Despite the toughest laws on money laundering, huge sums of money of illegal origin are channeled into the regular economy. Some of the EU members states have been too lax in supervising and scrutinizing suspicious financial transactions. Now, the European Commission has prepared a comprehensive reform plan to tackle the rising money laundering problem by monitoring and auditing large transnational financial institutions that are a potential risk.

Money laundering costs the European economy around USD157 billion, about 1.5% of the region’s GDP. European Union anti-money laundering is the toughest in the world, but they have not been immune to scandals. Not only the illegal practice creates a serious threat to the economy but also undermines trust in the financial systems and democratic institutions. After the unveiling of a series of banking scandals in Europe, involving billions of dollars in illicit transactions, the European Commission has decided to address the loopholes that criminals can exploit. Therefore, the commission has proposed a package of legislative measures to standardize rules on combating “dirty money” and mitigate the risks of terror financing right across Europe.

The four proposals include regulation for establishing a new EU anti-money laundering agency and prevention of the use of the financial system for terrorist financing. Other proposals include regulation on the providers of crypto assets and a new directive against money laundering without repealing the existing directives. The raft of proposals is aimed to amplify consistency, coordination, and supervision across member states to increase the detection of financial criminal activities. The EU anti-money laundering law will also support national supervisors and financial intelligence units that operate on the ground to track financial flows. 

The Emerging Need to Monitor Financial Transactions in Europe

The repeated division of assets into smaller units, nesting of companies, and electronic transactions through foreign accounts make it difficult for the responsible authorities to track the money obtained via illegal gambling, human trafficking, drug trafficking, and other such crimes. Around 70% of the consumer payments are made in cash in Europe. Criminals often hide their dirty origins of money by buying property or high-value goods like jewelery. Therefore, European Commission has proposed an EU-wide limit of €10,000 on cash payments, enough to let ordinary citizens use cash while restricting criminals from laundering money. While some EU member states have already imposed an upper limit on cash transactions like Greece (€500), other countries such as Germany and Austria have no limits on cash proceeds. With the growth of digitization, criminals are finding new ways to launder their “dirty money”.

White-collar criminals are increasingly switching to digital platforms that offer privately created currencies like bitcoin, which suits particularly well to make anonymous transactions as the account holder does not need to disclose their identity. The COVID-19 pandemic has accelerated the shift towards digital platforms, which law enforcement agencies and regulated entities cannot detect. But now, the European Commission has planned to ban anonymous crypto-wallets and trace crypto transfers. 

As the EU is stepping up its efforts against criminals, supervisors are being provided with better law enforcement tools to detect financial crimes. Authorities and supervisors are fighting against financial crimes harnessing advanced technology like anti-money laundering (AML) software, proving to be an asset for institutions across the world. Designed to identify money laundering and combat financial crimes, the anti-money laundering software forms an essential part of a risk-based approach. Their practical applications range from predictive analysis and machine learning to data management and procedural filtering. AML software varies in its functioning and capabilities, depending upon the platform for which it is used. 

Few ways leveraging technology can help to stop money laundering activities.

Preventing Money Mule Activities Leveraging Technology

The worldwide operation against the money mule scheme, European Money Mule Action (EMMA 6) identified 4,031 money mules alongside 227 money mule recruiters between September and November 2020. During the span of the operation, EMMA 6 was able to prevent a total loss of around €33.5 million, identifying 4,942 fraudulent money mule transactions. Criminals often recruit money mules to transfer illegal money between accounts, often registered in different countries, on behalf of others, offering a small amount as a commission. Banks shut down tens of thousands of accounts every year for a suspected fraudulent activity.

Till date, money mules have been a safe bet for criminals to convert illicit money into cheques or convert it into a prepaid debit card, among other options. In 2018, United Kingdom reported 40,000 cases in 2018 alone and the cases are on the rise. Since money mule activity seems normal at face value, many financial institutions are at loss to identify the illegal transaction of funds. However, artificial intelligence and machine learning can be utilized to address money mule challenges, detecting patterns and illicit behaviors. The advanced tools can look beyond the single customer and review the connections between customers and transactions to identify trends and patterns. Data collected by these machine learning tools can also prevent new attacks with early identification.  

