Just like legitimate businesses, illegal and criminal organizations also require money in order to function. Given the nature of their activities, many criminal groups are more than willing to infiltrate and manipulate financial organizations to access the money they need.
Presently, there are financial regulators that are designed to deter and detect criminal activities in banking, financial services, and insurance (BFSI) companies. Businesses that comply with regulators enjoy continued operation and a higher level of trust from the financial industry and their clientele. Those that cannot meet the standards set by regulatory bodies, on the other hand, are subjected to huge fines and may incur reputation damage, which can ruin their standing among the general public and discourage individuals, organizations, and even other financial institutions from transacting with them.
In addition to avoiding penalties and maintaining their pristine images, the BFSI companies that successfully adhere to the guidelines set by financial regulators are also doing their part in making the world a better place. This is because they are preventing funds from being allocated to the following illegal and highly destructive activities:
Terrorist Funding
Terrorist groups need funds to procure supplies, attract and support members, and conduct operations. It’s a must for these organizations, then, to tap into the market and get a stream of support from the people who believe in their agendas and those who have something to gain from the damage that they inflict.
Naturally, no legitimate business wants to be associated with terrorist activities. To keep terrorist organizations out of their list of clients, BFSI companies typically use anti-money laundering (AML) solutions with sanctions screening features. These programs can match prospective and existing clients with the names included in various sanctions lists maintained by different governments and watch groups. This step in the client screening process effectively ensures that BFSI providers are not transacting with entities that serve as a front for organizations that support or prompt terrorist activities.
Cut off from the market and with very few means to access ‘clean’ money, terrorist organizations will have a harder time implementing their activities, recruiting new members, and carrying out events that further their destructive cause.
Human Trafficking
Slavery has been deemed illegal in many parts of the world, but many vulnerable people still fall victim to the modern version of this practice to this day. People who are living in poverty, including those that have been exposed to various natural and man-made disasters, are especially prone to human trafficking and migrant smuggling. Millions of men, women, and children who have fallen victim to human trafficking every year are forced or coerced into performing labor, many of which are sexual in nature. It is estimated that the aggregated proceeds from human trafficking amounted to USD 150 billion in 2018, and the financial returns from such an inhumane but lucrative activity are being laundered in numerous legitimate financial organizations.
Having a strong AML system in place enables banks and other financial institutions to determine whether or not their organization is being used to clean money that has been gained through modern-day slavery and the abuse of people. Once BFSI companies are able to determine the trail of money coming from human trafficking activities, they can report these to the authorities, and this will then prompt law enforcement agencies to shut down the illegal operation and rescue its victims.
Drug Trafficking
Another illegal industry that benefits from money laundering is drug trafficking. To disguise the source of their profits, many illegal drug dealers put up legitimate shops that serve as a front for their criminal activities. For example, a drug dealer may set up a restaurant or a self-service laundry and make it appear as if they earned their funds through a legitimate business. The laundered money, then, will often be used to fund luxury consumption, leading to an increase in inflation and in the costs of goods and services. As such, in addition to contributing to the drug epidemic, the presence of drug traffickers in a location may lead to a community’s financial instability while also discouraging investors from putting their money in the area. This likewise prevents long-term sustainable economic growth in a location.
Financial institutions play a pivotal role in economic development. Banking, financial services, and insurance companies serve as a collective marketplace for money and assets, enabling individuals and organizations to allocate their resources to where they are needed the most. However, this role also makes them a prime target for criminal entities, especially those that aim to use financial institutions as a channel for committing money laundering, graft and corruption, and fraud. It’s a must, then, for financial organizations to take solid steps in preventing the proliferation of these illegal financial activities. Strengthening their AML programs is one way of preserving their good name and building a better world for their customers and other stakeholders.