted into assets that are seemingly legitimate. Second comes layering, where transfers between multiple accounts take place to distance funds from the illegal origin. Casinos are a popular method of layering, for example. Integration is the final step, whereby the washed or cleaned money then re-enters the economy to benefit the criminal organization.
Money laundering, however, can be far more involved and complicated or indeed more straightforward than this. For example, for financing other activities, the process is linear, where funds are first raised, stored, moved, and then used by a rebel organization.
Although there is a concerted effort on the part of many law enforcement agencies across the globe to crack down on money laundering, the nature of this activity means it continues to contribute to a significant role in the worldwide crime, even involving governments and major institutions at times.
Risks for Businesses
It is now easier than ever to process funds online. Unfortunately, this has also opened up even greater opportunities for money laundering and organized crime. Financial Institutions and businesses of all sizes are particularly at risk when it comes to money laundering and fines for noncompliance with AML regulations. For example, in 2020, $706 million worth of fines were imposed on businesses and employees for their role in breaches of money laundering laws. To avoid heavy penalities it is fundamental to learn about the constantly evolving world of fraud and businesses, and thereby know your way around business law to ensure your company is compliant with AML.
Ecommerce businesses are particularly at risk of illegal funds being layered through your online services. For example, criminals use a variety of methods to get around identity checks, including the use of fake or stolen IDs to open an account, including crypto accounts and Neobanks.
A good starting point is first to carry out a compliance & risk assessment via company like Peninsula. This will help your business clearly understand your responsibilities when it comes to compliance and AML. When undertaking a risk assessment, first consider your customers, locations, behaviors, financial processes, types of risky customers, etc. The customers you may identify as high risk may include non-local customers, those who process large cash transactions, large one-off transactions, etc.
The risks associated with your business will depend largely on the type of activities you are involved in and the size of your organization. Some of the highest risks are, of course, associated with financial institutions, currency exchange services , crypto exchanges, and any virtual services.
Once you have completed your risk assessment, you then need to decide what policies and procedures to put into place and consider software to automate and monitor anti-money laundering, with the ability to scale with size. And, importantly, once any fraudulent or suspicious activities are flagged, a process to report these to the relevant authorities.
Detection and Prevention Tech
New and continuously advancing technology and software are helping fight money laundering and related crimes. aml fraud detection is vital to mitigate against potentially massive fines that, in some instances, have crippled businesses. Thanks to the latest AI and machine learning, tech automation has made the massive challenge of protecting your business against fraud and staying compliant with AML regulations achievable.
Applying machine learning for anti-money laundering works by implementing artificial intelligence together with complex rules handling thousands of alerts to stop fraud. Machine learning is designed to detect and prevent breaches in a way that is not possible manually. With e-commerce, machine learning can quickly identify normal or risky behavior on the part of a customer.
The difficulty faced by businesses trying to implement AML measures is balancing this with their customers’ needs and experiences. For example, some AML regulations include holding funds for a more extended period of time, up to five working days, or funds over $10,000 requiring extra verifications and approval processes. These AML measures can create difficulties with customers, who nowadays have greater expectations when it comes to the speed and convenience of services. For larger businesses, there is also the challenge of massive volumes of transactions and the introduction of virtual currencies.
AML software provides businesses with the ability to confirm genuine identities and alert when suspicious activity or profiles is trying to deposit or access funds. Your business needs the ability to monitor each transaction, set automated rules, score and flag for risk, and notify and report any potential fraud. Such anti-fraud and money laundering software should include politically exposed person checks and social media tracking, for example.
For businesses of all sizes, risk assessment and implementation of AML measures are vital and, thanks to developments in technology, more achievable than ever. As it becomes easier and faster for us to process financial systems, avail of eCommerce services, and communicate, so does the ability for illegal funds to be hidden and laundered. Therefore, greater vigilance and preventative measures are required, particularly for those who provide financial services.