Challenges to the AML/CFT regime and effectively countering illicit financing

A few weeks ago, I was invited on A Podcast Called Intrepid. The hosts, Stephanie Carvin and Craig Forcese, were kind enough to have me on to chat illicit financing, financial intelligence, and the challenges facing the anti-money laundering / counter-terrorist financing (AML/CFT) regime in Canada and internationally. I’ve expanded on a few of the points that I raised during the podcast below and embedded links in the text to provide additional background on some of these issues. Fundamentally, the most significant challenge facing the AML/CFT regime primarily involves access to the information required for all regime partners to make evidence-based decisions to manage threats and risks.

To start out, let’s define what we mean by illicit financing: it involves the financing of activities related to espionage or sabotage, foreign influenced activities, terrorism and other illicit activities like sanctions evasion and organized crime. The basic premise is that for illicit activity to manifest, money is always involved. You have to pay your spies, pay for their cover, buy strategic assets, pay for your terrorist attackprocure your illicit materials / goods, etc.

Financial intelligence (FININT) plays a vital role in understanding illicit financing; however, there are a lot of misconceptions about what FININT is and what it can do. FININT is any intelligence of a financial nature. It can be collected using a variety of methods, including HUMINT, SIGINT,or through dedicated FININT collection platforms like financial intelligence units. FININT requires a significant amount of contextual information; essentially, it’s an all-source discipline. It doesn’t have to be transaction-level data either; it can include any information of a financial nature or that touches on financing.

FININT provides significant value for understanding illicit activity. Unexplained sources of money in people’s accounts can lend credibility to questions about whether they are engaged in espionage activity and tracing the financing of an asset purchase can help to determine who the ultimate beneficiary of the asset is. On the terrorism front, FININT can tell you about the seriousness of someone’s intentions. For instance, a young woman believed to have travelled overseas to join the Islamic State saved money prior to her departure - she stopped paying for small items such as coffee; this change in behaviour can be critical to understanding the seriousness of an individual’s motivations to engage in threat activity (very few people make financial changes in their lives if they aren’t serious about the end result).

The international and Canadian AML/CFT regime partners play a critical role in facilitating the collection of FININT and the analysis of illicit financing. Those partners include: 

  • multi-lateral organizations (FATF, Egmont Group, UNODC, etc)
  • law enforcement and security services
  • financial intelligence units
  • reporting entities (such as banks, money services businesses, casinos, etc)
  • policy bodies (international and domestic)

One of the biggest challenges facing the Canadian (and international) AML/CFT regime is a lack of current information (for all regime partners) on how terrorist and other illicit actors finance their activities. This information is critical in terms of supporting effective regulatory and legislative changes but also for supporting reporting entities in reducing risks.

Those reporting entities face two related risks from illicit financing: regulatory and reputational. Reporting entities must implement the regulatory requirements for the jurisdictions in which they operate, which can be a challenge to interpret. However, this risk can be managed by employing compliance professionals and consultants who can assist in interpreting and implementing regulatory requirements.

 The second risk, the reputational risk, is more difficult for to manage. This risk is derived from the possibility of reporting entity systems being exploited by illicit actors. Imagine a situation in which a bank or money services business facilitated transactions that were later found to have financed a terrorist organization or operation (even if all their regulatory requirements were in place). Those reputational risks are real, and can have significant consequences even if the regulatory requirements were met. In order to manage the reputational risk, reporting entities seek to detect illicit financing and in some cases  de-risk.

Reporting entities have a vested interest in going above and beyond their regulatory requirements and implementing an evidence-based compliance regime, integrating current analysis on trends and methods in illicit financing into their systems. In order to do this effectively, reporting entities need access to this evidence-base, an ongoing challenge in a regime that straddles the public and intelligence spaces. 

Illicit financing and FININT are at the forefront of a threat environment that demands that international organizations, domestic law enforcement and security services, and the private sector work together to mitigate threats. While these organizations have not always been natural allies, the AML/CFT regime can serve as a blueprint for other areas that demand close cooperation between non-traditional allies in the fight against threat actors, such as in the social media space or for bricks-and-mortar businesses.



Jessica DavisComment