As only a proportion of financial crime is detected, there will always be an element of doubt about the exact scale of the problem. But it is possible for those with an overview of world finance to make a considered estimate of its size.
As an example, a NASDAQ report stated that an estimated $3.1 trillion in illicit funds flowed through the global financial system in 2023. Money laundering was involved in human trafficking that generated an estimated $346.7 billion, as well as in drug trafficking ($782.9 billion) and terrorist financing ($11.5 billion).[1]
Future use of AI-generated deepfakes, synthetic identity fraud (where a real person's information is stolen and used with other falsified personal information to create a new identity) and other forms of cybercrime are expected to add to the financial crime workload facing the authorities in coming years.
A lot of financial crime is cross-border in nature. This poses particular problems for the authorities and other organisations who have the task of identifying and preventing such crime or bringing to justice those who carry it out or attempt to do so.
This article explains what cross-border financial crime is, why it is difficult to identify and prevent, and how the authorities try to tackle it.
What is Cross-Border Financial Crime?
Cross-border financial crime is, as its name suggests, financial crime that goes beyond the boundaries of one country.
Financial crime can be committed in one country and only involve organisations and individuals in that country, with any illegal gains from that crime not leaving the country. But cross-border financial crime has a connection to more than one country.
For example, a criminal based in country A may defraud a company in country B and then send the proceeds of that crime to a bank or his accomplices in country C.
As the financial world becomes increasingly interconnected – making it easier and quicker to conduct transactions between countries – and international finance systems become increasingly complex, criminals exploit any weaknesses they identify.
This can mean crimes being committed by people who are thousands of miles away from their target, with the proceeds of the illegal activity then quickly transferred out of the country where the victim is located.
Cross-border financial crime can involve criminals exploiting regulatory gaps in a country, weak enforcement mechanisms in companies and legal frameworks.
Examples of cross-border financial crime include:
- Fraud and other forms of cybercrime: A company or individual could be defrauded out of their assets online by someone (who could be anywhere in the world) who then moves those assets to another country.
- Money laundering: Criminals will move the proceeds of their crimes from one country to another to make it harder for investigators to trace the funds and identify those funds as having been gained from criminal activity.
- Bribery and corruption: Money can be moved from one country to pay a state official or senior business figure in another country in order to ensure that someone outside of that country wins a lucrative contract.
- Tax evasion: Wealthy individuals move their money from where they are based to offshore shell companies – based in countries that have little financial regulation or investigation of suspected financial wrongdoing – in order to dodge paying taxes.
The Importance of Combating Financial Crime
Cross-border financial crime poses a major problem for the authorities. The way that crimes can be committed from a distance and the proceeds then moved across borders at speed makes it difficult for investigators.
But cross-border financial crime is a major problem for other reasons:
- It can be hugely damaging to those affected (the victims) but it can also cause harm to a country’s economy. Particular nations may be viewed by criminals as more vulnerable to financial crime or as a safe place to hide their proceeds of crime.
- Funds that are laundered by being moved across countries are often used to finance terrorism.
- Once money obtained by criminals has been moved to another country, it can pose a greater challenge for those who are looking to trace it, whether that be the investigating authorities or the people who had the money taken from them.
- The way that cross-border financial crime exploits weaknesses in the legal and financial systems of various countries – such as by moving money to nations that have little or no scrutiny of financial activities – can make it hard to bring legal action to have money returned to its rightful owner.
Challenges In Identifying and Investigating Cross-Border Financial Crime
The nature of cross-border financial crime makes it, in many cases, more difficult to investigate than other types of crime. This is due to a number of reasons:
Multiple Jurisdictions
As cross-border financial crime involves more than one country, any investigation (and possible prosecution) can involve investigating authorities and legal systems in more than one nation. This can hamper an investigation by making it more complex and time consuming and can lead to questions about which country has jurisdiction (the power to make legal decisions) over the case.
Information Sharing
The sharing of information can be hugely important in an investigation. If this has to be done between law enforcement agencies, financial institutions and victims that are in numerous countries, the process can be more complicated than it would be if everyone were in the same country.