For instance, a person testing a transfer of funds with a small amount and then canceling it just before sending it to another individual does not raise suspicion. But a group of people testing a small transfer and canceling it simultaneously might raise an alert. Thus, machine learning can help to alert the banks for a probable mule account and prevent any illicit activities. 

Monitoring of Transactional Volumes 

The growth of financial transactions through electronic means, from buying a pint of milk at the store to paying bills has led to an increased need for monitoring of transactions via AML technology solutions. Digital payments in Europe are expected to increase by 70%, reaching USD1.95 trillion by 2025, causing a significant drop in the payments industry traditionally dominated by cash and cards. Advanced transaction monitoring solutions allow financial institutions to monitor transactions in real-time while analyzing historical information of the customer to predict risk levels and predict future activity. 

The COVID-19 pandemic has created new vulnerabilities, contributing to the rise in economic crimes such as money laundering, fraud, and currency counterfeiting. Sometimes complex criminal structures generate revenue that directly/indirectly supports terrorism. In 2019, nine Spanish citizens and one Syrian citizen were arrested on suspicion for being a part of an organization that runs a legitimate enterprise to hide illicit operations but has family links with leaders of Al Qaeda.  

The anti-money laundering software can help to identify the source of transactions, whether foreign or unknown, which can prove to be instrumental for screening and customer profiling features. Besides, the information obtained from transaction monitoring can help financial institutions to meet counter-terror financing requirements and filing Suspicious Activity Reports (SARs), etc. Thus, transaction monitoring is an important step to spot a suspicious transaction, that could potentially prevent thousands or millions of money. 

Matching the Sophisticated Way of Making Transactions

According to a recent survey, cryptocurrency thefts, hacks, and frauds accounted for USD1.36 billion in 2020, one of the highest levels on record. Thus, cryptocurrencies have the potential to threaten financial systems significantly. Cryptocurrency money laundering methodologies are somewhat similar to other types of cybercrimes as they allow money launderers to move a large volume of illegal funds around quickly and anonymously without triggering reporting thresholds. Therefore, regulators across Europe are now imposing new compliance rules and leveraging the AML transaction monitoring process to ensure crypto service providers prevent threats and ensure authorities make them aware of any emerging risks of cryptocurrencies. 

Smart monitoring of crypto transactions with the support of anti-money laundering software through the collection and analysis of vast amounts of data could help to speed up the transaction monitoring process. Besides, the software can help enhance accuracy and ensure the detection of any suspicious activity that would be impossible to process manually.

As the EU plans to adopt stricter reporting requirements for crypto service providers, the platforms will be obliged to collect and make data accessible for originators and concerning beneficiaries of crypto transfers. This means now all e-wallet providers and digital asset exchanges need to register European customers with EU authorities to ensure monitoring of illegal activities such as fraud, cybercrime, money laundering, and terrorism financing. 

According to TechSci research report on “Global Anti-Money Laundering Software Market By Component (Service & Software), By Deployment Type (Cloud & On-premise), By End User (Banking, Asset Management, Legal Service Providers & Others), By Region, Competition, Forecast & Opportunities, 2026”, the global anti-money laundering software market is anticipated to grow at a CAGR of around 13.9% during the forecast period. The growth can be attributed to the increasing incidences of money laundering cases and rising government regulations to address illicit financial activities.

According to another TechSci Research report on “Global Fraud Detection and Prevention Market By Component (Services & Solutions), By Fraud Type (Internal & External), By Deployment Type (On-premise & Cloud), By Organization Size (Large Enterprise & SME), By End User Industry (BFSI, Government & Others), By Region, Competition, Forecast & Opportunities, 2026”, the global fraud detection and prevention market is expected to grow at a CAGR of more than 18% during the forecast period. The growth can be attributed to the upsurge in electronic transactions and increasing incidences of cyber-attacks.