From laundromats to layering across many digital payments, financial criminals will always find ways to hide the origin of funds as the way we pay evolves. The ongoing transition to cashless payments is undeniable, driven by the convenience, security, and speed of modern technology. In an era marked by the proliferation of increasingly cashless societies, the financial landscape is undergoing a profound transformation, one that holds far-reaching implications for financial institutions and their fight against financial crime.
A global perspective on cashless societies
The markets closest to becoming cashless societies are the Nordic countries of Finland, Norway and Sweden. According to the World Bank, only 3-5% of Norwegian Point of Sale (POS) payments are made in cash.
Outside Europe, India has embarked on a journey toward digitalisation under its "Digital India" campaign, aiming to completely eradicate cash, making it a world-leading digital economy. However, this transformation has not been without challenges. Security concerns, data breaches, erratic internet connectivity, and payment platform failures have posed hurdles to widespread digital payment adoption.
According to UK Finance’s latest Payments Market Report, showing payments trends across 2022, in the United Kingdom, cash payments have seen a steady decline, with only 14% of payments made in cash in 2021, compared with 54% of all payments 10 years ago. Debit cards have emerged as the new method of choice, now accounting for half of all payments. The total number of payments, too, has surged, underscoring the ascendance of digital transactions.
Cash offers several advantages to criminals that could be lost in a cashless economy. Its primary advantage is its anonymity, as it doesn't leave a digital audit trail like electronic payment methods do. This anonymity reduces the ability of financial institutions to scrutinise the source of payments, making it harder to trace illicit funds.
Additionally, cash makes it easier for criminals to combine money from legitimate sources with funds obtained through illegal means. In fact, the term "money laundering" itself originates from the practice of mixing cash earned from legal businesses like laundromats with money acquired through illegal activities.
Financial crime: from paper to digital
As the use of cash diminishes, financial criminals adapt by seeking alternative channels and methods for illegal activities. While cash was traditionally a preferred choice for illicit transactions due to its anonymity, digital payment methods have ushered in new opportunities.
Criminals are increasingly employing sophisticated techniques, aided by advancements in artificial intelligence, to launder money through digital channels. They now turn to avenues such as cryptocurrencies, peer-to-peer payment apps, in-game purchases, and gambling to obfuscate their activities.
This is why, in 2023, India’s central government, in a similar move to other governments brought digital assets, and cryptocurrencies under the radar of the Prevention of Money Laundering Act (PMLA). This means crypto exchanges will now have to perform KYC checks on their customers and report suspicious activity to regulators.
The role of robust analytics
In the stages of money laundering, the absence of physical cash diminishes the anonymity of an initial "placement" of funds via cash, making the subsequent "layering" phase more critical for distancing the funds from their source. The digitalisation of financial transactions aids criminals in transferring illicit funds between numerous bank accounts, including cross-border transfers, allowing the creation of intricate and challenging-to-follow audit trails.
The surge in digital transactions, increasingly for small amounts or for new transaction types facilitated by micropayments underscores the need for high-performance advanced analytical capabilities. Tools identifying criminal patterns, monitoring irregular activities, employing risk-based scoring, and scscrutinisingransactions for anomalies have become imperative. These analytical tools must continually evolve to detect emerging criminal methods effectively.
The consequences of financial exclusion
In a cashless society, financial institutions must exercise caution when rejecting customers or transactions without clear grounds of suspicious activity. Overzealous rejection measures could leave individuals without access to banking services, effectively excluding them from the formal financial system. This underscores the importance of accurate, transparent, and explainable anti-money laundering software.
As the financial landscape continues to evolve in response to the rise of cashless societies, institutions must remain vigilant and adaptable to regulation and emerging trends. The fight against financial crime is an ongoing challenge that necessitates a comprehensive and dynamic approach.