Identifying Beneficial Owners (UBOs) and Intermediaries
Any gains made from cross-border financial crime may be moved between many people or organisations. Those assets may also be placed in offshore shell companies, where it can be hard to identify the beneficial owner – the person who actually has control of those assets. Such activity makes it hard for investigators to follow the trail of the stolen assets.
The Need for Customer Due Diligence (CDD)
As financial crime often involves an element of deception, fraud or secrecy, there is a need for all those operating in the financial sector to carry out thorough checks on those they are considering doing business with. This process is known as customer due diligence and can be time-consuming. But it has to be carried out to reduce the risk of falling victim to those looking to carry out financial crime.
When dealing with organisations or people who are deemed to be “high risk”, Enhanced Due Diligence (EDD) is often required, involving additional steps such as identifying the ultimate beneficial owner and a person's Source of Funds (SOF).
Increasingly Sophisticated Technologies
Great advances in technology have brought benefits to the financial world. But some, such as encryption and anonymisation techniques, have made it possible for criminals to carry out sophisticated financial crimes with little chance of being identified – making it harder than ever to trace them and the proceeds of crime they move across borders.
Diverse Legal and Regulatory Frameworks
As mentioned above, the differences in countries’ laws and regulations can provide criminals with opportunities. By exploiting any variations in countries’ law enforcement activities or approach to seeking information to regulate financial activity, criminals can remain “under the radar’’ and their activities can avoid attention.
An Increasingly Global Economy
The way that those in the financial world are more interconnected than they have ever been brings benefits to business, as it can make activity speedier and more efficient. But this also provides criminals with the opportunity to be more effective in how they carry out financial crime and move the proceeds once the offence has been committed.
Strategies To Combat Cross-Border Financial Crime
While there are challenges facing those who have to tackle cross-border financial crime, strategies have been put in place as a response to them. These include:
Multilateral Agreements and Treaties
There has been a strengthening of existing multilateral agreements and treaties in order to support cooperation between agencies in different countries, such as the United Nations Convention against Corruption (UNCAC) and the Basel Committee on Banking Supervision's Cross-Border Cooperation. Countries are being encouraged to ratify and implement international conventions and procedures relating to financial crime, such as extradition treaties and mutual legal assistance agreements, to aid cross-border investigations and prosecutions.
Bilateral Partnerships and Memoranda of Understanding (MOUs)
Bilateral partnerships and MOUs between countries are being established to formally detail their cooperation on areas relating to financial crime, such as the exchange of financial intelligence, following investigative leads and evidence sharing.
Inter-agency Collaboration
National and international law enforcement agencies, countries’ financial intelligence units (national centres that receive and analyse reports of suspicious transactions) and regulatory authorities will create working groups to focus on specific types of financial crimes and assess how they can best be tackled.
Public-Private Partnerships
Private sector firms, such as banks and other financial institutions, work as partners with the authorities to detect and tackle financial crimes through arrangements such as information-sharing mechanisms.
Providing Technical Assistance
Countries can provide technical assistance, training and resources to nations that lack the necessary technology and expertise to tackle financial crime effectively on their own.
Use of Advanced Technology and Data Analytics
Employing the most up-to-date technology to analyse large volumes of financial data is becoming increasingly common. Through the use of RegTech artificial intelligence (AI) and machine learning can be leveraged to identify signs of illegal activity.
Standardising Regulatory Frameworks
Working to ensure that countries have the same regulatory frameworks and standards helps close loopholes that are exploited by those committing cross-border financial crime. Encouraging countries to adopt internationally-recognised practices and guidelines - such as those promoted by the international anti-money laundering body, the Financial Action Task Force - for tackling money laundering and other illegal activities reduces the scope for financial crime to go unnoticed.
Better Supervision
Improving the supervision of financial institutions ensures that they comply with their anti-money laundering regulations and examine and – when necessary – improve their money laundering controls. This means that suspicious activities are more likely to be identified.
Conclusion
Cross-border financial crime is a significant challenge for the authorities, financial institutions and individuals. But efforts are being made to address the challenge and reduce the risk of such offending being carried out. As explained above, those efforts need to be cross-border in nature and have to evolve as the criminals look for new ways to commit financial crime.
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