The Legal Information Institute (LII) defines money laundering as “a financial transaction scheme that aims to conceal the identity, source, and destination of illicitly-obtained money”. Whether the funds derive from drug-related transactions, embezzlement, terrorism, fraud, or other crimes, money laundering is critical to the global illicit economy.
When successful, money laundering allows nefarious individuals and institutions to profit from illegal activity. This is why lawmakers implement strict anti-money laundering laws for financial institutions to follow.
And yet, despite legislation such as the Bank Secrecy Act in America and evolving AML directives in Europe, money laundering remains a booming enterprise. A decade ago, the United Nations Office on Drugs and Crime (UNODC) valued global organised crime at $870 billion per year—that number is likely much higher now, and does not account for the entire landscape of financial crime.
What can organisations do to combat the avalanche of money laundering? A strong knowledge base doesn’t hurt. The more we know about money laundering and other financial crimes, the more effective we can be at reducing such crime.
Laundered money equals between 2% and 5% of the global GDP each year (source: International Monetary Fund)
This figure puts into perspective the scale of money laundering. Money generated through illegal activity has to go somewhere, and it enters the legitimate economy through innumerable entrypoints.
Ultimately, that laundered money may comprise as much as 5% of the global gross domestic product (GDP). Take 5% of the monetary value of all finished goods and services produced in the world—that’s how much laundered money is produced every year, on the high end.
To be frank, this figure could be even higher. Considering that the vast majority of laundered money is not detected (more on that in a bit), can we have any certainty about the scale of the problem?
Drug cartels and other illegal organisations laundered approximately $50 billion in 2019 in Mexico alone (source: El Economista)
Want an idea of how the laundered economy looks in a single nation? Mexico saw an estimated $50 billion in illicit funds laundered within its borders in 2019. For context, Mexico’s gross domestic product was about $1.269 trillion in 2019. You do the math.
Consider that Mexico ranked 68th of 125 nations in the Basel Institute of Governance’s 2019 AML Index. In terms of the frequency of money laundering, it’s middle of the pack. However, the elusive nature of laundered funds means that we cannot be completely sure how much money was actually laundered in Mexico in 2019.
An estimated 90% of money laundering is not detected (source: Forbes)
Wonder why we say that we can’t really know how much money is laundered in a given year or jurisdiction? This is why.
We can’t even be certain about the estimate of how much laundered money goes undetected. After all, the money is undetected. Completely off the radar. Unaccounted for. Sure, we think that we catch about 10% of laundered funds. That could very well be wishful thinking.
A 90% failure rate seems like an astounding indictment of the effectiveness of AML practices. The situation could be even worse than that. We just don’t know.
In 2009, Europol uncovered a single money laundering ring that had washed at least $62 million through property investments (source: Europol)
Those who launder money have to be creative. They wash their illicit gains through a variety of means, and real estate is one of them.
The glut of money laundering schemes makes AML extremely difficult. Financial crime specialists have to be able to spot irregular activity across an almost-endless array of industries and investment types.
According to the 2019 Basel AML Index, the five nations most effectively fighting money laundering are Estonia, Finland, New Zealand, Macedonia, and Sweden (source: Basel Institute on Governance)
If you’re looking for advice on how to fight money laundering at the national level, these are your guiding lights. Basel gauges AML effectiveness by “the quality of a country’s anti-money laundering and countering the financing of terrorism (AML/CFT) framework and related factors such as perceived levels of corruption, financial sector standards and public transparency”.
The nations that round out the top ten are Bulgaria, Lithuania, Uruguay, Slovenia, and Israel. While geography clearly isn’t the only determinant of AML success, there seems to be something about Eastern Europe…
Compliance by financial institutions may cost 100 times more than laundered money seized by authorities (source: Forbes)
Financial institutions know that compliance is a costly venture. It’s discouraging that financial institutions’ investments in compliance don’t produce equivalent outcomes in terms of schemes thwarted. AML is necessary, though, both for legal and ethical reasons. Despite its cost, compliance is non-negotiable.
178 UK-based educational institutions received at least 4.1 million pounds ($5.8 million) in suspicious funds in 2019. (source: Organised Crime and Corruption Reporting Project)
…Yet another figure showing the unending reach of laundered funds. To those on the receiving end, including institutions of education, money is money. However, closer examination reveals that recipients of all kinds—restaurants, universities, even religious institutions—unwittingly accept laundered money.
