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Financial Crime, Money Laundering and Terrorism Financing

In what ways has financial crime hurt you? Most people would respond with a yawn. We might think it is limited to a few fraudulent schemes that deprive a small number of people of a few hundred or a few thousand dollars.

While we might sympathize with victims of such schemes, we often fail to see how far-reaching financial crime is. The reality is that financial crime affects every one of us personally, as well as impacting whole economies. So, what is financial crime? What does it do to us? And what is being done to fight it?

What is financial crime?

The term “financial crime” is an umbrella term covering a broad range of crimes rather than a specific act. Almost any non-violent crime that dishonestly generates wealth for the perpetrators falls under financial crime. Financial crimes typically involve some form of deceit, subterfuge or the abuse of position of trust, which distinguishes them from common theft or robbery.

In addition to the direct financial crimes the term also includes activities focused on hiding the illegal source or illegal destination of funds and placing them beyond the reach of the law. Examples are money laundering which tries to transform the proceeds of crime into ostensibly legitimate assets by hiding/changing the source of funds; or terrorism financing which attempts to hide the destination of funds so they could be used for criminal purposes.

Asset misappropriation, or embezzling, is the most common type of financial crime, because so many people assigned to handle their company or organization’s money have means to commit these crimes. These crimes, though, are often minor and they have the highest rate of detection, because those who perpetrate them are usually inexperienced in covering their actions. Furthermore, these crimes usually hurt only those with a direct stake in the company or organization, limiting the scope of damage.

Tax evasion is another common type of financial crime that affects more people. It siphons government revenues away from the economy. It also forces taxpayers to shoulder a heavier burden to replace lost revenues. Even here, though, when tax evasion is done on an individual basis, the overall effect to the society, while not negligible, is smaller than many other types of financial crime.

Different types of fraud, too, are a subset of financial crime. Fraud has a significant impact to the society. Association of Certified Fraud Examiners estimates that a typical organization loses 5% of revenue to fraud each year. Consumer fraud is also a huge problem with various estimates putting 5% – 15% of adult population being victims of fraud.

With cybercrime, or more specifically, cyber-enabled financial crime, we start to see increasingly a broader scope. Cost of cybercrime is estimated to reach $6 trillion by 2021 and is already now estimated to be significantly larger than prostitution, illicit drug trade and human trafficking combined. It enables criminals to target more victims, such as the theft of more than USD 300 million from more than 100 banks and financial institutions in Europe and the U.S. through malware and hacking. Cybercrime can also support traditional criminal activity, with the goal of the hack not being direct monetary gain, but rather acquisition of information that aids criminal activity. We see such cybercrime in the hacking of port data in Antwerp. The hack helped smugglers who had hidden drugs in incoming cargo containers identify and seize those containers before they could be delivered to the rightful owners.

However, it’s with the money laundering and terrorism financing that, in my opinion, we start to see the broader reach of financial crime. The large amount of funds crime puts in the perpetrators’ possession could ultimately lead to detection and prosecution unless that money can be successfully made to look like it came from legitimate sources. This process of “legitimizing” illicit funds, known as money laundering, is what ultimately leads to such massive financial impact on governments, financial institutions, businesses and individuals. Tackling money laundering and terrorism financing has the potential not only to reduce the direct impacts, but also to impact terrorists’ ability to mount attacks, as well as make any type of crime less profitable and riskier to criminals.

Assessing the economic costs of money laundering

Definitive figures on money laundering are elusive. Monetary figures for these crimes don’t appear in normal measurements of economic activity.

Estimates, however, made by organizations tasked with fighting these crimes show enormous impact. A 2009 United Nations Office on Drugs and Crime report estimated criminal proceeds for that year at USD 2.1 trillion – equal to a staggering 3.6% of that year’s global GDP. The intergovernmental agency charged with enforcing global standards for fighting money laundering and terrorist financing, the Financial Action Task Force (FATF), puts the impact of money laundering into perspective by comparing it to the GDP of an economy the size of Spain.

Understanding social costs

Even with those numbers, how can money laundering, a practice that most people see as having no effect on them, do such damage? Consider what money laundering requires to succeed.

It tears that massive amount of money out of the economic system. That greatly increases taxpayers’ burden while reducing the services they receive.

It costs the government additional funds for law enforcement to fight not only the financial crimes, but also the underlying crimes that generated the laundered funds. Such crimes have massive social impact in terms of violence and healthcare costs.

It raises the cost of banking. Banks must employ specialists to detect and disrupt the complex schemes that 1) move money through multiple institutions, 2) increase volatility of each bank’s holdings, 3) threaten the safety of depositors’ money and 4) erode depositors’ trust. These effects are so severe that they even produced bank failures in some countries. They also increase volatility in developing nations’ economies, as money launderers move money from country to country in the same way.

It increases violence, government corruption and corporate crime, as money launderers execute their plans by any means necessary. It causes failure of legitimate businesses and loss of workers’ jobs. Front companies compromised by money launderers can operate the legitimate parts of their businesses at a loss, placing legitimate competitors at an economic disadvantage and force them to fail.

Then, when it no longer serves money launderers’ interests to use those front companies, money launderers can pull out and go elsewhere, leaving those companies – or entire industries that they have taken over by forcing competitors to fail – to collapse.

