The term money laundering is said to originate from laundromats, the self-service laundry facilities owned by members of mafia in the United States during the Prohibition era. Infamous criminals, such as Al Capone, bought these outwardly legitimate businesses that operated primarily in cash, to make it easier to bring criminal money into the financial system. Some say, however, that this is merely a legend and the term laundering derives from the simple meaning of “washing” the money of its suspicious background.1
Be that as it may, money laundering is a serious crime that needs the attention of both the forces of law as well as financial institutions. Are the rising number of fintech startups fit for the task?
Money laundering 101
Money laundering is an act in which illegally obtained money is made to look as if it came from a legal source. The ways to launder money are extensive, requiring various transactions, and once illegal money has entered the global and financial markets, its origins become very hard to trace.
Money laundering is often carried out internationally and is the most prevalent in countries that don’t cooperate between each other in anti-money laundering operations or that have a weak financial system that fails to detect suspicious activities. Often thought of as victimless,
money laundering is the lifeblood of international organised crime and therefore far from innocent.
According to a study conducted by the United Nations Office of Drugs and Crime (UNODC), it was estimated that in 2009, criminal proceeds amounted to 3.6% of global GDP, with 2.7%, or $1.6 trillion (£964 billion), being laundered.2 $1.6 trillion – it’s the annual budget of Germany.3
With that we are talking about a problem that is causing serious economic distortions, reducing government revenue and raising socioeconomic costs, with a strong link to corruption in politics and among public officials.
Can modern fintech companies be trusted?
In light of today’s booming innovation, banking is known to adapt rather slowly. The legacy systems are hard to update and fail to provide customers with the same level of accessibility and ease of use that they have grown accustomed to with other services. Not to mention that the maintenance of such systems is costly, making the services more expensive for the end user.
A rising number of fintech startups are therefore challenging the status quo and perfecting services that are easy to use, affordable and noticeably cheaper than in the high street banks. The crowd is cheering, but secretly cautious. Are they really secure? Can I trust them with my money? What are they doing to prevent money laundering?
The short answer is, any company wishing to operate as a financial institution of any kind, must complete full anti-money laundering checks in the jurisdiction they wish to operate and prove that their systems are viable for holding client money and preventing money laundering and terrorist financing. All before they can open for business.
The longer answer is, given that over a trillion dollars of criminal money is laundered through the global financial systems every year, there must be something that the financial institutions are missing. So in addition to providing a better customer experience, the rising fintech companies are leveraging today’s technical possibilities to enhance security as well. Something that the high street banks are finding hard to do because of the weight of their systems and layers upon layers of ageing processes.
The new era financial institutions are building upon the technologies of today, using big data, state-of-the-art transaction monitoring and KYC methods, such as social biometrics. The new systems are built, keeping in mind the current money laundering schemes and are therefore much more likely to detect any suspicious transactions as they happen. To validate a person’s identity, they are using information available on the Internet, because whether we like it or not, there’s a huge amount of data about us on the web that creates a virtual identity that is becoming ever more difficult to artificially reproduce.
At the same time, high street banks still rely on utility bills to prove a person’s residency, which generates a whole new problem on its own, since people who don’t receive utility bills in their own name are represented in millions in the UK alone. Not to mention the fact that it’s known to be rather easy to produce fraudulent proofs of address, which in that case renders the whole gesture meaningless.4
It is possibly only a matter of time until the question will be reversed – are high street banks’ legacy systems really secure for today’s financial landscape?
- Money Laundering – A Brief History
- The Financial Action Task Force (FATF)
- The CIA World Factbook
- New Global Markets