In a new occasional series on the Legal Executive Institute blog, we will speak with experts in the financial sector, government, law enforcement, and non-profits who will explain why they believe in the power of public-private partnerships in fighting money-laundering and terrorist financing.
Part 1: Giving Victims a Voice
According to the intergovernmental body, the Financial Action Task Force (FATF), money laundering is “the process of disguising criminal proceeds from their illegal origin. This process is of critical importance, as it enables the criminal to enjoy these profits without jeopardizing their source.” Those laundered funds, ubiquitously known as dirty money, can be used to facilitate other criminal activities or even to finance terrorism.
This Machiavellian process whereby criminals disguise the source and control of illicit funds is a form of financial fraud, and it has serious implications.
The financial services industry may be one of the most at risk when it comes to fraud. According to experts and FATF, the one of the best ways to fight this type of crime is effective information-sharing. It should be at the cornerstones of any well-functioning, anti-money laundering and counter-terrorism framework.
Bad Actors Go Global
The United Nations Office on Drugs and Crime (UNODC) estimate the amount of money laundered globally in one year is between 2% and 5% of global GDP, or roughly $800 billion to $2 trillion in current US dollars.
Money laundering and terrorist activities are increasingly cross-border crimes. Criminals know no boundaries, they know no borders. Simply put, financial institutions and the government can be more effective at combating fraud if they fully cooperated with each other and enact a consistent plan to information-share fraud data pursuant to laws such as the USA PATRIOT Act.
“Organized crime actors are very-well seasoned. They are diversifying their organized criminal activities. It would be myopic to think that just because someone is a drug trafficker, doesn’t mean they aren’t selling counterfeit goods or committing extortion or healthcare fraud.”
Clearly there are many reasons individuals or groups commit money laundering and acts of terrorism — no one explanation can effectively capture all parties’ motives. Yet financial institutions and law enforcement need to remain vigilant and innovative in their approaches to catching and stopping the flow of illicit funds.
Michael Schidlow: Humanizing the Statistics
Michael Schidlow, Head of Financial Crime Compliance and Emerging Risk Audit Development at HSBC Bank, spends much of his waking hours thinking about ways to stop financial fraudsters. As part of his job, he monitors the geo-political environment and how it is impacting our financial institutions.
Schidlow retains a sense of urgency when he describes keeping up with the never-ending news cycle to get a sense of what criminals are doing at any given time. “Organized crime actors are very-well seasoned,” he explains. “They are diversifying their organized criminal activities. It would be myopic to think that just because someone is a drug trafficker, doesn’t mean they aren’t selling counterfeit goods or committing extortion or healthcare fraud.”
Schidlow is especially interested in the nexus between money-laundering, human trafficking and counterfeit goods production, and recently wrote a five-part series about it. Those victims, he believes, need a loud voice and a legion of champions. “The thing that drives me is humanizing” [the impact on the victims], he says. “We talk about monitoring and data analytics, but in the end, you must humanize the people involved. I’m concerned with the children who are victimized, with the elderly who are being financially exploited.”
Victims of human smuggling, human trafficking and human slavery are often a vital component in money laundering cycles. Oftentimes, victims are forced to work in factories under the most extreme unsafe conditions. “I knew counterfeit goods were a bad deal when I first saw them on the street in New York. I didn’t understand the depth of how bad it was until I researched it. Counterfeit goods have tentacles in every form of predicate crime.”
Schidlow recalled one story from Thailand that was reported in Harper’s Bazaar where children, all under 10 years old, were sitting on a factory floor with broken legs making knock-off designer handbags later sold on Canal Street. Why were their legs broken? The owner wanted maximum productivity and the children wanted to go out and play. “It is a big, heart-breaking picture,” he says. “The people producing these goods are fungible and there is an endless supply of slave labor.”
Value of Public-Private Partnerships
An attorney, accomplished investigator, professor of ethics and criminal justice, Certified Fraud Examiner (CFE) and Certified Anti-Money Laundering Specialist (CAMS), Schidlow is a proponent of public-private partnerships.
“It is invaluable,” he adds. “What tends to yield the most results, when it comes to detecting typologies or trends, is direct intelligence and information sharing.” His biggest piece of advice is to maintain open communication with law enforcement and in the industry. Schidlow often attends roundtable discussions and has meetings with law enforcement officials to get a better sense of new patterns, often simply asking, ‘Here is what we are seeing, what about you?’
For example, Schidlow describes the phenomenon with websites like the now-shuttered “backpage.com,” which hosted illegal prostitution advertisements and operated like a virtual sex marketplace. Naturally, human trafficking victims we caught up in it. (The website was shut down in April by U.S. law enforcement agencies.)
“Now that backpage.com is shut down, that doesn’t mean human trafficking stops. It moves to somewhere else,” Schidlow says, adding that’s why the key to thwarting this type of activity is for law enforcement and financial institutions to talk to one another.
“Let’s say you need three critical pieces of information to triangulate and find an illicit actor [like a human trafficker],” he says. “If you only have one of those [pieces] and law enforcement has the other two, that is how we find illicit actors. We take the information and turn it into a money-laundering typology to yield successful results.”
Schidlow describes how inordinately satisfying it is to work a case from end-to-end, from transaction-monitoring to filing a Suspicious Activity Report (SAR) to prosecution and conviction. Why? It always goes back to the victims for Schidlow.
“It’s not just about stopping bad actors,” he urges. “It is about protecting people.”