Home Editor's Pick Sergey Kondratenko: Money Laundering and Financial Fraud – How do illegal business destroy the industry?

Sergey Kondratenko: Money Laundering and Financial Fraud – How do illegal business destroy the industry?

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Despite progress in this area, combating financial crime requires extra effort. According to fintech expert Sergey Kondratenko, money laundering and financial fraud remain serious problems affecting various economic sectors.

Criminals continue to use various methods to hide the origins of funds, with industries handling high transaction volumes, such as the financial sector, real estate, the gaming industry, and cryptocurrency being particularly vulnerable.

What financial flows pass through illegal schemes, and what is the global community doing to prevent such crimes?

Sergey Kondratenko: Economic Impacts of Money Laundering and Financial Fraud

According to the expert, estimating the total volume of laundered money is a complex task due to the secretive nature of this crime. Nonetheless, some figures still demonstrate the scale of the problem. According to UNODC data, the annual volume of money laundering amounts to 2 to 5% of global GDP, equivalent to $2 trillion.

Sergey Kondratenko notes that there are many crimes that bring substantial income to criminal structures. For example, the annual turnover from illegal drug trade is estimated between $426 billion to $652 billion. Human trafficking represents a criminal business turning over more than $150 billion per year.

Given that the problem of money laundering and financial fraud is quite popular in the modern world, the expert proposes to consider the most vulnerable industries:

Real Estate. The real estate industry is attractive to money laundering because it allows large transactions to be hidden and allows illegal funds to be easily converted into profits through the sale of real estate at inflated prices.
Gambling Industry. Casinos allow criminals to exchange money for chips, play them, and then cash out, transforming illegal funds into clean money. For example, a lawyer from New Jersey was convicted of stealing $500,000 and laundering $250,000. He transferred $250,000 to a casino account, bought chips, and started playing roulette. During the game, he lost $10,000, but the rest of the chips were converted into $240,000, and he left the establishment.
Cryptocurrency. This is a new frontier for money laundering due to anonymous transactions and difficult operations tracking. This makes cryptocurrency an attractive tool for criminal activity.

‘According to Chainalysis, it is worth noting that in 2023, $22.2 billion was laundered through cryptocurrencies, less than the $31.5 billion in the previous year. However, it should be said that this is only 0.1% of the total global volume of money laundering,’ comments Sergey Kondratenko.

Art Market and Luxury Items. Acquiring expensive artworks for resale provides criminals with the ability to easily hide the origins of funds by avoiding tracking. Yachts, private planes, and other luxury items are also used for laundering money through purchases and resale at inflated prices.
Insurance. Money laundering in the industry involves using insurance products to legalise illegal incomes. Criminals purchase insurance policies by depositing large sums of money and then cancel these policies to receive payouts as “clean” money. This process complicates tracking the source of funds as transactions go through legitimate financial institutions. Regulators and insurance companies continuously refine methods of control and verification of clients by introducing strict requirements for documentation and the origin of funds to combat this problem.

Sergey Kondratenko states that the listed sectors are particularly at high risk of money laundering. In his opinion, solving this problem requires joint efforts of authorities, international organisations, the activity of regulators, and the continuous development of existing tools and norms to counter fraud.

Strategies and Rules for Combating Money Laundering: Key Aspects – Sergey Kondratenko

Combating money laundering

is an important global issue. Fintech expert Sergey Kondratenko emphasises the need for strict adherence to rules and international coordination in this field.

Combating money laundering is one of the main tasks of financial security on the international stage. Effective opposition to this crime requires coordinated work on several levels, including legislative regulation, international cooperation, and the implementation of advanced technologies.

A key aspect in the fight against money laundering is the adoption and strict compliance with anti-money laundering laws and standards. The most significant international body dealing with this issue is the Financial Action Task Force (FATF). FATF develops recommendations that serve as the basis for national legislation and help form effective systems for preventing and detecting financial crimes.

Among the key measures proposed by FATF, several main ones should be highlighted:

Customer Identification and Verification (KYC). Financial institutions must conduct KYC procedures to ensure the authenticity of clients’ identities and prevent the use of false information.
Proper Customer Due Diligence (CDD) helps assess the risks associated with specific clients and determine their funds’ source and the purpose of financial transactions.
Additionally, introducing mandatory financial reporting for politically significant persons enhances the transparency of their financial operations.

Continuous monitoring of financial operations.
Obligation for financial institutions to report suspicious transactions. Financial institutions must submit a Suspicious Activity Report (SAR) if there are suspicions of a client’s involvement in money laundering.

International cooperation plays a key role in combating money laundering since financial transactions often cross national borders. Countries exchange information through mechanisms such as intergovernmental agreements and mutual legal assistance agreements. This cooperation allows for quicker identification and curtailment of transnational financial schemes.

“Certainly, this is not the entire list of activities that are conducted within the global AML. However, they reflect the directions of checks and activities that are conducted with the aim of countering fraud,” believes Sergey Kondratenko.

EU Combating Money Laundering – Sergey Kondratenko

The EU regularly improves its anti-money laundering and financial fraud systems. By 2020, the European Parliament has already adopted 6 AML directives. In sum, they create rules and regulations that mandate national governments to implement them at regional levels. These include verification methods, screening, liability for money laundering and AML violations, and other international requirements.

“The directives mandate financial institutions to conduct thorough client checks when establishing business relationships. This process includes identity verification, monitoring financial transactions, and mandatory reporting of suspicious activities.,” explains Sergey Kondratenko.

The expert adds that EU laws are constantly updated to more effectively combat new risks. This concerns not only virtual assets and crowdfunding but also the regulation of crypto asset markets (MiCA).

For example, The Transfer of Funds Regulation (TFR) introduces monitoring of crypto asset transfers and user authentication in accordance with FATF standards. The document will come into force in December 2024.

Also, in 2024, a new body, the Anti-Money Laundering and Countering the Financing of Terrorism Authority (AMLA), will be created.  Its tasks are to oversee AML compliance, coordinate interaction between FIUs and develop regulatory and technical standards to better counter financial crime.

Sergey Kondratenko is confident that by effectively implementing rules and international cooperation, the maximum number of connections between money laundering and illegal activity can be uncovered. This will help protect national economies from the damage inflicted by financial fraudsters.

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