Every year, an estimated US$2 billion to US$4 trillion is laundered around the world. Over recent years, the money laundering that had been growing for decades has gained another layer of complexity. Nowadays, cryptocurrency is being used as yet another destination for illicit funds being laundered by criminals with research by Chainalysis detecting a total of $2.8 billion in Bitcoin.
Drug traffickers, corrupt politicians, and global terrorism, all use money laundering techniques to obtain legitimized funds. These funds often find their way through businesses owned by the same criminals in an attempt to “clean” the illegally earned cash. This laundered money then continues to fuel and fund criminal enterprises, supporting a vicious cycle.
Due to the prevalence of these issues, governments came together to create AML (Anti-Money Laundering). This organization is responsible for all of the laws, regulations, and procedures designed to inhibit criminals from concealing illegally obtained funds as legitimate income.
The Basel AML Index measures the world’s annual progress against money laundering and terrorist financing across 144 countries. In 2020, the report’s index was at 5.22 out of 10 – the report also stated that only 6 countries in the world had shown improvement in preventing money laundering.
But just how linked are money laundering and terror in threatening economic and financial stability and providing efficient means for criminals to undertake their endeavors? How can effective AML activities help fight global terror?
Funding terrorism with money laundering
Terrorist organizations vary greatly, going from large, state-like organizations to tiny, decentralized groupuscules and networks. Terrorist attacks have also been committed by lone individuals acting on behalf of themselves, receiving inspiration in highly radicalized environments or through self-radicalization. All of them, though, require some sort of financing for the acts of terror they plan or act on.
Terrorists use many different means to finance their criminal activities and camouflage where they get their funds from. These funds can come from legal sources like legitimate businesses, government funding, religious or cultural organizations. However, more than likely they’re from an illegal source such as drug trafficking, kidnapping, and government corruption. It’s also possible for these funds to come from illegal sources that are made to appear like legal sources, thanks to money laundering.
Hezbollah is one of the most prominent money launders in the Middle east. The organization receives funds through an assortment of different avenues including heroin, smuggling, and even private charities funded by wealthy donors. Several countries have also been accused of providing money to the organization, including Iran who has potentially provided over $750 million in 2018 alone.
Unfortunately, it’s difficult to track the actual amount of cash flowing into the organization. This is due to the complex network of investments, businesses, and other money laundering mediums used. But it’s quite apparent that Hezbollah is a multi-million dollar organization as it’s military might grow and represent a very real threat to other nations.
Financing is required by terror groups not only to fund particular terrorist operations, but also to cover the general costs of developing and maintaining a terrorist organization and to create an environment within which it’s possible for it to comfortably sustain its activities.
Thus, money laundering and the financing of terrorism are very well interlinked. In the unfortunately rare cases when law enforcement is able to detect and halt money laundering activities, it could also be forestalling the financing of acts of terror.
Combatting the financing of terror
In 1989, the first AML initiatives arose, when a worldwide grouping of countries and organizations created the Financial Action Task Force (FATF). The organization aimed to prevent money laundering and make a serious dent in the financing of criminal organizations.
FATF was tasked with the mission to devise international standards to prevent money laundering and promote its implementation. After the unfortunate 9/11 terrorist attack, the FATF broadened its scope to incorporate the combating of terrorist financing as well.
Additionally, the International Monetary Fund (IMF), has been fighting against money laundering to combat the financing of terrorists as well. The IMF has urged its 189 member countries to adhere to international standards to prevent terrorist financing and continues to develop further regulations as things evolve.
Effective AML tools to prevent money laundering
AML-enabling organizations such as the FATF or the IMF have helped develop incredibly important tools to combat money laundering throughout the years. “Effective anti-money laundering and combating the financing of terrorism regimes are essential to protect the integrity of markets and of the global financial framework as they help mitigate the factors that facilitate financial abuse”, says Min Zhu, Deputy Managing Director of the IMF.
AML tools can:
- Unmask the infrastructure of criminal organizations, systems of corruption, and plans to perpetrate terror acts
- Provide authorities with guides to understand those who facilitate criminal and illicit activities
- Achieve the destruction of unlawfully acquired assets
- Provide effective deterrence efforts against a great range of criminal activities, including terrorism.
As money laundering continues to suggest a very real threat to governments, financial institutions, and businesses, Anti-Money Laundering Compliance Programs have helped halt the spread of such crimes. AML Compliance Programs offer solutions for businesses to be able to keep track of all transactions and report any financial activities that seem illegal to the authorities.
It’s important to be informed about the corresponding laws and regulations, like the Bank Secrecy Act (1970) in the US and the Fourth Money Laundering Directive introduced by the European Union in 2017.
In case of violation of these regulations, financial institutions are charged with considerable fines for their lack of compliance. To help institutions stay updated on the legal changes regarding international and regional regulations, AML compliance software solutions have recently started to appear. Often powered by AI, these solutions keep track of the changing landscape and jurisdictions. Some of these software includes:
- FileInvite
- Clear View KYC
- ProcessGene GRC Software Suite
- ML Verify
- Biz4x by 4xLabs
- SAS Anti-Money Laundering
- Actimize
- AML Manager
- AMLcheck
- Token of Trust Identity Verification
Some of the AML practices these tools look for include:
- The internal regulation of operations
- A user vetting and processing policies
- Account reviews
- Transaction monitoring and detection
- The reporting protocol in case of any illegal financial activity
The importance of AML in the fight against money laundering
As we have explored above, criminals and terrorist groups use money laundering to hide their activities and their funds. Financial institutions play a very important role in the prevention of these financial crimes. If financial institutions fail to comply with the AML regulations in place to fight money laundering, financial crimes won’t stop increasing. Between 2-5% of GDP (Gross Domestic Product) is money laundered through the financial system, and this money is used to fuel evergrowing criminal and terrorist organizations. With trillions of dollars funding illegal activities, it’s imperative that governments and companies across the world comply with AML and FATF protocols to ensure the safety and integrity of the financial industry.
The author Netaniel (Nathan) Segal is a financial solutions expert, compliance and data governances practice with a trong reputation in the financial field within the Fintech and banking industry.
