Combating money laundering and terrorist financing: Everything you need to know

Financial Integrity is a concept introduced by the International Monetary Fund (IMF) and the World Bank in the wake of the 9/11 attacks. It is a comprehensive framework that incorporates anti-money laundering (AML) and combating the financing of terrorism (CFT) policies and practices. 

The Financial Action Task Force (FATF) has played a crucial role in setting internationally recognized standards through 40 Recommendations that lay out guidelines for countries to implement effective measures to combat money laundering and terrorist financing. 

What is money laundering? 

Money laundering is the act of making illicit funds that are obtained through criminal activity appear legitimate. Drug and human trafficking, smuggling, corruption, and other crimes tend to generate large amounts of money. 

For criminals to financially benefit while concealing their illicit activity, they use many practices to "clean" the money. If you've seen the hit television series “Breaking Bad,” you have an idea of what this looks like. 

In 2020, a United Nations panel estimated the annual flow of money laundering to be at $1.6 trillion, accounting for 2.7% of global GDP.

What is terrorist financing?

Terrorist financing describes obtaining or providing funds to support terrorist acts or organizations. These funds can come from myriad sources, such as:

• Illicit activities

• State sponsorship

• Charitable donations

• Money laundering

• Other forms of criminal enterprise

The main objective of those involved in terrorist financing is not necessarily to hide the origin of the money but rather to conceal both the act of financing and the nature of the funded activities.

AML and CFT policies support financial integrity

In response to the increased global concern about financial crimes, the IMF strengthened its efforts in anti-money laundering in 2000. 

However, following the tragic events of 9/11, the IMF expanded its focus to include combating the financing of terrorism as well. The objective of financial integrity measures is twofold:

• Prevent financial institutions from being exploited by criminals, including those evading sanctions

• Investigate and prosecute individuals involved in financial crimes while also seizing their illicitly obtained assets

New dynamics to adapt to

In financial integrity, a perpetual battle exists between those seeking to uphold the law and the individuals and organizations engaging in illicit activities. As preventive measures are implemented, criminals often devise countermeasures to evade detection and continue their illegal operations. This prompts authorities and financial institutions to respond with counter-countermeasures to stay ahead. 

Cryptocurrencies, AI, and a changing geopolitical landscape 

This ongoing cycle of innovation and adaptation underscores the dynamic nature of the fight against financial crimes. It requires constant vigilance, collaboration, and the continuous development of robust strategies and technologies to ensure the integrity of the global financial system. 

Cryptocurrencies, artificial intelligence (AI), and the changing geopolitical landscape are just a few things that have affected the financial integrity world. 

Cryptocurrencies 

Cryptocurrencies have emerged as a significant challenge in maintaining financial integrity. These digital currencies, such as Bitcoin, provide a level of anonymity and decentralization that can be exploited by criminals seeking to evade detection. 

The pseudonymous nature of cryptocurrency transactions makes it challenging to trace the flow of funds and identify the individuals involved. As a result, regulators and law enforcement agencies must explore new methods and technologies to address the risks associated with cryptocurrency-related illicit activities.

AI 

AI has become an increasingly valuable tool in the fight against financial crimes. AI algorithms can analyze vast data and detect suspicious or criminal activity patterns. 

Using machine learning techniques, AI systems can continuously improve their ability to identify potentially illicit transactions, enabling financial institutions to prevent money laundering and terrorist financing effectively. However, as AI technologies advance, so do the tactics employed by criminals, necessitating ongoing innovation and adaptation in the financial integrity space.

Geopolitical landscape 

The geopolitical landscape also poses challenges to maintaining financial integrity. The Russian invasion of Ukraine has led to the proliferation of sanctions imposed by various countries and international bodies. 

What are sanctions?

Sanctions are measures to restrict financial transactions and trade with individuals, entities, or nations involved in illegal activities or actions that threaten international peace and security. 

