The Changing Face of Money Laundering in Asia-Pacific
Gone are the days when money acquired illegally was tucked away under mattresses. Today, money has become like water. It can flow into any crevice and travel great distances. It can change shape and form. Laundering gives money mobility. It helps people legitimise illegally acquired money. Needless to say, money laundering has a high cost to the economy, as it not only robs the government of tax revenues but also funds terrorist activities. This is why it has become imperative to have robust regulation that defines and strictly implements anti-money laundering policies.
Financial Institutions – An Ideal Conduit
Money launderers have demonstrated a high level of swiftness in probing the financial system for vulnerabilities and devising new methods to circumvent and exploit these vulnerabilities. While money laundering does not necessarily involve financial services institutions, financial institutions like Banks, Non-banking Financing Companies (NBFCs), Insurance companies, and Capital market firms have historically been the favoured channels for money laundering activities. This can have widespread ramifications for banks that unwittingly become subject to laundering activities. Firstly, they become vulnerable to reputation risk as once a bank becomes associated with such activities, its reputation in the market becomes tainted and it risks losing customers. Additionally, it also impacts its relationship with other correspondent banks as reputable international banks may not want to transact with a bank that has questionable anti-money laundering practices. Secondly, banks also face legal risks as they may become subject to lawsuits resulting from a failure to observe ‘know your customer’ standards or practice stringent due diligence in customer evaluation and acceptance. Lastly, money laundering compromises the corporate governance structure of banks and can be a deterrent to deposit mobilisation and customer acquisition. Thus, it is imperative for financial institutions, especially banks, to establish effective risk governance practices, including internal controls, stringent policies, and regular audit checks to avoid or identify instances of laundering.
The overriding regulatory body for money laundering activities is the Financial Action Task Force (FATF), an inter-governmental body with 37 members worldwide. It has framed a set of regulations that are recognized as an international framework of AML standards. These AML regulations aim to detect, report, and prevent suspicious activities at financial institutions. Regional regulations are tethered to the standards set out by FATF. Considering the increasing threat of money laundering activities, countries worldwide have established stringent AML rules and regulations. The regulators in the Asia-Pacific region, in particular, have significantly increased their focus on financial crime, AML, and due diligence as key areas of enforcement activity. Between 2008 to 2010, no regulatory fines were issued regionally for AML or sanctions violations, yet this area has steadily increased to a record high of USD 541 million in 2018.
Old & New Methods of Money Laundering
Money laundering techniques have evolved over the years to become increasingly ingenious. The oldest method based on paper and hard currency has given way to sophisticated strategies that leverage digital transactions. While there are many ways to change the colour of money, some of them are discussed below:
- Perhaps an old trick in the book, a front company, is still one of the popular methods of laundering money. The launderers create a front company or a shell company to conceal the true beneficial owners who are seeking to profit from the laundered funds. The front company mixes the illegally acquired funds with the legitimate funds to convert the illegal proceeds into legal funds. This becomes especially conducive in cash-intensive businesses where huge amount of cash is generated through operations.
- Transaction laundering is a scheme where illicit merchants use the genuine credentials of other merchants to carry out e-commerce transactions. They do this by setting up an online storefront for illicit sales and then routing transactions through a legitimate source.
- Structuring is a method through which money launderers break down large cash deposits into small amounts and then purchase bankers drafts or money orders with these small amounts. The smaller amount helps them avoid detection or suspicions.
- Over-valued invoicing allows launderers to camouflage the movement of money through trade-based activity.
- Real estate laundering takes place through the purchase of the real estate. Simply, money obtained illegally is used to purchase the property which is then sold. The proceeds from the sale become completely legitimate.
- Black Market Currency Exchange (BMCEs): Black Market Currency Exchange refers to the black market in the foreign exchange of any country. Money launders can conduct financial transactions in foreign and domestic currencies on these exchanges.
Further, the proliferation of new digital payments methods such as prepaid cards, internet payments, and mobile payments has opened up new avenues for money launderers. Enhanced speeds and the relative anonymity of digital transactions is engendering new methods of money laundering.
Anti-money laundering solutions to thwart this rising risk
The first generation of anti-money laundering solutions adopted an if-then, rule-based approach to identify and alert any potential money laundering activities. This approach predicated on past suspicious laundering activities and multiple user-created scenarios. However, with the explosion of money laundering activities and the ingenious ways through which launderers move money, this method started falling short. This led to the second-generation of laundering solutions that adopted a risk-based rather than a scenario-based approach. These solutions follow an intelligent approach by leveraging the relevant analytical, artificial intelligence (AI), and machine learning tools (ML). Increasingly, banks are adopting technological tools in multiple areas to strengthen their AML activities.
- Artificial Intelligence: Banks can leverage AI to study disconnected risk signs across payment platforms, geographies, depositors and payees, and then connect the signals to generate meaningful insights.
- Machine Learning: Banks can leverage ML to identify money-laundering typologies, strange and suspicious transactions, behavioural transitions in customers, transactions of customers belonging to the same geography, age, groups and other identities, thereby helping reduce false positives.
- Analytics: Advanced filtering technologies and analytics can enable real-time fraud detection by generating alerts based on changes in behaviour patterns. Further, network visualisation can help provide an integrated view of all suspicious activities across all payment types.
These tools help in identity authentication, extensive customer risk profiling, watch list filtering, and suspicious activity reporting and monitoring. They have an enhanced ability to minutely analyse literally every customer transaction and identify divergence from regulatory compliance. This new generation of AML solutions can help financial institutions proactively identify money laundering activities, thereby enabling them to plug the flow of money. In this regard, Oracle’s OFSAA AML module can prove to be an ideal solution for financial institutions looking to strengthen their AML practices and keep the risks of laundering at bay. It deploys an advanced library of pre-configured, out-of-box, industry recognized AML scenarios across all lines of businesses to quickly meet regulatory requirements and provide a comprehensive view of all financial activity and financial risk. Further, it decreases implementation time, reduces false positives, empowers the management and compliance with comprehensive documentation, and reduces compliance costs. At Profinch, we have extensive experience in integrating OFSAA with various Core Banking Systems and are well-positioned to help banks fully harness the benefits of this product.
In today’s globalised landscape where innovative technology is blurring geographical borders, the risks stemming from money laundering activities are only getting further amplified. Considering the role that financial institutions can inadvertently play in global money laundering activities and its consequent impact on the institutions’ reputation and business, it becomes imperative for them to embrace the best AML solutions proactively.