Turning the tables on crime

27th July 2023

Money laundering is big business. The United Nations Office on Drugs and Crime estimates that between 2% and 5% of global GDP – up to 1.87 trillion Euros – laundered each year.

A report from Transparency International estimates that in the UK alone it exceeds £325 billion per annum.

From comparatively small beginnings, money laundering has boomed over the last 20 years on the back of organised crime and the dramatic increase in money supply following the 2010 financial crisis and Covid-19. In just two areas – people and drug trafficking – huge volumes of cash are created every year that criminals need to return to the legal economy or ‘clean’.

Pressure on financial institutions to act as a conduit for illegal sources of income has never been greater.

Professional money launderers – people who, for a fee, provide services to organised crime groups by laundering the proceeds of crime – are particularly interested in providers of finance. By being regulated, they lend a veneer of legitimacy to their activities and enable them to hide in plain sight.

Unsurprisingly, because the financial sector is a prime target of money launderers, it accounts for 80% of all suspicious activity.

At present, financial gate-keepers have obligations to report suspicions of money laundering via Suspicious Activity Reports to the National Crime Agency. The latest report from the NCA suggests that in the coming reporting year, a million SARs will be filed, almost three times the level of a decade ago.

With only a small proportion of money laundering activity leading to a successful criminal prosecution, the Financial Conduct Authority (FCA) is cracking down hard on companies that fail in their gatekeeping role.

Natwest was hit by a £264m fine in 2021 for a catalogue of AML failures, which included not acting on a large number of red flag transactions. These included the bank’s automated monitoring system incorrectly identifying cash deposits as cheques. In the same year, HSBC paid a £63.9m fine after regulators found that it had not run any AML checks on millions of pounds-worth of transactions. And, in late 2022, Santander had to pay £107.7m for inadequate customer verification checks.

For many, the fact that such large institutions can make basic AML mistakes, indicates that the industry has not been using available technology effectively. Financial institutions have systems in place to monitor suspicious transactions, but statistics show that 95% of those system-generated alerts have been false positives, leading to wasted investigation time. The temptation has been to override existing alerts in the name of expediency.

In their defence, banks point to the fact that the large fines relate to cases filed some years ago and do not reflect their current AML competence (in NatWest’s case, the transactions were from 2016).

They say their systems are light years ahead of what they were and such oversights would be rare today. False positives are no longer the problem they were. Evolving regulatory requirements, such as the EU’s AMLD, are also making them more alert to criminal activity.

Besides, UK banks are optimistic that big advances in technology are set to give them the upper hand, thanks substantially to the ‘internet of things’, artificial intelligence and ‘invisible banking’.

The internet of things – the network of smartphones, tablets, smartwatches, smart tags, wearables, etc, that exchange data with each other over the internet – is becoming a powerful tool in KYC. It creates a unique digital fingerprint for a person that is informed by an array of devices recording real time digital activity, allowing processes to be guided by far more sophisticated inputs. A massive quantity of data is being accumulated that in the near future will be better leveraged to make for a far more informed on-boarding decision.

Artificial intelligence, which is still in its early stages of development, has the potential to take KYC to a new level, for example training biometrics and facial recognition software to recognise individuals even if they change appearance. Within the next few years it has the potential to provide 100% accurate customer identification, although privacy concerns may limit its use.

And the development of invisible banking, the concept whereby financial services are embedded into our lives without us really noticing, for example by paying at the supermarket without a physical transaction, will build a much stronger link between a customer and their digital identity. Unusual activity that may indicate money laundering will increasingly be detected in real time via machine learning and algorithms.

Further down the line, Quantum computing, whose commercial use is thought to be imminent, has the potential to make money laundering via a regulated financial institution all-but impossible. Using quantum mechanics, or the physics and interaction of subatomic particles, the computational power of a single computer will grow exponentially.

This will allow the rapid analysis of undreamed of volumes of unstructured data. Google’s Sycamore quantum computer, for example, is said to have performed a calculation in 200 seconds, compared to the 10,000 years that IBM’s Summit computer would take.

With such technology being used, criminals may be forced to look to other channels subject to less oversight to dispose of their earnings: for example, non-regulated less digitally-advanced routes not covered by existing AML rules. Transparency International says that 177 different UK educational institutions received a total of £4.1 million in payments from shell companies with bank accounts since closed due to AML failings.

Criminal gangs may even find themselves having to revert to the most basic and riskiest form of money laundering: the direct exchange of cash.

The prosecution of a people trafficking crime syndicate earlier this year highlighted the extent to which this is already being undertaken. A court heard that the gang had successfully smuggled £100m from London to Dubai on 80 commercial flights. The money had been vacuum packed in suitcases and taken on board by couriers with business class tickets.

Such cross border placement, where gangs focus on jurisdictions with fewer or more lax AML controls, is likely to become increasingly common. There are developing countries that have become hotspots for ML such as Myanmar, Democratic Republic of Congo and Vietnam. In the case mentioned above, Dubai was used because it is viewed as a country with strategic AML weaknesses.

Whether money launderers are able to use less regulated alternative routes to replace banks and other financial institutions will largely depend on the effectiveness of detection and prosecution.

Something that the authorities admit has so far failed to keep pace.

David Wylie is Director at LendingMetrics