Money laundering and terrorist financing
are two severe crimes utilised to fund and hide activities that hurt and destabilise
economies from around the world.
With the advancement of technologies such
as Artificial Intelligence, there is a common misconception that it is easy to
detect these crimes and trace them to their origins. However, even though these
technologies have made detection easier, the combination of numerous sources of
funding and multiple methods used to transport and hide dirty money still make
identifying and tracking these crimes difficult.
To make the detection and prevention of
financial crimes more effective, authorities need the assistance of local
governments and corporations. That is why governments from all over the world have
introduced various obligatory policies that also hold businesses accountable
for helping to stop these crimes. Only by sharing the responsibility between
governments, the authorities and companies can we make a significant difference
in the prevention of these crimes.
But first, finance and compliance managers
must understand what money laundering and financial terrorism are so they can
identify them more quickly and understand what harm they can cause. Below we
explain what each crime is, how they work and how you can distinguish between
the two.
What is Terrorist Financing?
The term Terrorist Financing describes the managing of funds used for sponsoring and enabling terrorist activities. For terrorist funding to succeed long term, criminal groups will often create and maintain formal structures (organizations) that allow them to further develop and manage the funds they need to support their activities.These
organizations obtain income from multiple sources, and will often mix legal
with illegal funding that falls into two categories:
1. Getting Financial Support: Collected through
different forms of charity like donations, fund-raising projects, and community
solicitation either from individuals, organizations, or even from countries.
2. Earning Their Income: Generating income through
various illegal activities, including fraud, kidnapping, smuggling, drug
trafficking, illegal (black market) trading of currencies and commodities and/or
extortion. Activities can also include legitimate income sources like real
estate investment.
Once these organizations set up the
infrastructure to enable the collection of funds, their goal is to hide any
money that originated from illegal sources whilst simultaneously ensuring the
continuous flow of legitimate income. This need to conceal ‘dirty’ cash makes
terrorism financing very similar to money laundering since both crimes use the
same three steps of ‘place, layer and integrate’ to incorporate illegal funds
within the global financial system.
The 4 main differences between terrorism financing and money
laundering are:
·
Terrorist
financing’s primary goal is to conceal how the funds are used instead of where
they came from.
·
Therefore,
investigations in this field are focused on preventing access to these funds to
stop them from being repurposed for various criminal activities.
·
It
includes smaller amounts of money that can still cause a significant impact
through disruption, death, and destruction.
·
This type
of crime utilizes a combination of both legitimate and illegitimate funds to
support its activities.
What is Money Laundering?
Most criminal activities involve cash
payments because it is the only way to ensure that the money cannot be traced
to the crime or to those involved. However, at some point, this money builds up
to such a large sum that it then becomes difficult to disguise or transport
without raising suspicion.
That is where money laundering comes in. Money
laundering describes the practice of taking money earned from criminal
activities and making it look as if it came from legitimate sources. Like we mentioned above, money laundering
involves a three-step process where the goal is to hide where that money
originated from. The three steps are as follows:
·
Placement:
This is when the money enters the financial system,
usually through several small transactions such as a bank deposit or a sale
where no goods are received in exchange for payment.
·
Layering: In this stage, the dirty money is mixed with legitimate funds
through a series of continuous transactions until it becomes difficult for even
the most experienced accountants to distinguish between which money originated
from legitimate sources and which did not.
·
Integration: This is the final stage where the dirty money is successfully
blended within the legitimate financial system, which means it now appears to
have originated from lawful sources.
What Criminal Activities are Associated with Money Laundering?
Generally, most crime that entails large
amounts of cash requires money laundering to make it easier to hide that money.
The following are an example of the most common criminal activities that are
associated with money laundering:
·
General
Fraud
·
Cybercrime
·
Theft
& Embezzlement
·
Drug
Trafficking
·
Tax &
Customs Violation
The 3 main
differences between money laundering and terrorism financing are:
·
Money
laundering’s primary purpose is to take dirty money and ‘launder’ it to hide
its origins by running it through the financial system several times.
·
Money
laundering helps minimize the risk of getting caught by the authorities.
·
Investigation
in this field focuses on linking illegal funds to past criminal activities in
order to stop those involved with that crime from benefiting financially from
their actions.
How to
Stop Money Laundering and Financial Terrorism?
As a business, there are several things you
can do to ensure you are doing your part in the prevention of these crimes. The
most crucial action you can take is to ensure that your business is compliant
with all your local government’s financial regulations. Part of this is
conducting various due diligence checks, including identity verification, KYB
and KYC checks.
For this, you will need the help of a professional
and highly trusted business intelligence provider such as Cedar Rose. We offer
a wide variety of tailor made due diligence, business credit reporting and
identity verification services that are ideal for assisting businesses to
become compliant with any financial regulatory requirements. More importantly,
our experienced team of analysts, researchers, investigators and ground agents
can assist you to accurately perform customer due diligence and corporate
record verification and protect you from putting your business in danger by engaging
with criminal, sanctioned, politically exposed or unsavoury partners.