However, enforcing these sanctions can be complex as individuals and entities may employ sophisticated methods to circumvent them. Governments and financial institutions must continually enhance their efforts to ensure compliance with sanctions regimes and prevent illicit financial flows.

What financial institutions are doing 

Financial institutions must implement stringent AML and CFT regulations to ensure financial integrity. These regulations necessitate the development of sophisticated customer due diligence plans. 

Customer Due Diligence

Customer Due Diligence (CDD) has become a standard practice in the investment industry that requires advisors to verify the identity of their clients and gather information about their investment knowledge and financial situation. It serves as a means for advisors to understand their clients better, assess their risk tolerance, and provide suitable investment recommendations.

Customer Due Diligence includes: 

1. Identifying customers and verifying their identity using reliable, independent source documents, data, or information.
2. Identifying the beneficial owner and taking reasonable measures to verify the beneficial owner's identity, such that the financial institution is satisfied that it knows who the beneficial owner is. For legal persons and arrangements, this should include financial institutions understanding the ownership and control structure of the customer.
3. Understanding and obtaining information on the purpose and intended nature of the business relationship.
4. Conducting ongoing due diligence on the business relationship and scrutiny of transactions undertaken throughout that relationship. This to ensures that the transactions are consistent with the institution's knowledge of the customer, their business and risk profile, and, where necessary, the source of funds.

When criminal activity is suspected 

Through due diligence practices, financial institutions sometimes find suspicious activity. When that happens, they are required to report to a government body called a financial intelligence unit. The analysts in the financial intelligence unit then look at these reports along with other data like criminal charges and land records. They also look at similar information from the financial intelligence units of other countries. If they find any actionable intelligence, they refer the case to law enforcement. 

A growing need for financial integrity professionals 

Over the past decade, there has been a significant increase in both national and international efforts to combat money laundering, terrorism financing, and targeted sanctions. 

Heightened focus on identifying corrupt government officials

Recent events like Russia's invasion of Ukraine have resulted in the imposition of new sanctions and a heightened focus on identifying corrupt government officials. There is a much greater demand for AML/CFT/Sanctions professionals.

There is a growing demand for skilled professionals in various roles, such as:

• Compliance officers
• Supervisors
• Regulators
• Fraud investigators
• Law enforcement professionals in banks and financial institutions

Career opportunities 

As an example of the growth in this industry, the principal AML/CFT/Sanctions professional organization—the Association of Certified Anti-Money Laundering Specialists or ACAMS—has seen its numbers double in size over the past decade to over 100,000 today and growing. Career opportunities for people who are interested in financial integrity include: 

• Anti-money laundering, anti-bribery, and corruption, or anti-fraud professionals
• Financial regulation professionals
• Financial compliance (crime prevention, detection, and deterrence) 
• Officials, policymakers, analysts, military personnel, and uniformed staff
• Defense officials, policymakers, and national security analysts
• Fintech, blockchain, and cryptocurrency professionals 
• Compliance professionals in banks, money services businesses, broker-dealers
• Consultants, lawyers, prosecutors, defense attorneys, accountants
• Foreign professionals and government employees     

What current and future financial integrity professionals should know 

The current system needs to be fixed. Annual global costs are in the hundreds of billions of dollars, but they are not catching enough financial criminals and their illegal profits. Many jurisdictions use good laws for destructive purposes — to go after people with different political agendas, for example. 

The “Santa Claus is Coming to Town” rule

Currently, combating the financing of terrorism is primarily based on those implementing preventive measures looking at lists of known terrorists provided by governments and seeing if they are clients. Back in the day, we called this the “Santa Claus is Coming to Town” rule — making a list, checking it twice, gonna find out who's naughty and nice. 

This system needs to be improved, with those who know how money moves collaborating with those who understand what terrorism financers spend their money on. Also, these two groups must talk to prosecutors and those who discover and reclaim terrorism assets.