Financial institutions

Money laundering and how it is fought by financial institutions

Money laundering is the act of concealing large amounts of money to be used for illicit purposes, such as drug trafficking, illegal wildlife trade, or terrorist activities. While most people know that money launderers also use the banking system to carry out their criminal misdeeds, few have any idea how exactly they do it – let alone how often it happens and how often. how financial institutions are supposed to respond to it.

The truth is that money laundering often goes unnoticed among unequipped financial institutions. If banks don’t have the methods or the technology to properly distinguish money laundering from legitimate customer transactions, it’s not hard for the former to pass for the latter. It is also a difficult time for those working honestly in the financial industry, as many factors have caused criminals to become even more clever and ruthless in their methods.

How exactly does money laundering happen and how can banks use innovations such as anti-money laundering (AML) software to fight financial crime? Here is a brief overview of modern money laundering schemes, as well as approaches that financial institutions can use to counter them.

How does money laundering happen?

First, what the general public and those in the financial industry need to know is that money laundering in real life doesn’t always look like it does in the movies. To most people, money laundering conjures up images of sketchy-looking agents moving vast sums of money through one-time bank transfers. But most global criminal networks snub this approach in favor of something more effective: disguising illicit money transfers as legitimate, ordinary transactions carried out by innocent, respectable bank customers.

Criminals can “smurf” or split large amounts into small bank deposits, all made by different people. They can also divert illicit funds from bank accounts to other commodities such as precious metals or real estate, making it easier to move them between jurisdictions. Although diverse, these money laundering methods often have a key process at their core, which involves the following steps:

  • Covertly injecting illicit funds into legitimate vehicles of the formal financial system;
  • Overlay transactions using tricks like accounting treatments, and;
  • Withdrawal of funds so that they can be used for illicit purposes.

Unfortunately, many financial institutions only react to money laundering when the criminals are already deeply embedded in their systems. Too many support a reactive AML program, in which staff only begin to search for evidence of a crime when an illicit transaction has already taken place. At that point, a bank risks ruining its reputation with 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 preventative, with an emphasis on early and accurate detection and the efficiency of available technological and human resources. Financial institutions would do well to implement this four-pronged approach:

Model-Based Thinking in AML Detection

Best practices for fighting financial crime 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 prevent money laundering activities.

When at their full potential, they may be able to identify instances of money laundering through websites or customer behavior networks, as opposed to individual customer transactions. Successfully detecting iconic patterns of financial crime, rather than individual customer movements, can prevent further breaches of bank integrity and significantly hamper the operations of a criminal network.

Improvements to parsing and handling of AML data

Small and medium 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 massive amounts 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, data-driven solutions such as AML cloud databases, graph analysis, and custom AML scenarios. These will help financial firms develop an AML approach using a broader and more technically competent perspective, which is essential in the fight against smart and sophisticated financial criminals.

Increased intelligence in investigating and reporting AML cases

Financial institutions should also embrace technologies such as artificial intelligence (AI) and machine learning (ML) to increase their customer screening, transaction screening and case investigation capabilities. Using an AML platform that gets smarter with transaction data over time will help banks focus 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 financial crime initiatives, but the technologies are neither as inaccessible nor as difficult to use as they used to be. A smooth onboarding experience will ensure that an AML team can properly integrate these technologies into their screening, case investigation, and case notification workflows.

Higher AML compliance rates

Contrary to what some financial institutions may believe, AML regulators are partners, not adversaries, in the fight against money laundering and financial crime. Regulators impose high enough standards on financial institutions for anti-money laundering initiatives and encourage them to keep international criminal networks at bay.

For this reason, banks should strive to improve anti-money laundering regulatory compliance. A faster and more organized AML reporting system, operating on the basis of AML information offering greater richness and integrity of data, will allow them to achieve this goal. This will allow them to gain the trust of international anti-money laundering regulators and keep them abreast of regulatory requirements which will ultimately strengthen their institutions.

Last words

Criminal networks perpetuate themselves by evolving their methods. The only way for financial institutions to win against them is to stay several steps ahead. If you are part of your bank’s AML program, keep an eye out for new trends in financial crime and use preventative, data-driven, and model-based AML approaches.