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We must clean up our act on money laundering

Experts recommend a holistic analytical approach to identify threats early in their development

The International Monetary Fund has estimated that about $3.5t in money laundering occurs each year. That’s roughly the amount spent annually by the US federal government.

Money is laundered in many ways but experts tend to identify three main mechanisms: via financial institutions; bulk-cash smuggling across borders; and via traded goods.

The US approach to money laundering by financial institutions is principally to demand transparency in reporting. The system works, by and large. The HSBC case is an apt example – regulators pursued the bank because of problems with its own reporting and due diligence.

But what about the record of the US and other countries to combat other forms of money laundering?

In the US, criminals launder tens of billions of drug dollars every year by simply smuggling it out of the country. The preferred destination is Mexico. The proceeds of narcotics trafficking is fueling a conflict that has killed thousands of people. But a US Treasury programme aimed at starving Mexican drug cartels of cash has blocked only a few million dollars. Out of every $100 that is smuggled across the southern US border, officials seize a mere 25 cents, according to an investigation by the Associated Press.

In Afghanistan, more than $1b in bulk cash flows leave the country every year. Most of the money is destined for Dubai, where many wealthy Afghans park both their families and funds. US officials estimate that the amount of cash leaving Afghanistan exceeds its annual tax and other revenue.

Elsewhere, the US Treasury has identified complex schemes to launder the proceeds of the narcotics trade in Europe, Africa and Asia. In each case, the problem is exacerbated by large-scale customs fraud. The amount of money involved is staggering – far exceeding the allegations of money laundering levied against HSBC and other banks by the US regulators. Yet virtually nothing is being done to combat the problem.

Moreover, “trade-based value transfer”, where money is not physically moved, is used in the settling of accounts between those involved in underground financial systems such as hawala. Osama bin Laden once stated that jihadist groups have identified such “cracks in the Western financial system”.

There are also many new methods such as internet payment providers, mobile phone money transfers, pre-paid debit cards and laundering in virtual gaming worlds. From a law enforcement perspective, the problem of keeping up is daunting. Faced with budget constraints that demand law enforcement do more with less, little is being done.

Convictions for money laundering is the measurement ultimately used by governments around the world to measure success. Yet with few exceptions, countries are failing. Sometimes the limiting factor is expertise. But too often shortcomings revolve around local corruption and a lack of political will.

Just compare the amount of money laundered worldwide with the number of reported convictions (only a handful in any given year). It saddens me to say that for a money launderer to be caught and convicted, he or she is either very careless or very unlucky.

While the challenges are daunting, there is reason for optimism. There have been huge advances in the amount and variety of data collected. While it is important to strike the right balance between security and privacy, data mining and advanced analytical capabilities can help organisations derive meaningful “intelligence”. For example, data warehousing and social network analytics are only a few of the modern tools that should be at the disposal of financial crimes investigators.

So I urge that we keep the stories about HSBC and other banks in perspective. Instead of making political points over recent headlines, government officials should use this opportunity to rededicate themselves to combat the worldwide scourge of greed and dirty money.
NOTE: Originally published in Financial Times London. © The Financial Times LTD 2012.  Republished here by permission.

“Companies are reevaluating how they tackle security since a fragmented approach is consistently leaving organizations at greater risks of attack,” says Avivah Litan, VP and distinguished analyst at Gartner. “A more holistic approach to security ensures all layers of protection function together.”

Read more about this new, holistic analytical approach that will help you identify large-scale threats early in their development – while there is still time to mount effective countermeasures for maximum impact.

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