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Money laundering techniques used to finance terrorism
Ever since the tragic events that occurred on the 11th of September 2001, counterterrorism has become a more cohesive subject matter. Almost overnight, counterterrorism was thrust into the spotlight and was no longer considered to be a fringe issue. Prior to the events that occurred, domestic terrorism was the primary area of focus. The attacks that occurred on that day led experts in that field to reconsider their approach to counterterrorism and view terrorism with a more international dimension. As counterterrorism is still in its infancy, experts are still learning about its intricacies.
Sep 1
Over the course of the past twenty years, a lot of focus has been placed on how terrorists finance their crimes. Putting a halt to the funding of terrorism will have a knock on effect and will lead to a decrease in terrorist activities. The main goals of counteracting terrorist financing are the protection of the integrity and stability of the international financial system, cutting off the resources available to terrorists, and making it more difficult for those involved in crime to profit from these criminal activities.
Money laundering is the process of making the proceeds of criminal activity appear to have been legally obtained. According to the World Bank, criminals launder around two to nearly four trillion dollars on a year to year basis. Financing is an especially key step in financing terrorist activities. Terrorism is an expensive undertaking, and as such, the money enables terrorist organizations with the capacity to carry out terrorist activities. The funds that they acquire can come from both legitimate sources (i.e. profits from businesses and charitable organizations) and criminal sources (i.e. Drug trade, weapon smuggling, kidnapping for ransom). While terrorist financiers continue to use cash, gold, and bank wire transfers to raise or move funds, they also increasingly use new and alternative methods. Terrorists have been observed to use virtual assets, prepaid cards, and online crowdfunding websites, which now represent an emerging vulnerability.
The Risks of Virtual IBANs
While vIBANs offer numerous benefits, they also pose certain risks, particularly in the context of AML/CFT:
Opacity: The "virtual" nature of vIBANs can make it challenging to identify the ultimate beneficiary of a transaction, potentially hindering efforts to trace funds and detect suspicious activity.
Anonymity: vIBANs can be used to mask the identity of the payer or payee, increasing the risk of money laundering and terrorist financing.
Complexity: The multi-layered structure of vIBANs, with payments routed through various intermediaries, can create complexities in transaction monitoring and due diligence processes.
Opacity: The "virtual" nature of vIBANs can make it challenging to identify the ultimate beneficiary of a transaction, potentially hindering efforts to trace funds and detect suspicious activity.
Anonymity: vIBANs can be used to mask the identity of the payer or payee, increasing the risk of money laundering and terrorist financing.
Complexity: The multi-layered structure of vIBANs, with payments routed through various intermediaries, can create complexities in transaction monitoring and due diligence processes.
A New Era of Transparency and Compliance
The good news is that with the implementation of the new Anti-Money Laundering Regulation (AMLR) in 2027, virtual IBANs are finally gaining regulatory recognition. This means increased transparency and clearer guidelines for financial institutions (FIs) leveraging this technology.
The AMLR introduces specific KYC requirements for vIBANs, addressing the concerns around identifying the ultimate beneficiary of transactions. The regulation mandates that FIs must:
The AMLR introduces specific KYC requirements for vIBANs, addressing the concerns around identifying the ultimate beneficiary of transactions. The regulation mandates that FIs must:
- Identify and verify the identity of the individual or legal entity using the vIBAN.
- Identify the associated bank or payment account linked to the vIBAN.
- Ensure that information about the vIBAN user can be obtained quickly from the issuing institution.
Why This Matters
These changes are significant because they will necessitate more robust AML/CFT measures for FIs using vIBANs, including:
- Enhanced due diligence on vIBAN users
- More effective sanctions screening
- Tighter transaction monitoring
Bridging the Gap Until 2027
While the AMLR comes into effect in 2027, regulators are already taking steps to address the risks associated with vIBANs. The BaFin, in its "Risk in Focus 2025" report, highlighted the challenges vIBANs pose to money laundering prevention. Similarly, the Central Bank of Ireland has announced that details of vIBANs will be recorded in national Bank Account Registers to aid law enforcement agencies in tracing funds.
Navigating the vIBAN Landscape
It's crucial for FIs to proactively assess the impact of these upcoming changes and adapt their compliance frameworks accordingly. This includes:
- Reviewing and updating KYC procedures for vIBAN users
- Strengthening transaction monitoring systems
- Ensuring compliance with data sharing requirements
The Future of Virtual IBANs
The AMLR marks a significant step towards greater transparency and accountability in the use of virtual IBANs. By implementing robust KYC and transaction monitoring measures, FIs can harness the benefits of vIBANs while mitigating the associated AML/CFT risks.
Stay Informed
Join us next week for another edition of Compliance Insight, where we'll continue to explore the latest developments in the world of financial crime compliance.
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