Money laundering is the act of obscuring large amounts of money to be used for illicit purposes, like drug trafficking, illegal wildlife trade, or terrorist activities. While most people know that money launderers also make use of the banking system to execute their criminal misdeeds, few have an idea of how exactly they do so—much less how often it happens and how financial institutions are meant to respond to it.
The truth is, money laundering often goes undetected among unequipped financial institutions. If banks have neither the methods nor the technology to rightfully distinguish money laundering from legitimate customer transactions, it isn’t hard for the former to pass as the latter. It is also a testy time for those who do honest work in the financial industry, as many factors have driven criminals to become even smarter and more ruthless about their methods.
How exactly does money laundering happen, and how can banks use innovations like anti money laundering (AML) software to combat financial crime? Here’s a quick overview on modern money laundering schemes, as well as the approaches that financial institutions can use to counter them.
How Does Money Laundering Occur?
First, what both the general public and people in the financial sector need to know is that money laundering in real life does not always look like it does in the movies. To most people, money laundering elicits images of sketchy-looking agents who move conspicuous amounts of money in one-time bank transfers. But most global crime rings snub this approach in favor of something more effective: disguising illicit money transfers as legitimate and ordinary transactions done by innocent, respectable banking customers.
Criminals can “smurf” or break up large amounts into small bank deposits, all done by different people. They can also take illicit funds from bank accounts into other commodities such as precious metals or real estate properties, which make them easier to move across jurisdictions. Though diverse, these money laundering methods often have a key process at their core, which involves the following steps:
- Covertly injecting the illicit funds into legitimate vehicles in the formal financial system;
- Layering the transactions using tricks like bookkeeping treatments, and;
- Withdrawing the funds so that they can be used for illicit purposes.
Sadly, many financial institutions only respond to money laundering when the criminals are already deep into their systems. Too many uphold a reactive AML program, in which staff only start looking into evidence of a crime when an illicit transaction has already happened. By that time, a bank risks ruining its reputation among its legitimate customers—sometimes, for good.
What Are the Best AML Solutions for Financial Institutions?
Effective counterattacks against money laundering and other forms of financial crime are largely pre-emptive, with emphasis on early and accurate detection and efficiency of available technological and human resources. Financial institutions will do well to implement this four-fold approach:
Pattern-Based Thinking in AML Detection
Good anti-financial crime practices can start with a bank’s know your customer (KYC) and customer due diligence (CDD) protocols. If these systems are improved, they can serve as powerful siphons of suspicious behavior and preclude money laundering activities.
When at their full potential, they may be able to identify instances of money laundering through webs or networks of customer behavior as opposed to individual customer transactions. Successfully detecting patterns that are emblematic of financial crime, instead of individual customer movements, can prevent further damage to the bank’s integrity and significantly hamper a criminal network’s operations.
Improvements in AML Data Analytics and Data Management
Small- and medium-sized banks are now increasingly at risk of being manipulated by money launderers and other financial criminals. In their case, data is the best defense. They should aim to invest in AML systems that can process, sort, and analyze huge swathes of data in time to track suspicious customer activity and put a stop to it before it’s too late.
AML teams can explore innovative and data-driven solutions like AML cloud databases, graph analytics, and custom-built AML scenarios. These will help financial companies craft an AML approach using a wider and more technically proficient perspective, which is sorely needed in the fight against smart and sophisticated financial criminals.
Increased Intelligence in AML Case Investigation and Reporting
Financial institutions should also branch into technologies like artificial intelligence (AI) and machine learning (ML) to increase their customer screening, transaction filtering, and case investigation capabilities. Using an AML platform that becomes more intelligent with transaction data over time will help banks concentrate their efforts on cases of concern and react to them at the right time.
Some banks may balk at the idea of using AI and ML for their anti-financial crime initiatives, but the technologies are neither as inaccessible nor as difficult to use as they used to be. A smooth integration experience will ensure that an AML team can properly incorporate these technologies into their screening, case investigation, and case reporting workflows.
Higher AML Compliance Rates
Contrary to what some financial institutions may believe, AML regulators are partners and not adversaries in the fight against money laundering and financial crime. Regulators hold financial institutions to a high enough standard for AML initiatives and motivate them to keep international crime rings at bay.
For that reason, banks should strive for better regulatory compliance for anti money laundering. A quicker and more organized AML reporting system, running on AML insight that boasts greater data richness and data integrity, will allow them to achieve this. This will earn them the trust of international AML regulators and keep them on top of regulatory requirements that will ultimately strengthen their institutions.
Final Words
Criminal networks perpetuate themselves by evolving their methods. The only way that financial institutions can win against them is to stay several steps ahead. If you are a stakeholder in your bank’s AML program, keep an eye out for new trends in financial crime—and utilize AML approaches that are pre-emptive, data-driven, and pattern-based.