Global Financial System Weak in Fight against Organized Crime

Global Financial System Weak in Fight against Organized Crime

By Gustavo Arias Retana/Diálogo
January 25, 2019

Global Financial System Weak in Fight against Organized Crime

Drug-related money laundering is one of Latin America’s main problems. Criminals engaging in money laundering take advantage of the fragile financial system and the complicity of some international banks.

Deutsche Bank is alleged to have been involved in these practices. In late November 2018, the German Federal Police raided several of its branches for their alleged participation in a money laundering scheme linked to the Panama Papers, a scandal that broke out in 2016, after leaked documents showed that Panamanian law firm Mossack Fonseca had helped clients worldwide evade tax and launder money with companies set up in tax havens.

The German financial giant’s involvement shows how weak the international financial system is when trying to counter money laundering. It’s also a warning sign as to the help Latin American organized crime receives from banks to conduct illicit business.

According to the German investigation, Deutsche Bank helped open offshore corporations (companies that are registered in a particular country, but do not carry out any economic activity there) in Panama to evade taxes. In addition, it may have received money from companies set up in tax havens suspected of money laundering. German authorities suspect that in 2016 alone a Deutsche Bank subsidiary in the Virgin Islands helped 900 clients divert funds. The German bank never reported any possible illegal money movements.

Crime conducive

Sara Hsu, associate professor of Economics at the State University of New York, sees the Panama Papers case as an example of the serious problem that offshore operations pose in Latin America. Some financial institutions are willing to facilitate cash movements, taking advantage of regional countries’ weak anti-money laundering regulations, a perfect opportunity for organized crime.

“Many banks are involved in offshore operations, not only Deutsche Bank. Once the money is sent abroad, it’s difficult to track. Our top suspicion is that offshore transfers are linked to money laundering, although we don’t have much information about that,” Hsu told Diálogo. “Banks can get away with it, because many countries in Latin America lack proper regulations to counter money laundering, or they don’t enforce them.”

Complicit financial system

Cryptocurrency, such as Bitcoin, also facilitated organized crime’s businesses with their lack of official bank reserves to back the digital currency. This creates anonymity for their owners and facilitates instant money transfers to any country, without leaving a trace. In addition to Deutsche Bank, other banks are also under investigation for suspected money laundering: Experta Corporate and Trust Services, HSBC Holdings, Banque J. Safra Sarasin, Credit Suisse Channel Islands Limited, UBS Group AG, Coutts and Co. Trustees Limited, Société Generale Bank & Trust, Rothschild Trust, and Nordea.

Gonzalo Villa, head of the Association of Certified Financial Crime Specialists, based in Miami, Florida, told Diálogo that some institutions seek to prevent criminal use of the international financial system for money laundering. “But the system is as weak as its weakest link, and there are really weak links,” said Villa. “The international financial system is subject to the rules and law enforcement of each country, but there are grey areas, because laws are not the same, and these gaps can be easily exploited. When the goal is to break the law, all the system’s flaws are used for this purpose.”

Hsu and Villa believe that often times these flaws turn the international financial system into an accomplice of Latin American organized crime groups. “Criminals who need to launder their proceeds are no longer simple criminals who make cash deposits in a bank. Rather, they use sophisticated financial tools, the same as those used by companies that carry out legal operations—for example, the use of several jurisdictions and commercial registers in many countries, etc. Organized crime uses methods that allow them to create more fronts to hide the illicit origin of their proceeds,” Villa said.

Complex solutions

Solutions to counter the problem aren’t easy, because criminals adapt quickly, even more so with advice from specialists such as what Deutsche Bank employees presumably gave their clients. Villa and Hsu consider it necessary for countries within the system to be committed to keep their legislation updated and establish better universal tools to prevent the international financial system from becoming an accomplice to crime. These measures depend on the political will to confront serious issues, such as those exposed by the Panama Papers case.

Celina Realuyo, professor of practice at the William J. Perry Center for Hemispheric and Defense Studies at the National Defense University in Washington, D.C., thinks another important measure is for Latin American countries to increase financial intelligence work. Investigating the route by which crime money circulates helps governments detect, disrupt, and counter transnational threat networks. “Financial intelligence is helpful not only to understand how illicit networks operate, but also identify key financial leaders in these criminal networks, who are difficult to replace,” Realuyo told Diálogo.

Latin America should take the role banking institutions play seriously. The global financial system must be another link in the fight against regional organized crime, not an accomplice of criminals.