Michael Hearns is a veteran South Florida police officer and detective. In his 26-year law enforcement career, he spent a decade undercover investigating large scale cocaine trafficking and high-volume money laundering cases. He has a master’s degree in Investigative Criminal Psychology and has worked and consulted on multiple serial homicide cases. His experience and knowledge have also been valuable in his capacity as technical advisor for several movies and TV shows.
Although the secretive nature of transnational crime makes exact figures difficult to calculate, this type of criminal activity has risen exponentially in recent years, undermining global financial systems and causing immense social and economic harm to businesses and individuals in the process.
The United States criminal justice system encompasses a network of public and private agencies and which comprise three broad components; law enforcement, courts, and corrections.
The role of law enforcement in identifying financial crime networks
The purpose of law enforcement in the United States is to use the criminal justice system to disrupt illicit activity and infiltrate criminal organisations. Law enforcement agencies are responsible for investigating and deterring criminal activity and referring the results of investigations to state or federal prosecutors for escalation where needed.
I was involved in several large-scale drug cartel infiltrations during my time as a police investigator. The primary aim of such operations is to disrupt cartel operations by seizing the currency in which the organisation deals. In doing so, the financial supply to the group is cut off, thereby negating bribery, corruption, and halting any distribution channels.
Targeting illicit capital is a far more effective means of stopping criminal groups than focusing on the ‘goods’ themselves. Trafficked drugs, such as cocaine, can be reproduced with relative ease, so seizing these assets may only cause temporary disruption for organised crime groups (OCGs), whereas identifying and preventing capital flows has a far greater material impact on their operations.
The link between organised crime groups and financial crime
OCGs and financial crime
OCGs perpetrate serious and coordinated crimes, the likes of which include drug, human and firearms trafficking, organised illegal immigration, large-scale and high-volume fraud, the sale of counterfeit goods, or cybercrime. To carry out these crimes on such a scale, unimpeded, often these groups partake in financial crimes like corruption and bribery too.
The link between OCGs and financial crime stems from the need for criminal groups to clean their illicit capital to make it seem as though these profits have come from a legitimate source. Money laundering underpins and enables most forms of organised crime, allowing OCGs to further their operations and conceal their assets.
The scale of the money laundering issue
The United Nations Office on Drugs and Crime (UNODC) predicts that between 2% and 5% of global GDP is laundered each year, equating to between $800bn and $2trn. This laundered capital plays a fundamental role in facilitating the ambitions of OCGs, filling the pockets of criminals and ultimately funding insurgencies, criminal enterprises, militias, terrorist groups, and even corrupt political candidates.
Aside from the more immediate and harrowing impacts of financial crime, the economic repercussions of money laundering can be severe. The Pandora Papers, for instance, revealed how the rich and powerful abuse the UK property market (to the tune of around £170bn) for its low levels of transparency and because it allows offshore companies to own UK property anonymously, which increases the risk of money laundering.
The evolution of financial crime and money laundering in recent times
It’s a slow process
Although it can feel like financial crime and money laundering are advancing at great pace, in reality criminals have employed the same basic principles to mask dirty money for decades. The key change has come from the impact of the internet and innovation around digital banking.
Historically, criminals might carry small amounts of physical cash abroad under the legal declaration limit for international travel, before depositing the money into foreign bank accounts and subsequently transferring it back to the OCGs accounts in small, furtive transactions.
Now, innovative payments methods and the rise of mobile banking for example increase the frequency and speed at which money can be moved around and layered into the banking system, allowing criminals to perform multiple global transactions in a matter of minutes.
The rise of digital assets
With their inherently anonymous features, cryptocurrencies such as Bitcoin have become a central tool in the arsenal of cyber criminals, and decentralised finance (DeFi) as they offer an attractive means for OCGs to ‘cleanse’ their money, as it removes the need for intermediaries like banks, exchanges, or brokerages in value transfers. Digital assets also offer another way to store money, much the same as physical assets like gold, cars, or property.
Despite the risks, identified cases of money laundering through digital assets remain relatively small compared to the proportions of cash laundered through traditional methods. While it remains difficult to purchase real-world assets with crypto coins, criminals are forced to convert them back into fiat currencies which involves interacting with crypto exchanges that are increasingly adopting AML and KYC measures.
Crypto transactions are also not as anonymous as they once were, and there are more examples of authorities in the US and elsewhere successfully unmasking the owners of digital wallets to seize illicit proceeds.
The hurdles in combatting financial crime
1. High volumes of SARs
Law enforcement agencies are inundated with suspicious activity reports (SARs) and suspicious transaction reports (STRs) every year. The Financial Crimes Enforcement Network (FinCEN) in the U.S. alone received more than 12 million SARs between 2011 and 2017, and over two million in 2019. Unmanageable inflows of SARs cause an inevitable investigations backlog, and frustrations are amplified as up to 95% of reports turn out to be false positives, costing billions in resources.
2. Shifting to better technology
Improving the effectiveness of the SAR/STR filing process will have a knock-on effect on operational efficiency and cost for organisations. By integrating technologies such as machine learning and more complex forms of AI, technology can achieve a reduction in false positives and reduce the burden on law enforcement and regulated firms.
While such technology exists to support both the private and public sector; adoption is too slow. Institutions must negotiate multiple layers of approval throughout the procurement cycle, and many firms remain hesitant to automate certain procedures. OCGs are not burdened by the same hurdles, so can adapt far more quickly. Without adopting a more open and forward-thinking mindset to technology and collaboration, law enforcement will always be reacting to evolving risks, rather than predicting them.
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Photo by Bernd Dittrich on Unsplash