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.
· 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
· 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.
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.For further information on our services, please visit our company due diligence pages or email us directly.