Understanding the global financial crime landscape is crucial for policymakers, financial institutions, and law enforcement agencies to effectively combat money laundering, fraud, and illicit activities in the interconnected world of finance. Financial crime is generally defined as any activity that involves fraudulent or dishonest behavior for personal financial gain.
Financial crime refers to all crimes committed by an individual or a group of individuals that involve taking money or other property that belongs to someone else, to obtain a financial or professional gain. The two most significant types of financial crime are money laundering and the financing of terrorism.
Financial crime is a significant ongoing challenge for banks, institutions, and individuals. As regulators and financial authorities introduce new strategies to detect and prevent financial crime, criminals develop more sophisticated methodologies to evade legal scrutiny and commit offenses, including fraud, money laundering, and the financing of terrorism. Financial institutions are also expected to participate in the fight against financial crime, by ensuring compliance with the regulations that authorities put in place at the risk of potentially severe penalties.
Financial compliance is a significant international concern: the global cost of compliance in the financial sector alone is estimated to be around $180.9 billion per year.
Financial institutions spend lots of money to strengthen the internal controls and compliance culture to ensure that financial crime activities are prohibited within the organization and internal controls mechanisms prevent the occurrence of external financial crime threats to which the institution is exposed.
The Global Financial Crime Landscape
Financial crime ranges from basic theft or fraud committed by single individuals to large-scale, global schemes masterminded by organized criminal syndicates.
Financial crime is commonly considered as covering the following offenses:
- fraud
- money laundering
- terrorist financing
- bribery and corruption
- insider trading
- cybercrime
Prevention of financial crime is a law enforcement priority in jurisdictions around the world. Below are the most significant types of financial crimes:
Fraud
The term ‘fraud’ usually includes activities such as theft, corruption, embezzlement, money laundering, bribery, insider trading, and extortion. All fraud activities are illegal and person or persons involved in these activities are categorized as criminals. In other words, using deception to dishonestly make a personal gain for oneself and/or create a loss for another is fraud.
Fraud usually is an intentional act or series of acts which is perpetrated by human beings using trickery, and cunning using two types of misrepresentations which are a suggestion of falsehood or suppression of truth. It is primarily the responsibility of management to establish systems and controls, to prevent or detect fraud, errors, and weaknesses in internal controls.
Money Laundering
Simply spoken, the term money laundering describes the activity of concealing or disguising the identity of illegally obtained proceeds. This activity has the goal of making the illegally obtained proceeds appear to have originated from legitimate sources.
The precise definition of money laundering varies slightly in each country where it is recognized in criminal law, and it varies according to relevant organizations and standard-setting bodies, which are covered later on.
Money laundering is the processing of criminal proceeds to disguise their illegal origin. The money laundering process enables criminals to enjoy profits and funds without jeopardizing their source. When a criminal activity generates substantial profits, the individual or group involved must find a way to control the funds without attracting attention to the underlying activity or the persons involved. Criminals do this by disguising the sources, changing the form, or moving the funds to a place where they are less likely to attract attention.
When criminals derive funds from illegal activities, that money must be disguised before it can be introduced into the legitimate financial system. Money laundering is the illegal process of disguising the profits of financial crime, typically by using the services of banks and businesses. Criminals transfer their illegal funds from one place to another, through the use of a financial system of the country such as banking channels. The transfer of illegal money may be to support other criminals in various other jurisdictions or countries.
Terrorism Financing
The financing of terrorism involves the provision of funds to individuals and groups to commit terrorist acts. Terrorism financing resembles money laundering in the sense that it often requires criminals to conceal the transfer of funds within the legitimate financial system.
Terrorists may use high-profile people in the country, to support them in their terrorist activities and for private gain. Terrorists may use public officials, who may abuse the authority of their public office for personal gain, which interferes with democracy and the rule of law. Corruption also may be committed by private individuals who abuse their positions for personal gain, which can hinder fair market operations and distort competition.
There is a song called “Money makes the world go around” and this is true also for terrorists and terror organizations. Money is the lifeblood of terrorism. Terrorist organizations require significant funding, both for the actual undertaking of terrorist acts, but also for other issues. In particular to maintain the functioning of the organization, provide for its basic technical necessities, as well as to cover costs related to the spreading of their ideologies.
Terrorist financing can be described quite simply as the financing of terrorist acts, terrorists, and terrorist organizations. But terrorist financing is more than just providing money to them. Terrorist financing can also involve the facilitation of terrorist acts using other assets or stores of value such as oil and natural resources, property, legal documents, financial instruments, and others. But terrorist financing does not stop there. Terrorists also make more and more use of modern technologies, including the blockchain and cryptocurrencies. They use channels to help fund attacks more easily than they could ever do with fiat currencies.
Terrorist financing is the provision or collection of funds with the intention that they should be used to carry out acts that support terrorists or terrorist organizations or to commit acts of terrorism. Terrorist financing includes the financing or aiding, abetting, and facilitating of terrorist acts, and terrorists and terrorist organizations. It is a collection of funds, by any means, directly or indirectly, intending to be used, in full or in part, to carry out terrorist activities.
Bribery and Corruption
Bribery means the offering, promising, giving, accepting, or soliciting of an advantage as an inducement for an action that is illegal, unethical, or a breach of trust.
The inducement or bribe may take the form of anything of value to the person receiving it, including:
- Cash and cash equivalents (e.g., gift cards)
- Gifts, Meals, Entertainment, Travel
- Fees (this includes fees claimed to be consulting or success fees)
- Commissions, Kickbacks, Discounts, or credits
- Rebates
- Contractual rights or interests
- Business, employment, or investment opportunities
- Loans, Payment of expenses, or Donations
Corruption means the abuse of entrusted power for private gain. Corruption may be committed by public officials who abuse the authority of their public office for personal gain, which interferes with democracy and the rule of law. Corruption also may be committed by private individuals who abuse their positions for personal gain, which can hinder fair market operations and distort competition.
Insider Trading
Insider trading is the buying or selling of a publicly traded company’s stock by someone who has non-public, material information about that stock. Material non-public information is any information that could substantially impact an investor’s decision to buy or sell the security that has not been made available to the public. Insider trading is illegal and leads to penalties including fines.
Cyber Crime
Cybercrime is a crime that involves misuse or unauthorized access of systems, data, and information. Cybercrime such as cyberattack results in the loss of critical data and information, which causes financial losses, and reputational damages. Cybercrime is performed by a hacker, who through malicious codes, viruses, or penetration techniques gains access to the system and information of an organization, and steals such information for ransom money or to blackmail the management to perform a particular action.
The computer may have been used in the commission of a crime, or it may be the target. Cybercrime may harm someone’s security and financial health. There are many concerns surrounding cybercrime when confidential information is intercepted or disclosed, lawfully or otherwise. Internationally, both governmental and non-state actors engage in cybercrimes.
Final Thoughts
Understanding the global financial crime landscape is of utmost importance for policymakers, financial institutions, and law enforcement agencies. Financial crime encompasses a wide range of offenses, including fraud, money laundering, terrorist financing, bribery and corruption, insider trading, and cybercrime. These activities pose significant challenges to the integrity of the financial system and can have far-reaching impacts on economies and societies.
By comprehending the nature and intricacies of financial crime, stakeholders can develop effective strategies, regulations, and internal controls to detect, prevent, and combat these illicit activities. Collaborative efforts among international bodies, governments, and financial institutions are crucial to stay ahead of evolving criminal methodologies and safeguard the global financial system.
