This article is an extract from GTDT Anti-Money Laundering 2023. Click here for the full guide.
Money laundering is a fascinating topic that involves many different legal, practical and political issues. Each year, regulated firms, lawyers and others must grapple with new laws and evolving typologies of money laundering risk, always with an eye to the future. Regulated firms must also grapple with increased focus from regulators and law enforcement on their approach to anti-money laundering compliance. The burden on regulated firms is only expected to increase.
Innovation drives new legal and regulatory AML requirements. Emerging products or concepts, such as cryptocurrency, bring new AML risks and ultimately become subject to regulation. Over the past 10 years or more, there have been many new entrants to the world of financial services, bringing technological innovation to the fore for their customers and others. Lawyers and compliance experts must put in place systems and controls to address AML risk, and some truly innovative work is being done.
Innovation in the private sector is something of an arms race with the other innovators – the organised crime groups and the professional money laundering networks they employ. It takes time for law enforcement to identify and disrupt a money laundering scheme. Once they do, the criminals will quickly adapt. In the meantime, criminals undertake ever more complicated and inventive schemes to stop the detection of their activities.
How much money is laundered globally?
The global scale of money laundering is unclear. Money laundering was not a crime across much of the world until the 1980s. The initial focus was on the proceeds of drug trafficking. As time went on, focus on other types of crime increased, with tax evasion being a significant addition to most states’ lists of predicate crimes. The focus on politically exposed persons also increased as time went on. As the definition of money laundering expanded, so did the potential quantum of money laundered annually.
The United Nations has estimated that the amount of money laundered globally is between 2 and 5 per cent of global GDP – an extraordinary figure. However, any attempt to quantify the sums involved in money laundering is a difficult task. Some funds are likely to be laundered repeatedly during the layering process and, as such, could be subject to (at least) double counting.
The reported scale of money laundering is large, but the assets seized from criminals are of a much lower value. The cross-border nature of transnational money laundering schemes makes them difficult for law enforcement to combat. Often, law enforcement and regulators must make compromises – they may arrest a few people, but they can frequently disrupt money laundering schemes at a much lower cost. This disruption will often involve outreach and engagement to educate private sector about money laundering methods.
Increasing burden on private sector
Those in the regulated sector (eg, financial institutions, lawyers and accountants) have additional obligations because they are gatekeepers of the financial system. Such firms, particularly financial institutions, are devoting more and more resources to managing money laundering risk. The global compliance spend on financial crime matters increases every year against a backdrop of new legislation and enforcement action, which can incentivise firms to behave defensively.
One example of such behaviour is the other upward trend in AML – the increasing number of suspicious activity reports (SARs) filed each year. Of these SARs, very few are immediately useful to law enforcement. Some SARs are of low quality and may have been filed defensively by a regulated firm concerned about facing a regulatory investigation. The counterargument to this is that, one day, these SARs may provide useful intelligence to law enforcement. Across the globe, financial institutions make the majority of SARs, but other regulated firms are under increased scrutiny.
It is not uncommon for those working within the regulated sector to wonder what becomes of the SARs they file and what utility they actually provide to law enforcement.
One important and significant development has been more targeted information sharing between law enforcement and the private sector via public–private partnerships. An example of this is the United Kingdom’s public–private partnership, the Joint Money Laundering Intelligence Taskforce (JMLIT). Formed in 2015 and sitting within the National Economic Crime Centre, JMLIT is a partnership between law enforcement and the financial sector to exchange and analyse information relating to money laundering and wider economic threats. Membership includes the financial regulator, five law enforcement agencies and over 40 financial institutions. JMLIT shares information about emerging money laundering risks but also specific organised crime groups. This allows the private sector to target resources and law enforcement to receive SAR intelligence that is useful to ongoing investigations.
JMLIT is perceived as a success both domestically and internationally. The United Kingdom has helped other countries set up similar public–private partnerships and other states have introduced their own, with similar models now in operation in over 20 countries, including the United States, Hong Kong, Singapore, Australia and Sweden. These bodies will help in the global fight against financial crime.
Despite JMLIT’s perceived success, a frequent complaint from those in the regulated sector is that they spend too much of their time on more routine matters rather than on efforts that they think make a greater contribution to fighting financial crime.
This can all seem rather demoralising. Regardless of the precise sums involved, the amount of money laundered each year is undoubtedly huge, the amount of assets seized from criminals is comparatively low, and private sector firms face both an increasing compliance burden and corresponding spend. To combat compliance fatigue, national Financial Intelligence Units have started to make more of an effort to engage with the private sector and provide information on the utility of SAR intelligence. One subject of SAR intelligence that Financial Intelligence Units are quick to flag in this context is human trafficking. Vast sums of apparently criminal money flowing through the financial system may not be a concern to the person on the street, but people from all walks of life can sympathise with the plight of those who have been trafficked into a life of slavery and misery. The key role that SAR intelligence can play in identifying and safeguarding these individuals is one of the success stories of the regime and should not be minimised. Other crimes, such as fraud, also have the potential to cause personal devastation to victims, and we are starting to see more of a focus from legislators and law enforcement on the prevention and detection of fraud.
The AML regime is here to stay. In the United Kingdom, an economic crime levy on regulated firms is helping to fund the UK response to economic crime. This levy is essentially a form of tax on regulated firms and is charged annually. The levy was first charged for the period between 1 April 2022 and 31 March 2023, with payment being due by 30 September 2023. The levy is to be used to partly fund the UK government’s recently published economic crime plan. Imposing a tax on firms that must already spend large sums of money on a compliance programme or face large fines may seem unfair. Money laundering is an issue that affects all of society and, for now, it seems that the compliance burden on the regulated sector will only increase in the future. However, for tangible progress to be made in the fight against financial crime, it is increasingly apparent that greater funding needs to be given to law enforcement agencies across the world given the intrinsically global nature of the problem.