By many estimates, IS is now the richest terror group in history. While it gains most of its booty from smuggling, extortion and looting, it brings the proceeds into the financial system through money laundering. The financing of terrorism and money laundering are inextricably linked, so much so that the Financial Action Task Force, an inter-governmental body, doesn’t differentiate between them. It refers to what it does simply as AML/CFT (Anti-Money Laundering, Combating the Finance of Terrorism).
Money laundering is rapidly spiralling out of control. According to the latest IMF figures, it’s estimated to amount to around $3.59 trillion (£2.26 trillion) annually. There are two main reasons for its growth: the sophistication of criminals, and the deficiencies of modern correspondent banking. Correspondent banking is the process whereby one bank conducts transactions and facilitates wire payment transactions on behalf of another bank. It’s a breeding ground for financial crime because the moment more than one bank is involved, it becomes far easier for dubious transactions to slip through the net.
Banks often rely on a chain of trust that’s fundamentally flawed. One bank will believe, or sometimes choose to believe, that another is doing the necessary Know Your Customer (KYC) checks on a client. But all too often nobody is doing it, or it’s being done on a “lite” basis. Financial criminals repeatedly exploit this buck-passing.
Alongside this, money launderers can stay one step ahead by creating multiple “degrees of separation” between the originator of a fraudulent transaction and the beneficiary. They create intricate transactional ecosystems to cover their tracks, using obscure corporate structures across jurisdictions. The result is a veritable labyrinth that’s hard for banks to navigate.
With money laundering growing exponentially, and the link to terror very clear, lawmakers are clamping down. US and French authorities have issued fines, and the banks are taking action. In countries around the world, armies of compliance officers are being hired to counter the rising threat.
But while the intention is good, this will do little to contain the problem. The data ecosystems terrorist organisations create are so sophisticated that seeking to expose them manually is inadequate. The banks are fighting a digital battle with analogue solutions. To properly tackle money laundering, they need to fundamentally rethink correspondent banking and KYC. The way to do this is to embed a technological capability that can deliver an aerial view of even the most complex transactional ecosystems.
With the West bombing IS targets in the Middle East, the need to hit the terrorists’ bottom line is more pressing than ever.