These are only some of the social costs. Others include weakening of national economies, devaluing of nations’ currencies as money launderers manipulate exchange rates to maximize their profits, stripping foreign currency reserves from developing nations and loss of economic opportunities for those nations.

How money laundering operates

So, with these economic and social costs in mind, let’s examine how money laundering operates. And, because terrorism funding operates in a similar way and is usually detected through the same techniques, we’ll look at it, as well.

Traditional money laundering

In traditional money laundering, a group or person engaged in illicit activity seeks to make their influx of money look legitimate. To do this, they divide it into smaller amounts that are less likely to arouse suspicion and deposit them in multiple financial institutions under multiple names. This process may include smuggling cash into other countries to spread the deposits over multiple jurisdictions.

With these deposits complete, money launderers repeatedly transfer funds to other institutions, often in countries whose banking laws protect the anonymity of account owners from investigation. Ultimately, the illicit source of the funds disappears in the long chain of transfers.

Another money laundering method is to establish dummy businesses. These appear to be legitimate, but their main purpose is to accept illicit money and generate receipts that make the money appear to be payments for legitimate products or services. Using bribery, extortion or strong-arm tactics, criminal organizations can take over entire industries in developing nations and use them to launder illicit funds.

The “revenues” of these dummy businesses can then return to the originator of the transaction chain as seemingly legitimate profits. The originator can then use them without fear of the funds being traced to the crimes that generated them.

Terrorism financing

Terrorist funding operates slightly differently. In terrorist funding, terrorist supporters often obtain the original funds legitimately. Although funds often have no taint of criminal activity, the purpose or the destination of the funds is criminal and thus the perpetrators try to hide the destination. Donors also want to protect their anonymity to avoid prosecution or financial action against them. Thus, the funds must still be rendered untraceable.

Laundering terrorist funding uses the same chain of financial transfers to anonymize sources. It also uses the hawala money transfer system common in the Middle East, which allows anonymous transfers of cash. Takeovers of businesses and industries is less common in terrorist funding, largely because the focus is on moving money to terrorist operatives rather than maximizing the funds before they return to the originator.

This highlights the difference between traditional money laundering and terrorist funding. In traditional money laundering, the original money came from criminal acts and goes through a chain of transactions so it can come back to the originator apparently legitimate. In terrorist funding, the original money was often made legitimately, but the chain of transactions goes to operatives who will use them to commit crimes.

Because of this, detection of terrorist funding can also occur when the funds reach their destination. To successfully achieve the goals of terrorist funding, those engaged in it must anonymize the money at both ends of the chain. This gives those who fight terrorism funding a second place to detect illegal activity.

What’s being done

Efforts to combat financial crime are no less broad in scope than the problem. Those efforts require international involvement. No one country can fight these crimes alone. When criminal organizations and terrorist groups meet resistance in one country, they simply move to another.

Therefore, international organizations like the FATF, along with the United Nations, the World Bank and many smaller, regional organizations, enforce uniform standards for Anti Money Laundering (AML) and Counter Terrorist Funding (CTF) globally. The FATF helps nations adopt its internationally endorsed global standard, The FATF Recommendations (known for many years as the 40 Recommendations, even after its number grew beyond 40) and monitors compliance.

These recommendations are more than suggestions. FATF demands that countries fully implement the recommendations in their financial systems, places any country that does not comply on its list of “uncooperative countries” and urges nations that follow the Recommendations not to have financial dealings with countries on the list.

AML and CTF standards for banks include prohibiting anonymous accounts or accounts in fictitious names; practicing due diligence to ensure that new customers and wire transfers do not support illegal activities; and confirming compliance to AML and CTF standards of foreign financial institutions before transacting business with them. In addition, financial institutions must know their customers’ banking patterns well enough to identify deviations; report all suspicious financial activity; maintain an internal taskforce to protect the institution against money laundering and terrorist funding efforts; and follow all other standards proposed by FATF and set by local financial regulators.

A long way to go

All this does not mean that these financial crimes are close to final defeat, though. Money launderers and terrorist groups are notoriously resilient. When one avenue for their activities closes, they simply open another.

The only deterrent to these crimes is constant watchfulness on the part of financial institutions and enforcement agencies. Compliance to such basic standards as customer due diligence and knowing customer banking patterns can reduce these crimes by preventing new financial crime conduits from taking root. But I’ll talk about that more in my next post.


Financial crimes, such as money laundering and terrorist financing, have ramifications that reach far beyond their immediate victims. Financial crimes harm everyone from superpowers to large corporations to individuals.

The financial crime problem is massive and constantly changing as money launderers and terrorist groups strive to stay one step ahead of detection. Progress is being made, but more needs to be done in terms of international cooperation and identifying new strategies employed in these crimes. Vigilance is essential if nations, businesses and individuals are to see a reduction in the damage inflicted by these crimes.

(This is a guest post by Mojca)

Cryptosec is a leading provider of security solutions in the rapidly evolving world of blockchain, cryptocurrency, DeFi. Their specialist investigations arm, Crypto Investigators, offers expert services in blockchain forensics and legal investigations, leveraging deep industry knowledge and advanced investigative techniques to navigate the complexities of the digital age.

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