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Eduvest –
Journal of Universal Studies Volume 3 Number 5, May, 2023 p- ISSN 2775-3735-
e-ISSN 2775-3727 |
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THE
PLACE AND THE ROLE OF FINANCIAL MONITORING IN ANTI-MONEY LAUNDERING SYSTEM |
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Maryna S.
Utkina1, Oleg M. Reznik2, Olha S. Bondarenko3* University of Warwick,
Coventry, United Kingdom1 Sumy State University,
Sumy, Ukraine1,2,3 Email: [email protected]* |
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ABSTRACT |
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Financial monitoring plays
a pivotal role in the overall effectiveness of an anti-money laundering (AML)
system. This article explores the place and role of financial monitoring in
preventing and detecting money laundering activities. The authors highlighted
the significance of effective financial monitoring in meeting regulatory
compliance requirements. The definition of the role and place of financial
monitoring in the fight against the legalisation of corruption proceeds are
updated, considering the tasks and requirements set before Ukraine as a
candidate country for the European Union and the challenges caused by the
state of war. The article aims to analyse and provide an understanding of the
importance of financial monitoring in the broader context of combating money
laundering. The authors used different methods and approaches depending on
the nature of the research, such as literature review, legal and doctrinal
analysis, and comparative analysisб dialectical method,
method of analysis and synthesis and method of terminological analysis. The findings of this research underscore
the criticality of financial monitoring in safeguarding the integrity of the
financial system and protecting economies from the harmful effects of money
laundering. By understanding the place and role of financial monitoring
within the broader AML framework, financial institutions, policymakers, and
regulators can enhance their efforts to combat money laundering and ensure a
safer and more secure economic environment. |
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KEYWORDS |
anti-money laundering; money laundering; financial monitoring;
financial system |
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This work is licensed under a Creative
Commons Attribution-ShareAlike 4.0 International |
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INTRODUCTION
The dynamics of the integral
indicator of the effectiveness of the financial monitoring system were: 2018 –
64.58%, 2019 – 62.8%, 2020 – 61%, and 2021 – 60.7%. For 2022, the integral
indicator was not calculated. However, considering the martial law, it will be
lower. Considering Ukraine's European orientations (the need to fulfil the
requirements set before our state as a candidate country for the EU), the
question of the effectiveness of countering legalization and strengthening the
fight in the context of laundering corruption proceeds is being brought up to
date. Financial monitoring is one of the effective means of combating the
legalisation of corruption income; an essential component of its effectiveness
is the organization of effective interaction of its subjects (Kuzmenko et al., 2021). Considering the status
of Ukraine as a candidate country for the EU (Sapir, 2022), the issue of
implementing several provisions of international acts and the general
orientation to the recommendations of the FATF to effectively organize
financial monitoring in the system of countering the legalization of criminal
income is being updated. As a result, this will lead to the stabilisation of
the financial and economic security of the state as a whole.
This study brings
together multiple dimensions and provides fresh perspectives on financial
monitoring in the anti-money laundering system. By incorporating novel aspects
and addressing current challenges, it contributes to the existing body of
knowledge and offers practical implications for stakeholders involved in
combating money laundering. The article aims to analyse and provide an understanding
of the importance of financial monitoring in the broader context of combating
money laundering.
RESEARCH
METHOD
The authors used a complex interdisciplinary approach based on combined methods used in research in various fields (Creswell & Creswell, 2017). This made it possible to analyse and conduct research objectively and achieve the goal of conducting scientific research. It is worth noting that most domestic proposals for financial monitoring are based only on theoretical analysis. The method of analysis and synthesis, as well as the ascent from the abstract to the concrete, was directly used to determine the impact of money laundering on Ukraine's financial and economic security in the context of globalisation. The authors used the dialectical method to determine the methodological foundations of the study of existing ways of legalising corruption income, methods, and implementation of financial monitoring. It was used in combination with the method of terminological analysis and operationalisation to understand the purpose of studying and clarifying general theoretical provisions that reveal the essential nature and peculiarities of the views of representatives of the scientific community on defining the definitions of "legalisation", "corruption proceeds", "financial monitoring", "financial monitoring entities". The method of creating a theory was used to generalise the research results, to find general patterns for the objects being studied.
RESULT
AND DISCUSSION
Financial monitoring plays an essential role in the
complex system of combating the legalisation of criminal and corruption
proceeds, financing of terrorism and weapons of mass destruction (Orlovskyi, 2023). The authors highlighted that such measures are
important to the international fight against crime and terrorist financing. As
Crossman-Smith noted, reducing financial crime is crucial, and regulatory
expectations are high (Crossman-Smith, 2020).
One such crime is money laundering, a significant
problem globally, with criminals using various techniques to conceal the
origins of their illicit proceeds (Olujobi & Yebisi, 2023; Remeikienė et al., 2022). Money laundering is indeed a significant problem
globally. Criminals employ multiple techniques to hide the true origins of
their illegal proceeds and make them appear legitimate. Money laundering
typically involves three stages: placement, layering, and integration. Ferguson (2019) described these stages in his book as follows:
(1)
placemen
– illicit funds are used to make a purchase in the legitimate economy;
(2)
layering
– through repeated transactions, the source of the funds is concealed; and
(3)
integration
– the funds are fully and untraceably integrated into the economy.
