The real cost of money laundering is not only monetary

Money laundering can often be seen as a somewhat nebulous, victimless crime that doesn’t affect the everyday person. But Financial Intelligence Analysis Unit Guidance and Outreach Manager Dr Clara Borg Bonaci tells David Lindsay about how money laundering not only deprives government coffers of funds that could be used for the betterment of society, it also feeds serious predicate crimes such as the trafficking of drugs and arms, human smuggling and child sexual exploitation – ‘horribly destructive crimes that have an immense social cost’

Money laundering is often seen as a victimless crime that doesn’t necessarily affect the average person on the street. What are the ramifications of such practices on a wider scale? What are the hidden predicate crimes and what are their effects on the economy at large?

The truth is that the fight against money laundering and the funding of terrorism can be highly regulatory and involves the implementation of numerous laws, which makes it easier for us, and the entities we supervise, to sometimes forget or be disconnected from why we are actually doing it.

In its simplest form, money laundering is the process of placing funds that have been generated illegally into the financial system in such a way that they are disconnected from the criminal activity, so that even the identity of the person who conducted that crime is obfuscated and the funds cannot be immediately connected to the person or the crime.

When we speak of criminal activity, we are not necessarily talking about petty theft or shoplifting, we are talking about large sophisticated organised crime groups. The type of activities they carry out for a profit are serious crimes such as drug and arms trafficking, contract killing, human smuggling and trafficking, and child sexual exploitation.

All this is so horribly destructive and it has an immense social cost.

By fighting money laundering, we are making it harder for criminals to enjoy the proceeds of their crime. Once it’s harder to use these profits, in a way that allows criminals to be separated from their criminal activities, the risk-to-reward ratio is skewed, and that acts as a major deterrent.

Tax evasion is another predicate offence, and is often misunderstood to be more or less a victimless crime. When large businesses do not disclose the full extent of their income, they are cheating the state out of millions of euro in funds that are meant to be used to provide better services for its citizens.

As such, we need to realise that tax evasion is something that comes at a real cost to us.

Likewise, with corruption and bribery, public funds are not being used to provide the best services and infrastructure for the people. So money laundering has a cost for each and every one of us and we may not see it and we may not necessarily feel the impact directly on a personal level, but it is most certainly there and it is most certainly affecting us.

Why, apart from the legal repercussions, should subject persons feel obliged to report suspicious transactions?

Suspicious transaction reports, or STRs, are reports that obliged entities have to submit when during the course of conducting transactions or engaging with their clients they detect suspicious or unusual activities. STRs are the main source of information used by the FIAU – and by Financial Intelligence Units in general – to analyse potential money laundering cases.

The legal obligation is clear and well known among obliged entities. These entities might not know it or immediately see the effect of their STR, but a report is the spark that would trigger an analysis, that then leads to the investigation and eventual prosecution of criminals and the disruption of criminal organisations. The ripple effect extends beyond Malta and disrupts international criminal activity.

STRs are the lifeblood of any financial intelligence unit, and there is a higher, more noble purpose to reporting that suspicion.

Since the Panama Papers, ‘money laundering’ has entered the common vernacular.  How have you seen awareness rise amongst the people out there and amongst subject persons out there who you are targeting with your activities?

The Panama Papers is just one of many international money laundering scandals but this particular scandal perhaps brought the more abstract concept of money laundering to life among the general public, not just in Malta but around the world. The topic of anti-money laundering has rapidly become a point of interest internationally, and is being given much more priority at a policy level among international organisations.

I think the allegations of local involvement within the Panama Papers definitely sparked an interest in Malta, and we suddenly started seeing the topic of money laundering in the local news.

For the entities that we regulate, the Panama Papers may have hit closer to home, as it became more evident that Malta is not as immune to money laundering as may have been thought.

The regulations aren’t new, however, and subject persons have long been required to comply with AML/CFT procedures and experience FIAU supervision, and have long been aware of their obligations and risks. This is not the result of international scandals. We have observed a remarkable improvement in awareness - there has been a culture shift as we moved towards a culture of compliance, and this is attributed to several factors, one of them being the increase in the resources dedicated to more comprehensive risk-based supervision, guidance, and outreach, more dissuasive penalties, and more visibility of the FIAU’s enforcement actions.

In Malta, much is said about the fight against money laundering but how affected are we by the spectre of terrorism financing?

The risk of terrorism financing is distinct from the risk of the terror attacks themselves. Every country is at risk of terrorism financing in one way or another and no country is immune.

While generally speaking there may not be a high risk of terror activities taking place, it doesn’t mean that we are not at risk of having our financial services sector and our voluntary organisations misused to move funds. Malta is considered to be a small international financial centre because of the size of its financial services industry. Typically, with financial centres around the world the risk is more about having the financial system misused to move and conceal funds intended to support terror organizations, rather than that of having entities raising funds in Malta or conducting attacks on the country’s soil.

Understanding these risks and how they manifest themselves when providing a given service is crucial to preventing misuse for terror financing purposes. To enhance knowledge on the funding of terrorism as distinct from money laundering, the FIAU published a comprehensive Guidance Document on the Funding of Terrorism, indicating the types of risks that one may be exposed to in Malta, the risk assessments conducted on a national level, and also on the different typologies explaining how terror financing can take place, by providing examples of local and international cases of terrorism financing.

This helps drive the message that terror financing is a concern that entities need to be ale to detect.

Through this guidance document and the training we subsequently provided, we sought to ensure that obliged entities are in a much better position to detect the nuances of terrorism financing as opposed to those of money laundering.

There has been a 200% increase in STRs according to the FIAU’s last annual report. What has this been attributable to?

The increase in STRs is a trend that has been positively noted each year for quite a number of years. Part of this is a result of more targeted guidance and outreach activities, because by providing sector specific risk factors, red flags and cases studies, entities become better at detecting the type of activity that needs to be reported.

However, there are certainly other factors that have contributed. One, for instance, is the increase in resources dedicated to supervision, where we are looking at entities’ ongoing monitoring processes and their transaction screening systems. Another is the increase in enforcement actions and the publication of penalties.

All of this has served to drive home the message that compliance is critical, that activity needs to be monitored and scrutinized, and that reports must be submitted in cases of suspicion.

These results clearly show that Malta has become better at preventing and detecting suspicions of money laundering and our goal is to ensure that both the quantity and quality of reports continue to improve year in year out.