If you work in an industry subject to money laundering regulations, then you’ll know how important it is to perform an AML check on each new customer and monitor existing ones. Companies that fail to comply with these regulations put themselves at risk of a large fine and subsequent damage to their reputation.
Over the last decade, governments worldwide have issued ever-more stringent anti-money laundering (AML) laws to crack down on financial crime. However, according to the United Nations Office on Drugs and Crime, the amount of money laundered each year around the world is estimated to be $2 trillion or 2–5% of global GDP.
One reason this staggering figure remains so high is that money launderers have more opportunities than ever due to recent advances in digital technology. The pandemic accelerated the demand for remote technologies in the financial services industry. But according to the Financial Action Task Force (FATF), the number of financial crime incidents also increased during this time.
Advances in digital technologies have presented several advantages to criminals, including:
- Greater anonymity
- Faster transactions
- Better global connections
- The ability to target businesses across multiple channels
It also shows that business anti-money laundering systems haven’t kept pace with increasingly sophisticated global money laundering schemes. New technologies pose a significant threat to banks and financial institutions, but thankfully there are some advanced tools and data available that can help them overcome these ongoing challenges.
Digital money laundering fraud examples
The value of digital technology in the marketplace has exploded over the past decade. But with this growth comes new opportunities for fraud, which continues to be a considerable issue. There are many examples of new and sophisticated ways that criminals use digital technologies to commit fraud.
Synthetic identity fraud
This is when criminals combine some real elements of someone’s identity with fake details to create a synthetic identity.
This identity is real enough that it can be used to apply to borrow money via credit cards or something similar. This facility is either used for money laundering or is used and never repaid.
Synthetic identity fraud is the fastest-growing crime in the USA, costing the nation’s banks $6 billion annually.
Criminals often acquire a person’s social security number and then accompany it with false details. Although it will be rejected the first few times the fraudsters apply for credit, the fact that it has already been used means that it has a credit history, which legitimises it. Eventually, a financial institution will accept an application.
Cryptocurrency money laundering
Cryptocurrency is known for its anonymity and lack of regulation. As a result, it has been popular amongst cybercriminals and money launderers.
In a recent case, Denis Mihaqlovic Dubnikov, the co-founder of crypto trading platforms Coyote Crypto and Eggchange, pleaded guilty to laundering money on behalf of a notorious ransomware gang, Wizard Spider.
The gang would be paid by their victims in Bitcoin. Dubnikov and his conspirators laundered this money using a complex process, which involved sharing it between many digital wallets and feeding it through several crypto exchanges, where it would be converted into different coins. Eventually, it would be exchanged for fiat currency.
Dubnikov could face 20 years in prison and a fine of $500,000 for his crimes.
Crowdfunding platforms were set up to help organisations and entrepreneurs garner support and funding for their ideas.
But unfortunately, they have also been used by extremist and terrorist groups and money launderers. For example, the Time website reports that far-right groups in the USA raised more than $6 million between 2016 and 2022.
Many crowdfunding platforms don’t have suitable anti-money laundering processes in place. This increases the AML risk to the banks and financial institutions that work with these companies.
Cost of combatting financial crime
Anti-money laundering compliance costs UK companies around £28.7 billion annually, which is expected to rise to £30 billion in 2023.
The average large institution spends around £300 million, while smaller companies spend over £186.5 million yearly.
The factors that contribute to this rising cost include:
Implementing new regulations costs money. For example, it is estimated that meeting the requirements of the Fifth Anti-Money Laundering Directive (5AMLD) costs the average UK financial institution £75,000.
The repercussions of regulatory non-compliance are steep. Regulation breaches can see businesses subject to civil penalties, criminal sanctions, and significant fines.
Global fines for businesses that failed to comply with money laundering regulations increased by 50% in 2022. A total of $5 billion in fines were issued to banks and other financial institutions.
Economic Crime Levy
The government has also introduced a new Economic Crime Levy, essentially a tax aimed at sectors subject to money laundering regulations. The money raised will fund government action to tackle money laundering.
