The Financial Flows of Terrorism and Transnational Crime

Yearly revenues from transnational criminal activity account for USD 1 to 1.6 trillion, and a wide variety of methods is employed to transfer those revenues across borders and launder it. The specific type of crime largely determines the choice of methods. Terrorists, for example, use both "legal" as well as illegal activity, in particular drug dealing, to raise funds, and largely employ the formal financial sector as well as physical cross-border transfers to move funds across borders. Money attributable to terrorism, however, accounts only for a tiny share of international proceedings from illicit activity

Losing the War Against Dirty Money: Rethinking Global Standards on Preventing Money Laundering and Terrorism Financing

Following a brief overview in Part I.A of the overall system to prevent money laundering, Part I.B describes the role of the private sector, which is to identify customers, create a profile of their legitimate activities, keep detailed records of clients and their transactions, monitor their transactions to see if they conform to their profile, examine further any unusual transactions, and report to the government any suspicious transactions. Part I.C continues the description of the preventive measures system by describing the government\u27s role, which is to assist the private sector in identifying suspicious transactions, ensure compliance with the preventive measures requirements, and analyze suspicious transaction reports to determine those that should be investigated. Parts I.D and I.E examine the effectiveness of this system. Part I.D discusses successes and failures in the private sector\u27s role. Borrowing from theory concerning the effectiveness of private sector unfunded mandates, this Part reviews why many aspects of the system are failing, focusing on the subjectivity of the mandate, the disincentives to comply, and the lack of comprehensive data on client identification and transactions. It notes that the system includes an inherent contradiction: the public sector is tasked with informing the private sector how best to detect launderers and terrorists, but to do so could act as a road map on how to avoid detection should such information fall into the wrong hands. Part I.D discusses how financial institutions do not and cannot use scientifically tested statistical means to determine if a particular client or set of transactions is more likely than others to indicate criminal activity. Part I.D then turns to a discussion of a few issues regarding the impact the system has but that are not related to effectiveness, followed by a summary and analysis of how flaws might be addressed. Part I.E continues by discussing the successes and failures in the public sector\u27s role. It reviews why the system is failing, focusing on the lack of assistance to the private sector in and the lack of necessary data on client identification and transactions. It also discusses how financial intelligence units, like financial institutions, do not and cannot use scientifically tested statistical means to determine probabilities of criminal activity. Part I concludes with a summary and analysis tying both private and public roles together. Part II then turns to a review of certain current techniques for selecting income tax returns for audit. After an overview of the system, Part II first discusses the limited role of the private sector in providing tax administrators with information, comparing this to the far greater role the private sector plays in implementing preventive measures. Next, this Part turns to consider how tax administrators, particularly the U.S. Internal Revenue Service, select taxpayers for audit, comparing this to the role of both the private and public sectors in implementing preventive measures. It focuses on how some tax administrations use scientifically tested statistical means to determine probabilities of tax evasion. Part II then suggests how flaws in both private and public roles of implementing money laundering and terrorism financing preventive measures might be theoretically addressed by borrowing from the experience of tax administration. Part II concludes with a short summary and analysis that relates these conclusions to the preventive measures system. Referring to the analyses in Parts I and II, Part III suggests changes to the current preventive measures standard. It suggests that financial intelligence units should be uniquely tasked with analyzing and selecting clients and transactions for further investigation for money laundering and terrorism financing. The private sector\u27s role should be restricted to identifying customers, creating an initial profile of their legitimate activities, and reporting such information and all client transactions to financial intelligence units

Detecting money laundering using hidden Markov model

Recent money laundering scandals, like the Danske Bank and Swedbank’s failure to mitigate money laundering risks (Kim, 2019), have made “anti money laundering” (AML) a much discussed topic. Governments are making AML regulations tougher and financial institutions are struggling to comply, one of the requirements is to actively monitor financial transactions to detect suspicious ones. Most of the financial industry applies simple rule-based methods for monitoring. This thesis provides a practical model to detect suspicious transactions using the hidden Markov model (HMM). The use of HMM is justified, because the criminal nature of a transaction is hidden to the financial institution, only transaction parameters can be observed. By using past data, a model is built to detect if current transaction is suspicious or not. The model is assessed with artificial and real transactions data. It was concluded that this model performs better than a classical k-means clustering algorithm

Has clarity been brought to the diamond sector? A survey into AML and TF risk mitigation by diamond traders and their financiers

The international diamond trade always has been a somewhat closed world in which different rules applied compared to other sectors. The myths and mystic surrounding diamonds as the most precious material on earth are in sharp contract with the contemporary demand for transparency. The clarity of a diamond, one of its four valuables, is not reflected in the ways of the diamond industry. However, recent initiatives, such as the Kimberly Process, which attempts to put a ban on blood and terror diamonds and a handful of banking scandals, have brought a wind of change. This wind of change is to some extent a mere side-wind fanned by the hurricane of the global anti-money laundering and anti-terrorist financing movement. Banks financing the diamond trade, assurance companies providing insurances to the sector and the diamond traders and retailers have all become subject to AML and CFT legislation. Compliance has become the magic word in the world of financing, along with transparency, but the diamond sector proved to be a slack student in this respect. This paper explores the different aspects of compliance by diamond sector market players and examines whether the extension of the regulatory framework to these players have brought a shift in responsibility, away from the financial institutions financing the diamond sector. In addition it addresses the question whether the regulatory framework and regulatory practice are sufficiently developed to enable effective supervision by the authorities

