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What is Financial Crime?


Financial crime has existed ever since money has. From money laundering to theft to corruption to terrorist financing to tax evasions to scams and frauds, the list seems to go on and on. 

Over time, as authorities came up with new ways to increase financial security and track down criminals, criminals started upping their game as well by developing innovative techniques to stay out of sight.

The reason why financial crime and how it works is important for you to understand is that it affects not just financial institutions and banks, but everybody associated with money, which is, well, everybody.

You may not be the direct target, but financial crime affects you in ways that are invisible and incredibly hard to trace, especially for a common individual. But before we dig deeper into that, let’s first define what financial crime really is to get a better and clearer idea of what we’re talking about. 

What is Financial Crime? 

According to Wikipedia, financial crime refers to a “crime committed against property, involving the unlawful conversion of the ownership of property (belonging to one person) to one’s own personal use and benefit.”

Essentially, it’s the unfair and unjust means of obtaining property and claiming its ownership without having provided value against the said property. From physical currency notes to digital cash to materialistic assets to financial instruments and so on, all count as “property.”

Who commits a financial crime?

Anyone and everyone who uses fraudulent means to gain a dishonest and invalid possession of a property. This can include, but is not limited to:

  • Organized crime units including terrorist groups
  • Stock traders who may try to cheat the market via insider trading
  • Business leaders and senior executives who may try to manipulate the financial data of the company to avoid taxes
  • Individual fraudsters and opportunists trying to scam vulnerable sections of the society

In this article, we are going to be talking about two of the most prominent financial crimes: money laundering and terrorist financing. We are going to try and examine their effects on the global economy and the threat they impose on our financial security.

What is Money Laundering?

Money laundering is a serious problem, one which has left authorities scratching their heads in frustration and individuals like you and me doubtful of financial institutions’ security, accountability, and honesty.

According to research, a jaw-dropping estimate of about US $800 billion – US $2 trillion is laundered every year in total. To put that number in perspective, that’s about 5% of the world’s total GDP annually.

Insane, right? We think so too. 

If you are not familiar with the concept of money laundering, it is essentially the process via which funds obtained from criminal activity, say theft, drug trafficking, bribery, or illegal business, are disguised and “cleansed” by running them into a chain of diverse financial transactions.

It is done with the aim to hide the true origin of the “dirty money” and make it appear as if to have come from a legitimate source. The methods used to launder money are generally very sophisticated and backed by creative techniques to avoid suspicion, making it hard to track the parties involved.

For instance, an organized criminal cell may move its proceeds into financial institutions via loan repayments, currency exchanges, or transactions with legitimate businesses to funnel dirty into the financial system.

This “cleansed” money is now used to purchase assets like houses, cars, or other property from legit businesses, making it appear as if the criminal proceeds have legal origins. Once this illusion is created, the assets are then re-introduced back into the cycle to fund criminal operations.

What is Terrorist Financing?

Any substantial goal needs money to be met. The same goes for terrorist organizations and smaller terrorist units to achieve their goals. Terrorist financing is the process via which terrorist organizations obtain funds or financial support and use the same to fund their operations.

It is done with the intention to execute malevolent terrorist acts and establish political dominance and power. It is important to keep in mind that terrorist financing and money laundering are not the same things, though both operate in the domain of criminal activity.

The difference between money laundering and terrorist financing is that the money used for terrorist financial may come from either legitimate sources or criminal sources, or even a combination of the two. But funds involved in money laundering always have a criminal origin.

How Financial Crimes affects you

Money laundering affects you, whether you choose to believe it or not. It demonizes global financial systems and institutions, encourages crime and corruption, weakens and slows down economic growth, disrupts communities, promotes violence, drug abuse, and dishonest behavior.

It wouldn’t be wrong to say that this is largely the consequence of ineffective governments and their inability to abolish strict measures against such financial crimes. Not just ineffective governments, but a lot of it is also simply because banks tolerate it.

In fact, in the mid-September of 2020, a set of classified confidential documents which were later leaked known as the FinCEN files revealed that some of the wealthiest banks in the world had allegedly moved trillions of dollars worth of money in potentially illicit cash. This was done to serve suspected terrorist groups, criminals, and drug kingpins around the world.

Financial Crime Prevention & Anti-Money Laundering (AML) programs

There’s where inter-governmental bodies like the FATF (Financial Action Task Force) come into play. It aims to counter money laundering and fight terrorist financing and is committed to protect, preserve, and regulate the financial health of the global economy,

The FATF assumes responsibility for such financial crimes and seeks to minimize the same by imposing concrete AML (Anti-Money Laundering) programs and conducting regular audits of suspected countries on its lists.

Doing so, not only does the FATF increases compliance and betters management, but also addresses the faults and loopholes in the financial system – notifying authorities about potential areas of improvement in their operations.