Financial Crime World

Financial Institutions Vulnerable to Money Laundering and Terrorist Financing

Recent reports have highlighted the vulnerabilities of financial institutions in the fight against money laundering and terrorist financing. Electronic funds transfer systems, which enable rapid switching of cash deposits between accounts in different names and jurisdictions, increase the risk of being used in the layering and integration stages of money laundering.

Additionally, some financial institutions may be susceptible to sophisticated criminal organizations that use front companies and nominees to create false international trading activities and launder illicit monies. These organizations may use falsified invoices, letters of credit, and other documents to confuse the trail and evade detection.

FATF Recommendations

The Financial Action Task Force (FATF), an international standard-setter on money laundering, has issued 40 recommendations for combating this crime. The FATF standards aim to strengthen global safeguards and protect the integrity of the financial system.

In recent years, the FATF has revised its recommendations to address changes in money laundering methods, techniques, and trends. The latest revisions were made in February 2012, with a focus on combating terrorist financing.

Terrorist Financing

Terrorist groups require funding to support their activities, and financial institutions may unwittingly be used to hide or move terrorist funds. Terrorist financing can be derived from two primary sources:

  • Financial support provided by states or organizations with large enough infrastructures
  • Individuals with sufficient financial means

To combat this threat, financial institutions are encouraged to:

  • Enhance existing due diligence requirements
  • Review their practices and consider the risks identified by the FATF in its Report “Emerging Terrorist Financing Risks” issued in October 2015
  • Pay special attention to terrorist financing methods and techniques identified in the report and enhance their systems and controls accordingly

Sources of Terrorist Funds

Terrorist financing may be derived from:

  • Financial support provided by states or organizations with large enough infrastructures
  • Individuals with sufficient financial means
  • Charitable donations
  • Extortion
  • The sale of illegal goods and services

In conclusion, financial institutions must remain vigilant in combating money laundering and terrorist financing. By enhancing existing due diligence requirements, reviewing practices, and considering emerging risks, financial institutions can play a crucial role in protecting the integrity of the financial system.