When Technology Meets Money Laundering, What Should Law Do? New Products And Payment Systems And Cross Border Courier

Money Laundering has become very sophisticated by technology assistance. Perpetrator is tending to use the help of technology to create easiness of doing crime. This condition is supported also by the activity of cash courier across border which has been choosing as means to do money laundering. Some Conventions and/or multilateral agreement between countries have appointed the vulnerability of exploration of money laundering through cash courier. From research, it can be understood, the Convention just gives the guideline how to detect, but as long as it happens, there is no specific measurement how to recognize it directly. Since money laundering is proceed of crime. It needs an inspection and evaluation from the Authority and decides that the crime is money laundering. It is not a crime against Customs Law. Other condition that increases possibility to support money laundering is the development of new products and payment systems. So many innovation conducted by technology creates new payments methods and products, such as bitcoin, litecoin, linden dollars, other crypto currency and other bearer negotiable instruments, could help offender to do money laundering. In the research, it was discovered that the crime is developing further rather than the law. Technology seems like taking place in the heart of the money launderer and robs the position of the law, even though Technology is never created for something bad. The research is a qualitative research that will analyze how the law can work together with technology to fight against money laundering. The hypothesis of this research is that law is having a good position as guidance of the development of technology, and technology is having good role to trigger the readiness of law to develop. Thus money laundering will not be easy to “develop” when technology meet law. The government of every country in the world need to synergies information on new technological discovery this is very important as it will help each country to formulate laws bordering on trans-border crime especially on money laundering. Money laundering comes in different formats and styles with the introduction of different payment system across the world. One of such latest development is the introduction of crypto-currency i.e. bitcoin a fiat currency that is mainly a block chain technology driven

The Sixth Pillar of Anti-Money Laundering Compliance: Balancing Effective Enforcement with Financial Privacy

The U.S. government has responded to the increase of financial crimes, including money laundering and terrorist financing, by requiring that financial institutions implement anti-money laundering compliance programs within their institutions. Most recently, the Financial Crimes Enforcement Network exercised its regulatory powers, as authorized by the Treasury Department, by proposing regulations that now explicitly add customer due diligence to the preexisting anti-money laundering regime. The policy behind the government’s legislative and regulatory measures is clear—financial institutions must ensure that they are protected from and not aiding in the illegal efforts of criminals. The complexity and insidiousness of these financial crimes makes it difficult for the government to act solely and without the compliance of financial institutions. Although national security and the protection of the global economy are urgent priorities, all legislative actions or considerations need to be sensitive to personal privacy. This Note examines the criminal activity and legislative history that has necessitated the proposal of such regulations, the burdens that compliance places on financial institutions, and the technology that aids these financial institutions in their compliance efforts. As a result of these compliance obligations and the potential penalties for non-compliance, customer privacy is not always guaranteed. Existing privacy laws do not sufficiently ensure that customer financial information is adequately protected; rather, these privacy laws allow privacy invasions for the sake of compliance with anti-money laundering legislation and, as a result, are often inadequate and insufficient when compared to international privacy schemes. It is important to find a balance between the need to protect national security, the requirements placed on financial institutions, and the rights customers have to financial privacy. The global nature of financial networks and of these illicit activities warrants concerted efforts by governments domestically and abroad to ensure that compliance does not result in unwarranted financial privacy invasions. Until a global system can be established, this Note proposes that the currently proposed regulations be amended to mandate privacy programs within financial institutions. Financial institutions should develop privacy policies and procedures that will work with their already existing anti-money laundering compliance programs and should ensure that their compliance and privacy focused personnel coordinate their efforts so that regulatory compliance neither detrimentally impacts the way they conduct their business nor betrays their customers’ right to privacy

Are Cryptocurrency Transactions Private in the European Union? Examining the Effects of Regulation (EU) 2015/847’s Amendment, Proposed Regulation (EU) 2021/0241, and the General Data Protection Regulation

In July 2021, the European Union proposed Regulation (EU) 2021/0241 to regulate the rise of cryptocurrency within its member countries. Proposed Regulation (EU) 2021/0241 is an amendment to Regulation (EU) 2015/847, and its main purpose is to augment the current legal definition of “funds” to include cryptocurrency. Moreover, proposed Regulation (EU) 2021/0241 attempts to tackle criminal activity by forcing crypto wallets to divulge personal identifiable information to European Union financial regulators. This change, however, does not come without concern as it has potential ramifications for proposed Regulation (EU) 2021/0241 to work with the current General Data Protection Regulation. The General Data Protection Regulation’s main purpose is to provide privacy to individuals from third-party and governmental interests, which also includes their financial transactions. This note examines the effects of proposed Regulation (EU) 2021/0241 and highlights the current deficiencies where the regulation would fall short, mainly through the lens of the General Data Protection Regulation