There is a perception that money laundering is a victimless crime involving offshore accounts and faceless transactions. But the reality is more sinister. Human trafficking, terrorism, government corruption and organised crime are enabled by laundered money and they take an enormous toll on society. Even smaller-scale crimes like romance scams or identity theft leave lasting damage on their victims.
A staggering $5 trillion is laundered through the global banking system each year. This raises the question of why money laundering remains so prevalent and who is to blame. There are no easy answers. However, a combination of growing criminal sophistication, misaligned incentives for regulated institutions, and gaps in global cooperation partly explains why money laundering remains so rife.
One of the challenges regulators and banks face is how quickly financial criminals’ tactics evolve. Money laundering schemes are well-organised and hard to trace. New tech, like generative artificial intelligence and deepfakes, makes it easier for financial criminals to create fake identities or bypass digital security checks. Cryptocurrencies and digital assets, especially where regulation is weak, offer new places to rinse or hide dirty money.
Financial institutions (FIs), meanwhile, are often caught between competing imperatives. Regulators mandate them to clamp down on money laundering. Yet they also face demands to grow their customer bases, increase profitability, extend financial inclusion, and provide frictionless service to their customers. Other business needs make it difficult for them to clamp down on every instance of laundering or terrorist financing.
Government corruption remains a significant blind spot. Financial crime is often linked to local government contracts and cartel networks. These aren’t always captured by traditional Anti-money laundering (AML frameworks, even though they contribute to long-term state capture. Banks and financial platforms still end up serving the associated criminals. Without legal or reputational damage, criminals keep getting away with it.
Banking on ethics: the reputational risks of inaction
Some AML failures occur even though there is no fault in a bank’s internal processes. But many institutions accept that some degree of criminality will exist under their noses. They set an accepted threshold for fraud or AML failure. These institutions do not aim from total net-zero because they believe elimination is prohibitively expensive. But given the human and reputational cost of financial crime, we believe banks should be more ambitious.
After all, trust is key for institutions as they strive to attract new customers. Those that acknowledge the faults of the financial system they exist in and show ethical consideration to prospective and existing customers will enhance their reputations and relationships with stakeholders. Conversely, customers lose faith in banks due to news stories of AML fines and data breaches or even worse, when they become direct victims of fraud or ID theft.
At the moment, financial crime enforcement is complicated by the blurred lines of responsibility between law enforcement, banks and regulators. It can be difficult to determine who is at fault for missing red flags or misreporting money laundering alerts. In today’s global environment, the picture is even more complex. If there was a centralised global agency utilising shared data, who would govern it and be liable for breaches?
AML frameworks came into existence in the 1980s, where law enforcement was perceived to be unable to handle the extent of financial crime. But regulatory architecture has not shifted as fast as criminal typologies. We have reached a new tipping point in the digital age – one that requires actionable regulation and not just guidance.
The role of compliance technology in restoring accountability
Robust, standardised protocols could help build bridges between various players in the financial ecosystem. By sharing intel and using industry-leading technology to identify criminality and report data to relevant authorities for potential prosecution, we can cement a more proactive and collaborative approach to maintain sector-wide integrity. Making this work depends on overcome institutions’ reluctance to share data with their competitors.
Today, most individual FIs are also tailoring their own detection systems rather than relying on industry-wide solutions. It is an ongoing challenge to adopt a unified AML approach that applies to every diversified financial provider in every country, despite the efforts of regional and global watchdogs. This is improving as we speak, however. Advanced regulatory technology (RegTech) could provide a lifeline here.
RegTech platforms turn check-box compliance into real-time financial crime detection and risk reporting by using artificial intelligence-driven automations for transaction monitoring. Partnering with RegTechs makes it more cost-effective for banks and fintechs to allow friction-free transactions for low-risk payments and entities. At the same time, this risk-based approach shows dedication to investigating real crime, prioritising people over profit.
While a fragmented and complex regulatory zone may still allow dirty money to hide in the businesses, we all bank with, clarified legislation and tech-first thinking address the gaps. Closer collaboration across the ecosystem, stronger regulation, and robust RegTech could leads to genuine repercussions for financial criminals and fewer financial crimes slipping between the cracks. This level accountability will trust in the financial world and contribute to a safer future.