The levy aims to raise £100 million per year and will operate on a tier-based system, with small companies (under £10.2 million in revenue per year) exempted and the largest firms (over £1 billion in revenue) paying £250,000 per year.
Complying with anti-money laundering requirements puts strain on company resources. The average UK firm reported having at least 38 FTEs (Full-time equivalents) working on anti-money laundering compliance, with large institutions having over 100.
If a company lacks good systems, it can also slow down processes such as customer onboarding. This impacts efficiency, which has a corresponding impact on the business’s bottom line.
How financial services have adapted to increased regulation
Anti-money laundering regulations in the EU and the UK have become more stringent since the September 11 World Trade Center terrorist attack. Since then, several laws have been passed that have put increasingly onerous AML requirements on banks and financial institutions.
These laws include:
- The Proceeds of Crime Act 2002
- The Terrorism Act
- The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017
- The EU Fifth Money Laundering Directive (5AMLD)
- The Sanctions and Anti-Money Laundering Act 2018
The ultimate result of these laws is that financial institutions must take a risk-based approach to money laundering threats. This involves assessing each customer for signs of money laundering and then implementing an appropriate and proportional response.
Four main measures need to be implemented for an effective risk-based approach. They are:
1) Set up an anti-money laundering programme
All regulated businesses must have an anti-money laundering programme in place. This should include measures for:
- Customer due diligence and know your customer checks
- Monitoring transactions
- Screening for adverse media stories, politically exposed persons and sanctions
- Storing and retrieving anti-money laundering reports and data
2) Appoint a money laundering reporting officer (MLRO)
Businesses also need to nominate a money laundering reporting officer (MLRO). This person is responsible for overseeing the company’s anti-money laundering compliance programme. They will report to the board director with overall responsibility for AML compliance.
The MLRO’s responsibilities include:
- Ensuring AML systems and processes are correctly in place and followed by staff
- Maintaining AML records
- Keeping abreast of the latest legislative developments
- Training colleagues on AML processes
- Submitting suspicious activity reports (SARs)
- Sourcing the right tools to perform anti-money laundering checks
3) Implement a reporting system
Your staff must be trained on what suspicious activity looks like and why it is important to identify it. If they see it, they should alert the MRLO, who submits a SAR to the National Crime Agency (NCA).
4) Set up a training regime
Regulated businesses are required to have a training regime in place that ensures all staff know what money laundering is and the negative impact it has. They should also be able to identify the signs of money laundering. All staff should be sent on regular refresher courses and updated on the latest regulatory changes.
Challenges banks face when dealing with data
Data quality and sharing data are critical challenges for regulated industries.
If anti-money laundering processes are to be effective, then different bank departments need to be able to share data. This will give them a single, unified view of challenges.
Unfortunately, existing anti-money laundering and data protection laws don’t facilitate this kind of data sharing well. This often impedes bank customer due diligence measures and know your customer processes.
The upcoming Economic Crime Bill is expected to include reforms to boost the reliability of Companies House data. It is thought that companies will be able to bypass UK data protection laws if they suspect a financial crime. This would allow different departments and even different firms to cooperate on data.
What Tools Enable an Effective Anti-Money Laundering Check?
According to Deloitte, regulatory authorities expect banks and financial institutions to use technologies such as artificial intelligence (AI) and machine learning (ML) in their fight against money laundering.
These systems provide several advantages to banks:
- They can access a wider range of data on each transaction, which allows them to make more accurate risk-based decisions.
- They can process more anti-money laundering checks quicker, without compromising on the quality of the checks.
- They can improve the customer experience by making quicker anti-money laundering checks during onboarding.
- They can reduce compliance costs by requiring fewer resources to perform anti-money laundering checks.
Red Flag Alert: Transforming Data into Insight
Red Flag Alert’s AML and KYC platform provides the AI and ML tools you need to monitor for suspicious activity without disrupting everyday commercial activities.
Businesses that incorporate it into their new or existing compliance regime can count on:
- A full range of risk-level checking
- Unbeatable match rates
- Digital ID verification
- Enhanced due diligence
- Sanctions and PEPs real-time screening
- Monitoring alerts
- User-friendly interface
- Secure audit trail
- AML checks