Rachel Dettmer
Worldwide, criminals launder between $800 million and $2 trillion each year, with 90% of money laundering crimes going undetected.
We are going to explore the financial crime market and have divided this into a five-part series looking into different geographical regions and considering what’s most prevalent for each as we head into 2023.
We begin our series with Europe and the United Kingdom.
Jurisdictions with Strategic Deficiencies
Albania and Gibraltar remain on the Financial Action Task Force’s (FATF) watchlist for “strategic deficiencies in their regimes to counter money laundering, terrorist financing, and proliferation financing,” and are therefore subject to increased monitoring.
Corruption, organized crime networks, and weak legal and government institutions make Albania vulnerable to money laundering and the FATF has expressed concern over the failure to complete its action plan which expired in February 2022. This insufficient progress has resulted in the FATF considering the next steps and it will be interesting to see how this plays out in 2023.
Gibraltar was added to the FATF’s list with its gambling sector being one of the major reasons for this, with authorities not “applying sufficient fines for anti-money laundering failings.” However, their action plan only consists of two points, and they should easily be able to implement this in 2023.
Rogue Russia
Russia’s invasion of Ukraine brought anti-money laundering into sharp focus in 2022.
Major Russian banks were excluded from the financial system, economic sanctions were imposed, and new legislation such as the UK’s Economic Crime Bill was fast-tracked.
While Russia was not placed on FATF’s watchlist, warning statements were published in response to the threats presented to the international financial system and jurisdictions were cautioned to consider the emerging risks.
2023 could be a year of hefty fines and penalties for organizations that have inadvertently subverted these sanctions and newly introduced regulations.
Compliance teams should look to conduct renewed risk assessments, gap analysis, and ongoing due diligence this year to ensure their organization remains compliant.
Artificial intelligence-based tech solutions and automation can help to close these gaps and facilitate ongoing compliance.
Due Diligence: Protecting Human and Environmental Rights
Protecting human and environmental rights is a crucial element in the fight against corruption; it is also critical to ensuring the future stability of the global economy and the planet.
Yet, the 2022 Corruption Perceptions Index (CPI) shows that most countries are failing to stop corruption due to a reduction in accountability and transparency measures, as well as several procurement scandals off the back of the pandemic.
According to the FATF, environmental crime alone ‘is one of the most profitable criminal enterprises, generating around $110 to $281 billion in criminal gains each year.’
Subsequently, the European Commission proposed new legislation to establish a corporate sustainability due diligence duty to address negative human rights and environmental impacts. Particularly, contracts or operations with suppliers and producers in non-European countries. This directive is now formally being enacted and implemented.
Likewise, as of 1 January 2023, the German Supply Chain Diligence Act came into effect, which requires large companies to ensure social and environmental standards are observed in their supply chain.
Both are set to foster sustainable and responsible corporate behavior, and while this new legislation is a landmark move to reduce cross-border money laundering for the region – organizations are now faced with new challenges of how they will assess the actual and potential impact of shortcomings, act on their findings, and effectively address the impact to ensure they de-risk their supply chains and avoid regulatory scrutiny.
This brings due diligence to the front and center of the conversation, yet due diligence is often limited by data availability and a long supply chain could incur high costs.
Consulting with a global advisory expert or deploying third-party compliance software are two practical approaches to identifying, mitigating, and responding to emerging risks.
New Crypto Regulation Set to Shake Things Up
FinTech is fast-moving, and dynamic, and continues to radically change the financial landscape.
While the Digital Finance Package was introduced by the European Commission in 2020 to mitigate and regulate the risks while supporting digital transformation in finance, the year ahead will focus on the operational aspects of this, with the reins passing from the legislators to the regulators.
Particularly, the Markets in Crypto-Assets Regulation (MiCA) — intended to close gaps in existing EU financial services legislation by establishing a harmonized set of rules for crypto-assets and related activities and services — expected to come into force in early 2023 and take effect in 2024.
While the regulation is finalized, service providers and other businesses operating in this space need to figure out how these new frameworks will impact operations and proactively review and consider the legislation to stay ahead of the regulatory changes. You can read more about this here.
The UK has also introduced the Financial Services and Markets Bill and aims to have Financial Markets Infrastructure (FMI) sandboxes in place in early 2023. Although the details are sparse and remain unclear for the time being, more direction is expected in the coming months as the UK begins to engage with industry and regulators.
All these new regulations and standards are set to make it harder for digital assets to be used to launder money and easier for criminals to be tracked and prosecuted when they do; which is essential for businesses to operate safely in the digital space.
Deepfakes and Synthetic Fraud: Imitation Isn’t the Sincerest Form of Flattery
Synthetic Identify Fraud (SIF) is one of the fastest-growing types of financial crimes and this upward trajectory is predicted to continue in 2023.
Artificial intelligence, machine learning, and deep learning technology applications are being used by criminals to modify or construct video, images, and audio; particularly for loan products and credit services.
These cunning and sophisticated tactics usually combine real and fake information, blurring reality, and making it even harder for financial investigators to detect when a crime is being committed.
Unfortunately, there is no quick fix to combating this type of fraud due to its complex nature.
However, requesting and verifying more information or alternative types can help; beyond just the basics such as utility bills and ID documents. With more information to verify, an informed decision can be made about if a person actually exists, and this multifaceted approach can mitigate the risk of synthetic fraud.
Organizations will need to consider how they can improve and optimize their current KYC process and gather additional information. One of the most effective ways to do this is by incorporating AI software into compliance programs to identify subtle and nuanced patterns of suspicious behavior and build granular risk profiles.
Final Thoughts
The abundance of emerging fraud trends is daunting. It's also clear that fraud is a living, breathing threat – and an unpredictable one.
Organizations need to prioritize investment in advanced technology and secure partnerships to counteract increasingly sophisticated and innovative criminal activity.
We’d welcome the opportunity to talk to you and learn more about your business and the challenges you face. Just fill out our contact form and we’ll start the conversation.
Don’t forget to keep an eye out for the next four parts of our series, delving into further legislation and hurdles for financial crime compliance this year.