Why Banks Are Critical in the Fight Against Organized Crime

“Follow the money” was the sage advice the stealthy “Deep Throat” contact gave to Washington Post journalist Bob Woodward to help him in his investigation of the infamous Watergate Scandal in 1972, and that holds true today. It was also the method then U.S. attorney for the Southern District of New York Rudy Giuliani used to prosecute the American mafia families in the 1980’s. It wasn’t murder, violence or theft that took down the”Five Families.” It was instead The Racketeer Influenced and Corrupt Organizations Act (RICO), legislation that allows prosecutors to bring cases where the criminal act is a form of business or a way to earn illegal money regularly or briefly but repeatedly.

Organized crime bosses are smart enough to have henchmen carry out their dirty work, so they could never be satisfactorily linked to different crimes, even though they were obviously the ones giving the orders. Law enforcement knew that without taking down the heads of each of the organized crime syndicates, they would never be able to dismantle the entire operation. They seemed untouchable, hiding in a legal blind spot, until RICO closed this loophole knowing that most crimes have one thing in common: Money.

Organized crime is financially motivated, making money is its driving force and Achilles heel.

Small volumes of cash could certainly be spent without notice or suspicion, but larger purchases such as real estate or motor vehicles are going to raise an eyebrow or two when there’s no W-2 to back up the earnings and the days where a buyer could turn up with a suitcase full of cash are long gone. This forces criminals to find ways to turn physical cash into electronic money and to also make their profits look legitimate. They will look to hide ownership of assets usually by using shell companies or an opaque and complex structure, which is exactly where they are now becoming exposed. The primary reason for this is the creation of Beneficial Ownership data bases that look to remove the anonymity of assets.

The world is becoming increasingly digital. Shops are now online and on the high street, online purchases are delivered to physical addresses and they are all paid with by credit cards and online transfers. Every transaction and interaction leaves behind a digital footprint – some such as the delivery address and credit card – link to the real world.

When money moves, it becomes subject to anti-money laundering (AML) compliance regulations like Know Your Customer (KYC) that require banks and regulated entities to verify the identity of their clients (including source of wealth and funds) and assess the AML risk of the transaction, from the purchase or sale of a house to the simple deposit of cash or movement of funds domestically or international. Criminals know this and deploy a variety of techniques to try and hide their true identity or involvement. They use a network of affiliates (normally businesses) to make deposits and transfers reasonable amounts (below average for that sized business) that will fly under the radar and/or they work with legal firms to set up opaque-structure shell companies.

A perfect example of this is the now defunct Panamanian legal firm Mossak Fonseca at the center of the Panama Papers scandal. The firm was responsible for hundreds of thousands of shell companies that served to launder money for known child molesters, terrorist organizers, political slush funds and violent regimes – and that’s just from the 25 percent of clients it could actually identify. Law enforcement has been asking for years for new laws focused on data collection and transparency so their investigations would not be hindered by anonymous shell companies.

But even with all these layers, emerging technologies like artificial intelligence (AI) are helping banks and law enforcement connect the dots to uncover suspicious transactions that could point to criminal wrong doing and expose the networks themselves. By combining a financial institution’s transactional and KYC information with criminal and public records, and corporate registries, data points like profits and ownership can be cross referenced and checked for accuracy. This helps to fill in knowledge gaps, but more importantly provides much needed context about why a transaction may or may not be suspicious. Before AI, the time it would take a human to comb through all those records by hand made this nearly impossible. Now, algorithms can automate this process in seconds, making those connections that much easier to spot.

Let’s look at a scenario of using a network of affiliates to make transfers in small amounts. How does contextual data help uncover this strategy? Let’s say you’re a director of several (front) companies; you want to transact with as many people as possible to try and hide your money laundering transactions in the volume of legitimate ones. With this in mind, you recruit a network of affiliates to interact with your business which helps to generate the volume but also helps to move more money. It is impossible to spot these bad transactions and companies when looking at their data in isolation, one company at a time. What is proving to be beneficial is incorporating the registered beneficial owner of each company you’re trading with into the analysis. If five, ten or twenty organizations that your bank is receiving money from are linked to the same owner, that is highly unusual and will now raise several red flags and thus be further investigated by a compliance team.

Without the information from the business registries, we could not link those five, ten or twenty companies to the same owner. However, this only works for organizations where the beneficial owner is known, so this strategy would be thwarted by opaque-off shore tax structures and shell companies. Legislation and global initiatives are already in place to help remove this anomality lead by the OECD BEPS (Base Erosion and Profit Shifting) program, which essentially creates an inclusive framework, with over 100 countries and jurisdictions collaborating to implement measures to tackle tax avoidance, but this starts the process of sharing data that is so critical in tackling financial crime.

Currently, bank KYC teams have to first identify that a company is registered in a tax haven and then request additional information from the respective local governments to help figure out ownership. A simple way to get rid of this entire issue would be a law prohibiting companies from doing business (buying property and other assets, etc.) with entities for whom the beneficial ownership is unknown. Start with big-ticket assets like property and antiques where control can be enforced and checked through land registries, solicitors and auction houses, before moving to other item classes.

Since organized crime bosses are too smart to commit offenses themselves, the only way to take them down is by following the money. What worked in the 1980s will work now if there is a will and the right data is made available. As transactional information is proprietary, it can only be accessed by banks and payment providers, putting them front and center in the fight against organized crime is only right, but we must help them with the right tools, data and ways to collaborate. Only then can we truly follow the money and use this to stop human trafficking, terrorism and modern-day slavery.