For many years, money laundering has disrupted economies worldwide—and it will continue to do so in the future. Due to the constant influx of new technologies, money launderers continually develop new and more sophisticated ways to gather funds illegally.
With the growing complexity of these methods, financial institutions should proactively improve their security infrastructure.
Financial institutions should view money-laundering prevention as a moral obligation. It’s not enough to comply with anti-money laundering (AML) regulations and invest in the latest technologies. Organizations also need to be aware of the current cybersecurity trends and money laundering methods.
Staying on top of these trends is the best way to ensure the safety of your stakeholders and business. Check the infographic below to learn more about money laundering and how to prevent it from happening.
Fast Facts and Stats on Money Laundering
Money laundering is one of the most notorious crimes around the globe. It’s often difficult to determine the vast effects of the scheme on the global economy. Here are some notable statistics for a better picture.
1. Anti-money laundering measures are only able to recover 0.1% of stolen funds (Legal Jobs)
A 2020 study showed that global AML efforts over the past three decades are ineffective as only 0.1% of illegally gained funds are recovered from criminals. This is alarming, given that financial institutions worldwide have already spent billions of dollars to combat money launderers.
2. The estimated amount of money laundered is around 2–5% or $800 billion–$2 trillion of the global GDP (United Nations)
Money laundering affects more than just bank operations. It also slows global economic growth, promotes crime and corruption, and causes social degeneration.
3. Between January to May 2020, crypto thefts, hacks, and frauds reached $1.36 billion in value (Dawes Centre for Future Crime at UCL)
While money launderers still steal fiat money more than cryptocurrencies, the latter still contributes to billions of dollars lost. Despite their advantages, the decentralized and anonymous nature of blockchain and crypto makes it possible for money launderers to move laundered money around easily.
4. Global banks received $2 billion in fines for money laundering violations in 2021 (Nasdaq)
Financial institutions failing to stop money launderers proves they either have weak AML systems or criminals have gotten smarter with sophisticated technologies. Not only do these fines affect the financial stability of banks, but they also reduce consumer confidence.
5. 41% of financial institutions have an inadequate or severely inadequate budget for AML and sanctions compliance (Norton Rose Fulbright)
With insufficient funds for AML programs, financial institutions can easily fall vulnerable to attacks and be fined with additional penalties from regulators. The lack of resources also exposes financial institutions to market and operational risks that can quickly irreparable harm to them.
Common Money Laundering Tactics
Over the past few years, money launderers have devised different sophisticated tactics to steal money from financial institutions.
1. Synthetic identity creation
With the help of new technologies, criminals can successfully steal identities, which they can then use to open credit cards or bank accounts and commit other illegal activities. Identity theft has become so common that in 2021, thieves stole around $52 billion from 42 million Americans.
Institutions are recommended to adopt multi-factor authentication methods to protect user data and combat identity thieves. They are also encouraged to encrypt their databases and install firewalls on their computers.
2. Dummy companies
Money launderers create dummy companies or shells to hide ill-gotten money, evade taxes, and protect themselves from authorities. You can easily identify a shell company if it conducts little to no economic activity, serves only as a pass-through for transactions, and makes high-value transactions irrelevant to its operations.
3. Bulk cash smuggling
Bulk cash smuggling involves depositing large amounts of money into offshore banks or other financial institutions in countries with more relaxed regulations. There are many ways to spot this type of money laundering method.
For one, it’s considered a red flag if a person or group exchanges small denominations of bank notes for large denominations. Unauthorized transfers of large amounts of money via armored transport should also be a clear sign of bulk cash smuggling.
4. Trade-based money laundering (TBML)
In trade-based money laundering, criminals use trade transactions such as under or overvalued invoices to legitimize their illegal activities. In some cases, shells, offshore front companies, and third-party intermediaries are used to conduct TBML.
While TBML is more difficult to detect and combat than other money laundering methods, institutions can stop it by adopting stricter know your customer (KYC) processes, assessing their risk mitigation systems, and sampling test trade finance accounts.
5. Smurfing
Smurfing involves breaking down ill-gotten funds into small, less suspicious amounts and depositing them into multiple accounts within one bank or across several financial institutions. Money launderers, or smurfs, use this method to avoid triggering suspicious transaction reports. Aside from advanced AML tools and detection algorithms, you can use social media lookup, data enrichment, and device fingerprinting techniques to detect risks and spot possible smurfs.
6. Anonymous online payments
While ideal for digital privacy, anonymous online payment services are being used by money launderers nowadays. Products and services such as prepaid gift cards and cryptocurrencies have been instrumental in moving money without revealing the identities of both the sender and receiver.
While financial institutions cannot control private payment services, they can still stop illicit activities by enacting robust KYC measures to ensure customer legitimacy.
6. Black salaries
Also referred to as black money, black salaries are funds paid by companies to unregistered employees. These are typically exempted from tax and distributed in cash.
Recipients of black salaries are required to hide the money, spend it only in the black market or underground economy, or disguise it as legitimate funds through money laundering.
Black salaries are often difficult to detect and quantify. Financial institutions can prevent them from circulating by using data analytics tools and sensors that can track cash inflows and monetary malpractices in real-time.
5 Ways to Prevent Money Laundering
Combating money launderers requires holistic solutions rather than a few dole-outs. Here are five ways to prevent criminals from stealing billions of money from your organization.
1. Follow AML policies and recommendations
On a broad level, financial institutions must follow AML policies and recommendations before adopting their security measures.
One thing you can do is follow recommendations from the Financial Action Task Force (FATF). This inter-governmental body sets standards to combat money laundering and other illegal financial methods.
To ensure that your organization complies with these recommendations and other national policies, consider appointing a dedicated compliance officer. This person should oversee your AML program and coordinate with financial authorities regarding AML activities.
2. Optimize your KYC processes
When enhancing your KYC processes, make sure to cover elements such as the customer identification program, customer due diligence, and internal controls. These are important in verifying customer identities, increasing your organization’s security, and stopping money launderers at the onset.
3. Standardize and update security tools
With outdated technologies, you may have difficulty detecting more modern money laundering tactics. Make sure to update your security tools to track suspicious patterns and protect your systems from other threats. Use advanced technologies such as artificial intelligence and data analytics to support your AML efforts.
You may also standardize your AML tools across your organization to quickly and more efficiently gather data. Set your own terminologies that every department of your institution can understand.
4. Conduct organization-wide AML training
Training every member of your organization on AML can help them easily detect and report financial crimes. Teach them the proper reporting channels when identifying or suspecting suspicious activities.
5. Allot adequate resources and workforce
Detecting money laundering schemes requires both skilled workers and modern technologies. Dedicate enough budget to your AML efforts to help your organization anticipate and recognize money launderers, document financial crimes, and assess other risks.
Enhance Your AML Measures for the Future
As money launderers get smarter, you must also improve and stay abreast of the new methods that can harm your organization. By following the tips above, you can protect both your customers and your reputation as a premier financial institution.
If everything still sounds overwhelming, consider employing the help of experts from Q5id. Our identity and access management solutions are designed to protect your customer data and prevent instances of identity fraud. Combining technologies with knowledgeable professionals can improve your AML efforts and save time and costs.
Contact us today to learn more.
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