Since money laundering was criminalised and the Financial Action Task Force (FATF) was founded in 1989, financial organisations have been required to put AML risk procedures in place to recognise and stop illegal activity in its tracks. As criminals become shrewder and more sophisticated in their methods, organisation’s anti-money laundering initiatives need to evolve and be one step ahead. In recent years however, money laundering has been on the rise, and even more worrying, has not being caught in time.
This blog will look at why this is happening, the necessity of a robust risk-based approach to mitigate against it, and the vital role of technology, in protecting organisations and the wider community from being exposed to criminal activity.
What is money laundering?
Money laundering is when individuals attempt to hide profit gained from criminal means by entering funds into the financial system under false pretences, claiming to be from a legitimate source. Criminals may use a number of methods to make their income or cash appear legitimate, or they may move it around to try and avoid scrutiny.
If they are successful, this jeopardises the security and integrity of the financial system, and banks themselves may face criminal charges for allowing it to happen. Of course, the risks of money laundering go deeper than this, as it enables criminals to continue to exploit others and gain from harmful activities.
Is money laundering on the rise?
As businesses and individuals across the world struggled with the effects of the pandemic, opportunistic criminals saw chances to exploit the situation for their own advantage. With more payment channels available to consumers, such as ‘Buy Now Pay Later Schemes’, and an upsurge in online payments, money laundering has managed to gain traction within the financial system.
The Financial Action Task Force (FATF) have published insights and guidance on tackling financial crime in the present circumstances, stating:
"Ensuring citizens remain safe from harm caused by criminal activity including money laundering and terrorist financing should remain a priority for all governments around the world. Competent authorities must continue to be provided with the appropriate resource to enable them to function effectively, in light of the evolving threats posed by criminals, and the constraints on resource faced as a result of the effects of the pandemic."
In 2020, there was an 80% increase in banks being fined in relation to money laundering, totalling $10.4bn, for example, the $390m fine against Capital One. It’s clear that there is still work to be done in detecting and preventing money laundering, but why have there been so many slip ups?
During the MENA Regtech Virtual Executive Boardroom in January 2021, FATF discussed the new global challenges that the covid-19 pandemic has brought, in being able to properly recognise and mitigate the risks that can arise if AML policies are not in place. They highlighted that the move towards remote working has impacted security and identification checks on customers, leaving a vulnerability in the financial system. In addition to this, the increased volume of contactless and online payments make it almost impossible to pick up on ‘red flag’ transactions.
They emphasise the need to adopt available technologies in order to manage these risks going forward: “my main message is that the pandemic has been and should be a catalyst for the adoption of RegTech, and more efficient and effective AML/CFT measures.”
The importance of a risk-based approach to internal auditing
Internal audit teams can take a proactive approach with a risk-based audit methodology that’s specific to their organisation. This means you can catch the signs and investigate any risk factors before they’ve entered the financial system - assuring the integrity of the business and mitigating the chance for criminals to profit.
The FATF have published standards for putting in place a good framework for analysing and mitigating money laundering risk. This gives organisations the best possible chance at identifying the signs and implementing a system which allows them to effectively deal with it.
The role of technology and the internal auditor
As digital activity increases, and the FinTech market grows at an accelerated rate, effective use of technology is going to be vital in managing AML risk. The use of internal audit software is an example of how technology can support the risk-based approach that’s needed to effectively identify and manage the threat of money laundering.
Internal Audit departments have a critical role to play in managing this and can provide a real source of value to businesses with their findings. In order to effectively pinpoint money laundering risks, they need access to real-time data to identify risks and flag issues before they become a problem. Internal audit software provides the right functionality to enhance this line of defence against financial crime.