Financial Institutions Face Increased Risk of Money Laundering and Terrorist Financing

Vulnerability of Electronic Funds Transfer Systems

A recent report has highlighted the vulnerability of electronic funds transfer systems to being used in the layering and integration stages of money laundering, as well as the placement stage. The rapid switching of cash deposits between accounts in different names and jurisdictions increases the risk of criminal activity.

• Financial institutions are susceptible to the attention of sophisticated criminal organizations that use front companies and nominees to create large-scale but false international trading activities.
• These criminals may generate fake invoices and letters of credit to confuse the trail further, making it difficult for financial institutions to detect illegal activity.

FATF Recommendations

The Financial Action Task Force (FATF), an international standard-setter on money laundering, has issued 40 recommendations to combat this crime. The FATF standards have been revised several times to take into account changes in money laundering methods and trends.

Terrorist Financing

Terrorist groups require financial support to achieve their goals, just like criminal organizations. Financial institutions may unwittingly be used to hide or move terrorist funds, making it essential for them to enhance existing due diligence requirements to detect transactions that may involve terrorist financing.

• According to the FATF, terrorist financing can come from two primary sources: states or organizations with large financial infrastructures and individuals with sufficient financial means.
• Other sources of terrorist funding include charitable donations and extortion.

Enhancing Due Diligence Requirements

Financial institutions are encouraged to review their policies and procedures on money laundering and enhance them where necessary to detect transactions that may involve terrorist funds. They should pay special attention to the methods and techniques identified by the FATF in its report “Emerging Terrorist Financing Risks” and strengthen their systems and controls accordingly.

Conclusion

The risk of money laundering and terrorist financing is a serious concern for financial institutions, which must take steps to protect themselves from being used as conduits for these illegal activities. By enhancing due diligence requirements and staying vigilant against emerging threats, financial institutions can help prevent the flow of illicit funds and support global efforts to combat terrorism and organized crime.