Albanese highlighted that money laundering is
recognised as a type of “serious and organised crime”, and its primary
objective is always to escape detection by law authorities (Albanese, 2021).
The global COVID-19 pandemic, the most significant
public health crisis in modern times, has significantly accelerated the
transition from in-person financial activities to online account opening,
payments, and lending. This has increased the fraud risk for online financial
services and commerce in general and led to a dramatic spike in the number of
stimuli, healthcare, bank, elder, and government fraud schemes and scams
exploiting the COVID-19 pandemic (National Money Laundering Risk Assessment, 2022). At the same time, the 2022 russian
invasion of the territory of Ukraine also influenced the given procedures.
Analysing legislative
acts and specialised literature systematised the views of scientists, allowed
the authors to outline the number of ways in which money laundering and
terrorist financing harm society:
(1) it facilitates and
perpetuates crime and supports criminals;
(2) it facilitates the
commitment of atrocities at home and abroad;
(3) it undermines
citizens' trust in financial institutions, negatively affecting market
integrity and threatening the financial system's stability (Anti-Money
Laundering and Countering the Financing of Terrorism, 2020).
The term “money
laundering” first appeared in the USA in the 1930s in connection with adopting
the country's law, which prohibited the free sale of alcoholic beverages. One
of the negative consequences of this law was the smuggling of alcohol, the
income from which was invested in developing a network of laundries, thus
obtaining legal status. Since then, operations of this kind have received the figurative
name “money laundering”. At this stage
of development, “money laundering” is considered the process by which the
proceeds of crime are sanitised to disguise their illicit origins and are
legitimised. Money laundering schemes come with varying levels of
sophistication, from the very simple to the highly complex (Anti Money
Laundering Policy v3.0, 2022). Almost the exact
definition of the notion of “money laundering” was given in the work of Kumar (2012), in which “money
laundering” was defined as the process by which a large amount of illegally
obtained money from drug trafficking. Tamplin (2023) mentions that “money
laundering” is the process of making illegally earned money appear to be
"clean," often through complex bank transfers and transactions.
The goal of a large
number of criminal acts is to generate a profit for the individual or group
that carries out the act. Money laundering is the processing of these criminal
proceeds to disguise their illegal origin. This process is of critical importance,
as it enables the criminal to enjoy these profits without jeopardising their
source (Manual in
Countering Money Laundering and the Financing of Terrorism, 2003).
Concluding the
abovementioned definitions of the notion “money laundering”, the authors
highlighted it as a criminal activity wherein illegally obtained funds or
“dirty” money are passed through a sequence of transactions to make them appear
as if they come from legitimate sources. This process effectively “cleans” the
funds, giving them the appearance of being derived from lawful activities. The
direct source of obtaining "dirty" funds is the shadow economy as a
set of unaccounted-for and illegal types of economic activity.
The financial sector may get adverse effects from
money laundering, especially financial institutions, including banking and
non-banking financial institutions (NBFIs), and equity markets - may
directly or indirectly be affected (Kumar, 2012). Preventing money laundering and
terrorist financing is of utmost importance across the entire financial sector.
Over time, its significance has significantly increased for financial
institutions of all sizes and types, as well as for lawmakers, regulators, and
supervisors. Ensuring that the financial system is not exploited for the
purpose of disguising illegal funds or financing terrorist activities is a
critical component of global efforts to mitigate the destructive impact of
crime and terrorism (Machine Learning in Anti-Money Laundering – Summary
Report, 2018).
As the authors
mentioned before in their research, countries began to install anti-money
laundering regimes in the 1970s and 1980s crime-solving assistance, basically
related to money laundering from drug trafficking and other organised criminal
activities (Reznik et al., 2023). A key element in the
fight against money laundering and terrorist financing is the need to monitor
countries' systems for compliance with international standards (Hedziuk, 2018). The mutual evaluation
conducted by the FATF and relevant regional organisations regarding the
development of financial anti-money laundering measures, as well as the
evaluations conducted by the International Monetary Fund and the World Bank, is
an essential mechanism to ensure the effective implementation of the FATF
Recommendations by all countries (The FATF Recommendations, 2012). The main functions of financial monitoring
include detecting, tracking and analysing transactions and financial operations
to identify signs of illegal activities. In the context of financial monitoring,
it is possible to identify patterns and connections between various
transactions. In turn, this helps to establish potential channels of financing
criminal activities. In our opinion, this kind of data can be helpful for the
investigation of organised crime, corruption, drug trafficking, smuggling,
terrorism, and other criminal activities.
Kantsir and Bryts’ka (2019) gave their
definition of “financial monitoring”, and they mentioned that it should be
analysed in three areas:
(1) as a system of
measures of a financial, administrative, criminal and operational-investigative
nature;
(2) as a tool of state
regulation;
(3) as a mechanism for
permanent monitoring of financial transactions.
