What we can tell from the 50% increase in reported money-laundering
The number of reports on suspected money laundering reached ca 38,000 during 2021, up 50% from 2020. Compared to 2016, it is a 127% leap.
But property brokers, lawyers and chartered accountants are nowhere to be seen in the statistics, which is noted with concern by the Financial Intelligence Unit.
Better and automated reporting systems and ramped up headcounts are part of the explanation behind the increase in reported money-laundering.
However, data quality of what is reported varies significantly, according to the Financial Intelligence Unit at the Swedish police, making the information more or less useful in the combat of a increasingly sophisticated and complex type of criminality.
While 278 financial companies reported to the FIU, three quarters of all reports were submitted by banks, and in total approximately 90% from the financial services sector. Around 20% of all reported cases involve frauds.
Noted conduits for money-laundering
- Currency exchange – Foreign currency exchange services count among the most frequent conduit for money laundering, and the access to illegal currency exchange is decisive to large-scale drugs trade in Sweden, according to the police. Worldexchange in Stockholm is one well-known recent example, which laundered hundreds of millions from 16 different criminal networks, and where 12 people were charged.
- Crypto – Cryptocurrencies is noted as a segment which the Swedish police is focusing on. While the 5th ALMD includes virtual asset service providers, crypto remains a relatively unregulated area where weaknesses in technologies as well as processes within financial institutes are exploited. Internationally, Crypto money laundering rose by 30% in 2021 cryptocurrencies launderers in criminal networks are according to Europol offering their services to other criminals.
- Neobanks – Highly exposed and misused by organized crime. The neobanks enable fast transactions including cross-border, attractive to criminals seeking to launder money, finance other crimes or terrorism. Criminals can also use the accounts of neobanks to act anonymously, to make purchases or pay with cryptocurrencies. According to the Swedish FIU, around 40% of the persons suspected for money-laundering through neobank accounts are known in relation to other serious and organized crime.
Sharing some reflections
Legacy systems may be part of the explanation for the noted discrepant data quality in reports that reach the FIU. Financial companies are in a constant catch-up between regulatory updates and developing appropriate IT-functions. With the massive investments made in IT-infrastructure, this can become a strategic Achilles heel, obstructing the objective to assure a risk-based approach. The approach and scope of monitoring should take into account the risks identified in the general risk assessment and the risk classification of the customer. When a company uses a model for transaction monitoring, it should have routines for model risk management, to evaluate and ensure the quality of the models that the company uses. On the back of this discussion, model validations must also be considered.
The absence of money-laundering in certain sectors such as property brokers, lawyer and chartered accountants may be explained by a very nascent stage of risk awareness, where the responsibilities of brokers contra banks is not always clear and brokerages to take one example would benefit from training staff and assuring more pedagogic KYC-processes. Moreover, one practical explanation may be that incentive schemes frequently found in the property broking business are simply not conducive to AML-reporting, which makes a future of better money-laundering reporting from properly brokerage a structural issue.
There are ample of services for cash payments online, requiring no personal information, no bank account and no creditcard. To take one example, a 16-digit code obtainable from a retail agent is all you need. Cash in, receipt out, and the ’asset’ can be freely and safety transferred. Developed as tech companies, disrupting the industry with convenient and fast services, neobanks are targeted as money laundering conduits. At the same time, neobanks are in the position to take a quantum leap towards AML excellence, which can be translated into significant market positioning opportunity, considering lean and integrated operations and no legacy systems.
Really knowing your customers (KYC)
Customer risk and monitoring will need to become even more sophisticated and granular in future. About one fifth of all reported money-laundering cases involve fraud. Frauds often managed by organized crime networks are highly systematized and often recruit minors and young people without means as money mules, as reported by the Swedish National Council for Crime Prevention. Frauds against the elderly increased by ca. 30% last year, and criminal proceeds are layered through (typically) low risk accounts and relatively small transaction amounts, however broadly and in large volumes. While the KYC-process is highly critical, financial companies will in future be increasingly challenged in their customer risk profiling and will need to leverage transaction monitoring even more effectively.