Money laundering: unofficial banking networks on the rise thanks to technology

Fraud, digital crime, corruption, tax evasion. And also, undeclared work, illegal gambling and terrorist financing. These are some of the criminal economies that launder money, also making use of informal financial networks, the so-called underground banking. This was revealed in the report ‘Investigating professional money laundering, underground banking, and the use of hawala and other similar service providers’, published on 3 September by the Financial Action Task Force (FATF).

According to the study, the use of opaque systems has, in recent years, become widespread even outside the criminal contexts that have traditionally relied on them, such as drug trafficking and other crimes that generate large cash flows. Drug trafficking and fraud are among the offences underlying money laundering through these systems in 40 per cent of the jurisdictions considered in the study. These are followed by smuggling (35 per cent) and tax evasion (30 per cent), and, tied at 25 per cent, cybercrime, corruption and human trafficking.

The misuse of these systems – as the FATF experts explain – whilst widespread globally, is particularly significant in certain regions where, for example, there is a lack of regulated financial intermediation. Whilst in Africa and Asia, underground banking is often accompanied by mobile payment systems, the Middle East sees hybrid models that include virtual assets and precious stones and metals.

The report goes on to argue that technology plays a dual role within the realm of underground banking. On the one hand, the proceeds of digital crime are increasingly being laundered through informal networks; on the other, digital tools simplify and streamline the coordination of processes and the execution of the money laundering itself. This transformation, the FATF continues, is not a uniform phenomenon, but rather a spectrum of practices ranging from the digitisation of communications to the integration of virtual assets and payment technologies. What these operations have in common is their ability to increase the opacity of transactions, which are becoming increasingly multi-layered. Faster, harder-to-trace and more resilient processes are, in fact, the result of the digitalisation of informal networks.

Among the trends identified globally by FATF analysts is the growing integration of these informal systems with those of the regulated financial sector, with the aim of exploiting regulatory asymmetries. Another growing phenomenon is the professionalisationof these criminal schemes, which are becoming increasingly sophisticated, including in terms of how the work is organised. The third and final trend is the diversification of the client base.