At the same time,
according to FATF Recommendations (2012), all procedures and methods of
financial monitoring are reduced to solving three functional tasks:
(1) identification of
participants in a financial transaction;
(2) recording information
about suspected transactions and their participants;
(3) informing a specially
authorised body about suspicious transactions (in Ukraine – the State Financial
Monitoring Service).
In general, the
concept of “financial monitoring” in the context of defining a set of measures
to prevent money laundering has emerged relatively recently. Until the
beginning of this century, the term was used in the vast majority in its
original semantic meaning – as a definition of some systematic, regular
observations and actions based on them in the field of finance, regardless of
the specific subject of their focus (Reznik et al., 2023). The authors proposed
to understand “financial monitoring” as a complex of measures defined at the
legislative level, carried out by authorised subjects of primary and state
financial monitoring and aimed at fulfilling the requirements of current
legislation in the context of countering and preventing money laundering of
criminal origin.
Financial monitoring
and anti-money laundering (AML) are closely related concepts that work together
to combat money laundering and other financial crimes. While financial monitoring
refers to the broader process of observing and analysing financial transactions
and activities, anti-money laundering focuses explicitly on preventing and
detecting money laundering. Financial institutions and other regulated entities
implement anti-money laundering measures as part of their compliance
obligations. These measures include:
(1) customer due
diligence (CDD). Financial institutions must verify their customers' identities
and assess the potential risks associated with their transactions. This
involves gathering information about customers' identities, sources of funds,
and the purpose of their transactions;
(2) transaction
monitoring. Financial institutions use sophisticated monitoring systems to
track and analyse real-time transactions. These systems flag unusual or
suspicious activities, such as large cash deposits, frequent transfers, or
transactions involving high-risk jurisdictions or individuals;
(3) suspicious activity
reporting. When a financial institution detects suspicious transactions, it
must file a suspicious activity report with the appropriate regulatory
authority. Suspicious activity reporting provides detailed information about
suspicious activity and enables regulatory bodies to investigate further;
(4) compliance programs.
Financial institutions establish robust anti-money laundering compliance
programs to ensure adherence to applicable laws and regulations. These programs
include internal controls, employee training, independent audits, and ongoing
risk assessments;
(5) regulatory oversight.
Government agencies and regulatory bodies provide oversight and enforcement of
anti-money laundering regulations. They conduct examinations and assessments to
ensure financial institutions have effective anti-money laundering policies and
procedures.
Analysing financial
monitoring system in Ukraine, can be defined as two-level system which consists
of the following:
1) state level (state
financial monitoring) (represented by the State Service for Financial
Monitoring and subjects of state financial monitoring);
2) the primary level
(primary financial monitoring), represented by financial monitoring entities.
The following main
functions characterise primary financial monitoring:
1) regulatory
(organisational and managerial), based on current legislation, provides for the
definition of the monitoring system and procedure, its executors, their tasks,
duties, forms and means of financial monitoring;
2) control and
supervision - implemented through the identification and study of the identity
of the client who carries out a financial transaction, checking his activities,
comparing the objects of transactions with them, concerning which financial
monitoring is carried out;
3) operational-analytical
– analysis of the content of the financial transaction and the likelihood of
the risk of money laundering;
4) informational -
involves the exchange of information between subjects of state and primary
financial monitoring regarding suspicious transactions;
5) preventive - consists
in preventing money laundering by subjects of state and primary financial
monitoring (Rekunenko et al., 2020).
In general, financial monitoring and anti-money laundering efforts aim to prevent criminals from using the financial system to legitimise their illicit proceeds. By implementing anti-money laundering measures, financial institutions contribute to the overall global effort to combat money laundering, protect the financial system's integrity, and safeguard against other financial crimes, such as terrorist financing, fraud, and corruption.
CONCLUSION
In the conditions of
the globalisation of the world economy, the adequate protection of the national
economy largely depends on the work carried out in combating the legalisation
(laundering) of dirty funds by our state. Financial monitoring and anti-money
laundering (AML) are closely related concepts that work together to combat
money laundering and other financial crimes. While financial monitoring refers
to the broader process of observing and analysing financial transactions and
activities, anti-money laundering focuses explicitly on preventing and
detecting money laundering. Financial monitoring is a complex of measures
defined at the legislative level, carried out by authorised subjects of primary
and state financial monitoring and aimed at fulfilling the requirements of
current legislation in the context of countering and preventing money
laundering of criminal origin.
The findings of this
research underscore the critical role of financial monitoring in identifying
suspicious transactions and patterns indicative of money laundering. Through
techniques such as transaction monitoring, customer due diligence, and
watchlist screening, financial monitoring acts as a crucial line of defense in detecting and reporting potential illicit
activities. The article highlights the significance of in-formation sharing and
collaboration among financial institutions and regulatory au-thorities. Cooperation and coordination among stakeholders
are crucial in effectively combating money laundering, as they enable the
exchange of valuable insights, in-telligence, and
resources.
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