Rachel Dettmer
Welcome back to the third part of our 2023 Financial Crime Market Outlook.
We are going to focus on North America and the laws, regulations, and focal points for financial crime prevention this year.
Economic Volatility
It’s estimated that $300 billion is laundered through the United States each year, and this year will be no different.
The current economy is volatile, which often increases the levels of risk-taking behavior.
Individuals are more likely to fall victim to fraudulent schemes, or perhaps are more willing to engage in financial crimes themselves.
Last May, the US Treasury Department announced its National Illicit Finance Strategy designed in response to the increased threats from fraud, corruption, and the digitization of finance.
The Biden Administration put three measures in place to increase transparency and will continue to focus on these areas in 2023:
- Strengthening laws and regulations to tackle illicit financial flows
- Modernizing, building, and enhancing regulatory and enforcement frameworks, particularly in the crypto space
- Targeting wrongdoers who seek access to the US financial system to launder the proceeds of crime.
Illicit Financial Flows: Real Estate & Crowdfunding
Real Estate: A Cloak for Dirty Money
Real estate in America continues to be a thorn in the side of anti-money laundering.
It's one of the most common methods for criminals to clean their money and the US has quickly become the preferred destination for stashing illicit funds through property.
This in part is due to the acceptance of cash deals that bypass anti-money laundering rules mortgage lenders are subject to, as well as complex ownership models.
Recently, an alert issued by the Financial Crimes Enforcement Network (FinCEN) made headlines as it warned that sanctioned Russian oligarchs and elites are heavily investing in commercial real estate in the US.
As always, banks and financial institutions must remain vigilant in monitoring, detecting, and reporting suspicious activity that may be indicative of sanctions evaded.
The Treasury Department also released a set of proposed regulations in late December, with the first draft expected in April this year.
While this has been a long time coming, when these regulations are finalized, they will alter key rules affecting many real estate funds, sovereign wealth funds and other foreign investors in US real estate and help to stem the flow of illicit finances.
Crowdfunding: An Emerging Terrorist Financing Risk
Crowdfunding platforms are increasingly being used to finance extremist groups and domestic terrorism, with a recent report suggesting over $6 million has been raised between 2016 and mid-2022.
I also suspect this number is much higher in reality.
However, because these funds are being raised through legal avenues, they are harder to detect and present a very unique emerging risk.
To avoid facilitating the movement of illicit funding, financial institutions need to assess their current processes to identify gaps and inefficiencies.
There is a need for dynamic risk-based transaction monitoring and behavioral analysis, largely facilitated by deploying artificial intelligence-based software.
It is also recommended that before partnering with crowdfunding platforms, banks should perform thorough enhanced due diligence to mitigate any third-party related risks; and ensure that existing partnerships are monitored on an ongoing basis.
Crypto Regulation: The Lummis-Gillibrand Bill
The unregulated era of cryptocurrencies is ending.
Last year in Congress alone, there were 15 separate hearings on digital assets and how these will be regulated moving forward.
At the same time, some of the biggest players in the space disastrously and notoriously met their ends, resulting in criminal fraud charges being brought forward in the most serious of cases.
In response, the Lummis-Gillibrand Bill has been proposed with the primary focus to provide clarity on digital assets and how these are classified, specifically, as either commodities or securities.
The Financial Action Task Force (FATF) is also set to continue implementing new AML standards for digital assets. Under the standards, organizations must comply with KYC and AML compliance programs including customer due diligence, transaction monitoring, and reporting suspicious activity.
While compliance can be costly and time-consuming, with careful consideration needed for new frameworks, it is essential for businesses to operate smoothly in the digital asset space.
There is also an opportunity here, as increased AML legislation and regulation could be beneficial to the market by improving investor confidence.
Targeting Wrongdoers: Drug Traffickers
Drug trafficking is one of the most lucrative activities for organized criminal groups.
These groups are also experts at identifying and exploiting loopholes in financial systems and employ a variety of money laundering schemes, with the FATF noting there is ‘no single business model for layering and subsequent integration methods.’
Unbound by rules, regulations, or borders, they have the freedom to do whatever is necessary when required, which is a definitive advantage in comparison to law enforcement.
These illicit financial flows continue to pose a severe risk to socioeconomic development and the security of the state by fueling violence, insecurity, instability, and corruption.
In North America alone, the non-medical use of synthetic opioids like fentanyl is causing hundreds of people to die every day from overdoses and opioid-related deaths and continues to be the leading cause of non-injury-related death.
FATF published a report late last year, the first since 2014, providing information on risk indicators and best practices to aid in money laundering investigations involving the proceeds of drug trafficking.
Financial institutions need to optimize multi-factor identity verification processes, due diligence, and AML transaction monitoring, flagging high-risk transactions for suspicious behavior, as well as emerging trends and patterns.
Final Thoughts
The continued effort and prioritization towards legislation improving vulnerabilities being exploited by criminals are promising, and it is great to see this trajectory continue into 2023.
However, a multitude of new frameworks and regulatory obligations often present a range of challenges for banks and financial institutions.
One of the easiest ways for organizations to comply with these complex anti-money laundering and compliance requirements is by using artificial intelligence to monitor financial activity.
Inefficiencies are reversed, costs are lowered, quality is uncompromised, and compliance standards are kept high with explainable machine learning techniques; while making new frameworks easier to implement and maintain.
Do you want to find out more about how our advanced technology can help you? Just fill out our contact form and we’ll start the conversation.