It’s a startling reality that you may not want to think about for too long or too hard.
The FBI’s Internet Crime Complaint Centre (IC3) received nearly as many complaints by late May 2020 (~320,000) as it did the entire year prior (~400,000 in 2019) (source: FBI)
Money laundering is not static. While criminal organisations are constantly engaged in money laundering, financial crime is also the territory of opportunists. Changes in the social climate, such as the widespread fear and desperation caused by the pandemic, can correlate with an uptick in financial crime—money laundering included.
12 of the 50 largest financial institutions were fined for AML violations in 2019 (source: Forbes)
The point: no institution, small or large, is above AML regulations. Even the most robust, profitable financial institutions can unintentionally facilitate money laundering if they aren’t diligent about compliance. This means embracing the latest AML technology, maintaining consistent training, and adhering to the letter of the law. Even then, the tricky nature of compliance means that a financial institution can still get dinged.
According to the 2019 Basel AML Index, the five countries most conducive to money laundering were Mozambique, Laos, Myanmar, Afghanistan, and Liberia (source: Basel)
We highlighted the best-performing nations when it comes to AML (the carrot), so we’ve got to point out those who are trailing the pack (the stick). Fair is fair.
Being that fair is fair, we also have to point out that these five nations (Mozambique, Laos, Myanmar, Afghanistan, Liberia) are among the poorest in the world. The tough reality is that countries without reliable infrastructure, let alone complex financial systems, are going to be more attractive to financial criminals.
UK-based financial institutions facilitated at least 325 billion pounds (more than $459 billion) in transfers of illicit funds in 2019 (source: Transparency International)
The scale of money laundering in the UK is immense, and financial institutions reside at the epicentre of the problem. This isn’t to say they’re complicit. It’s unavoidable that financial criminals will rely on financial institutions in some capacity. These institutions are constantly striving to reduce the amount of illicit funds that enter and exit their coffers.
Each of the Big Four accounting firms (KPMG, PwC, Ernst & Young, Deloitte) received suspicious payments in 2019. (source: Organised Crime and Corruption Reporting Project)
This is a reminder that the largest, most respected and financially literate institutions in the world can become victims (or unwitting accomplices) of money-laundering operations. Nobody (aside from the most effective AML specialists) knows more about detecting financial crime than the Big Four. And yet, each of those firms had suspicious payments on their books in 2019.
Domestic financial crime in the United States produces approximately $300 billion in proceeds. That money is then laundered to conceal its status as the product of financial crime (source: U.S. Department of Treasury)
Like most statistics on this list, $300 billion is an estimate. It’s a large number, to be sure, but it may not reflect the true profitability of money laundering in the United States.
Consider the reach of $300 billion. Where throughout the United States is that massive sum hidden? In real estate ventures? University endowments? Throughout banks’ deposit books? Once the money is successfully laundered, there is no way to differentiate it from funds earned through honest means.
Financial service firms spend an average of $14.3 million on AML compliance each year (source: LexisNexis)
And yet, even with this great investment in AML, we know that the vast majority of laundered funds slip through the cracks. As KYC specialists gain increasing access to more sophisticated AML tools, the hope is that financial service firms will see greater value from their investments in compliance.
270 cryptocurrency addresses laundered $1.3 billion in 2020 (source: Al Jazeera)
Ladies and gentlemen, introducing the future of money laundering. As if AML professionals didn’t have a difficult enough job, the broad adoption of cryptocurrency introduces an entire new set of challenges. Because identifying money laundering via cryptocurrency is difficult, we can’t know the true scale of the problem. Let’s go ahead and assume it’s a large one.
The emergence of cryptocurrency as a money laundering vehicle illustrates how complex the problem is, and how important it is that we continue to improve our tools for fighting financial criminals.
Financial institutions have to spend modest fortunes just to remain compliant. They exhaust valuable resources just to avoid fines, and even then savvy financial criminals slither through their grasp completely undetected.
Every available statistic tells us that AML compliance is a losing battle. And yet, it is one that we must continue to participate in. If the law compels us and we as ethical societies want to snuff out criminal behavior, why not do the best possible job at identifying money laundering?
AML specialists deserve all the help that you can afford as they seek out suspicious activity. The odds are stacked against them, but the fight is far from over.