Cyber-laundering - How can we combat money laundering over the internet? more

How can we effectively combat the use of the internet for money laundering? by Kilian Strauss The internet increasingly becomes the ideal tool for money launderers. What is money laundering? According to UN estimates1, criminals across the world launder each year a sum of between USD 800m and 2 trillion of illegal proceeds derived from criminal activities, such as drugs trafficking, arms smuggling, trafficking in human beings or corruption. This represents some 2-5 % of global GDP and would constitute one of the most important “economic” activities across the world, if so qualified. What it does however constitute is a significant loss to economies, treasuries and people everywhere, as these sums bypass state budgets and thus do not contribute to economic growth. All they do is illicitly enrich criminal individuals. Although money laundering and most related predicate crimes are outlawed across much of the world, there are significant differences between different legislations, as some countries for example do not consider tax evasion a crime or indeed the paying of bribes. International efforts to combat money laundering The laundering of illegal proceeds is not a new phenomenon: the international community has been actively seeking to combat it for more than two decades, driven by the initiatives of a number of developed countries, as well as of a number of international institutions, above all the key standard setting institution in the field, the Financial Action Task Force (or FATF)2. Its main instrument are the forty Recommendations on Combating Money Laundering3, first adopted in 1990 and regularly amended since, as well as the nine Special Recommendations on Combating Terrorist Financing4. These 40+9 Recommendations are complemented by a number of international conventions, above all the UN Convention on the Suppression of Terrorist Financing of 19995, the 1988 United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances6, as well as the UN Convention against Transnational Organised Crime of 20007 and the UN Convention against Corruption of 20038. As a result, national anti-money laundering regimes and international co-operation mechanisms across the world have been considerably strengthened over the last decade, making it increasingly difficult for criminals to exploit loopholes in national legal frameworks or in weak international co-operation. Most developed countries’ banking systems have by now adopted measures that make it more and more difficult to launder funds through established financial channels. 1 2 www.unodc.org/unodc/en/money-laundering/globalization.html www.fatf-gafi.org 3 www.fatf-gafi.org/document/28/0,3746,en_32250379_32236920_33658140_1_1_1_1,00.html 4 www.fatf-gafi.org/document/9/0,3746,en_32250379_32236920_34032073_1_1_1_1,00.html 5 www.un.org/law/cod/finterr.htm 6 www.unodc.org/pdf/convention_1988_en.pdf 7 www.uncjin.org/Documents/Conventions/dcatoc/final_documents_2/convention_eng.pdf 8 www.unodc.org/unodc/en/treaties/CAC 1 A new tool to launder illicit funds As a result of this international clampdown against money laundering, criminals have started to look for new tools and mechanisms to hide the origins of their ill-gotten gains and to channel them from one location to another. What they want is a way to launder their illicit proceeds that is all at once • • • • quick discrete secure and global. A near perfect tool meeting all these conditions is the internet: an extremely swift, largely secure, almost anonymous and truly global instrument. Due to its decentralised structure, the internet has increasingly become the mechanism of choice of many criminals to channel funds from one global location to another, sometimes in mere minutes and, if handled professionally, without leaving traces. Although the amounts thus shifted are currently thought to be still relatively small compared to the overall volume of funds laundered, the practice of using the internet as a tool to hide the origins of illicit funds is growing fast. And as criminals and terrorists across the world get increasingly cyber-savvy, they make more and more frequently use of the above mentioned advantages of the internet and thus succeed in always staying several steps ahead of most law enforcement officers, who are only gradually starting to get to grips with the virtually unlimited possibilities of the world wide web. But in order to successfully prevent and combat money laundering and terrorist financing over the internet, we first have to understand how illicit funds can be transferred by way of mouse clicks. Typical examples of cyber-laundering Let us therefore look at some typical examples of cyber-laundering, used both by criminals and terrorists, as explained, by Minwoo Yun of Hansei University9: money can be laundered over the internet through fake online auctions, online sales, online gambling websites as well as online games, virtual worlds and other similar ways. One typical example is second life: it uses a virtual currency, the Linden dollar, which can easily be converted into real currencies. Often criminals make use of new means of payments to transfer their funds, for example by using prepaid storage/payment cards, different forms of e-money (e.g. ekash), paypal accounts or payments over mobile phones. The laundering of funds over the internet and through mobile phones is made particularly easy by the growing use of peer-to-peer transactions, i.e. funds are directly transferred from one individual to another, without the interaction of a third party, such as a financial institution, thus avoiding financial oversight and potential detection. Besides, even if the funds transit through the financial system, they may not always trigger alerts of detection software. Illegal means can therefore easily be moved around the world, criminal proceeds laundered or terrorist organisations funded in ways that escape detection by compliance systems or law enforcement. The rapid growth of mobile payments, especially in developing countries (e.g. M-PESA in Kenya), makes it particularly easy for criminals and terrorists, as payments are handled only by 9 www.itu.int/ITU-D/asp/CMS/Events/2011/CyberCrime/S3_Minwoo_Yun.pdf 2 mobile phone companies and are usually conducted directly peer-to-peer, therefore avoiding the prying eyes of financial oversight and law enforcement. How to combat cyber-laundering? What can we do to prevent and combat money laundering and terrorist financing over the internet? It is clear from the above that urgent action is required, in particular because more and more of today’s and tomorrow’s financial activities use new channels and new means of payment that often bypass the financial sector and therefore escape the oversight of financial regulators. We therefore have to urgently take action in the four following areas, using the 4-I approach: The 4-I approach 1) we need better IT knowledge 2) we need better ID checks online 3) we need better IP tracking 4) we need better IC (international co-operation) Here is what needs to be done in detail: 1) All institutions involved in preventing and combating money laundering and terrorist financing, especially supervisory and law enforcement bodies, urgently need to strengthen their IT knowledge to keep up pace with criminals across the world. This includes increased training and, for example, the hiring of former hackers. 2) Criminals and terrorists can often operate largely anonymously due to lax enforcement of due diligence, in particular in areas outside the financial industry. We therefore have to introduce better ID checks with new financial instruments (e.g. prepaid storage cards), especially outside the financial sector. This could help reduce the use of anonymous payments. 3) Cyber-savvy users can relatively easily avoid the tracking of their online identity by using proxy servers and anonymisation software. Although a certain degree of online anonymity is acceptable, especially in politically delicate regions of the world, financial operations should never be conducted anonymously. We therefore need better IP tracking to prevent criminals from hiding their online identities. 4) Criminals can easily exploit the lack in international co-operation by moving from country to country. We therefore need much better international co-operation and coordination to prevent and combat money laundering and terrorist financing. We have to strengthen national and international efforts and instruments aimed at combating online money laundering and terrorist financing, for example by allowing for faster exchange of information and speeding up requests for mutual legal assistance. If we want to effectively reduce the rising use and abuse by criminals of the internet for the purpose of money laundering and terrorist financing in an effort avoid national and international regulators and law enforcement agencies, we have to take joint and co-ordinated action that has to be swift, creative, effective and truly global. © 2012 Kilian Strauss 3