4 Trends Shaping How We Combat Money Laundering In Asia Pacific

4 Trends Shaping How We Combat Money Laundering In Asia Pacific

by June 4, 2024

The Asia-Pacific (APAC) region faces significant challenges in combating money laundering due to its diverse economies, large volume of cross-border trade, and varying levels of regulatory enforcement across different countries — the trends of money laundering in Asia Pacific are constantly evolving.

However, enhanced regulatory measures, technological advancements and increased public-private and international collaboration are introducing promising opportunities to address these challenges more effectively, a new report by Forrester Research says.

The report, titled “Top Trends Shaping Anti-Money Laundering in Asia-Pacific in 2024”, delves into the key trends, technology adoption, and regulatory imperatives shaping the anti-money laundering (AML) market in APAC.

It sheds light on the rise of crypto- and trade-based money laundering, the growing prominence of shell companies as hotspots for money laundering, and the accelerating adoption of cutting-edge technologies to bolster AML efforts.

Shell companies: a hotspot for money laundering in Asia Pacific

In APAC, shell companies are emerging as a focal point for money laundering, as criminals exploit regulatory loopholes and the varied regulatory frameworks across the region to conceal illicit funds, Forrester said in a report.

Shell companies are legal entities that exist primarily on paper, lacking significant operations or physical presence, often used to manage financial transactions without conducting substantial business activities. While these entities offer benefits like asset protection, tax optimization, and privacy, they are also prone to misuse for money laundering, tax evasion, and other illicit activities.

A 2023 research by Moody’s Analytics revealed a wealth of corporate structures enabling sanctions evasion, money laundering, fraud, and other financial crimes. The firm identified over 21 million risk activities across 472 million companies as of November 2023.

In February, one of India’s law enforcement agencies uncovered a money laundering operation involving fake invoices issued by purported shell companies in Singapore for software and other services. The agency said that shell companies in India paid the firms in Singapore using monies received from foreign loan, gambling and betting apps. They used Nium India, a subsidiary of Nium Singapore, to transfer the funds. Suspected proceeds of crime totaling S$1.23 billion were frozen in Nium India’s accounts.

Crypto and trade-based money laundering on the rise

The Forrester report also highlights the rise of crypto and trade-based money laundering as of the key money laundering trends in Asia Pacific

In APAC, the widespread adoption of cryptocurrency, alongside the region’s inconsistent crypto regulations, are empowering criminals with perceived anonymity, decentralized nature and ease of transferring value across borders, the report says.

The United Nations Office on Drugs and Crime (UNODC) identifies casinos, junkets, and cryptocurrencies as key components of the underground banking and money laundering infrastructure in East and Southeast Asia, aiding transnational organized crime.

Blockchain analysis firm Chainalysis estimates that money laundering activity involving cryptocurrency totaled US$22.2 billion in 2023, with centralized exchanges like Binance, Coinbase, and Bitstamp being primary destinations of the funds.

In addition to cryptocurrencies, the Forrester report also points out that trade-based money laundering is especially prevalent in Asia. The region’s status as a hub for global commerce, and its complex network of suppliers, intermediaries and financial institutions involved in cross-border trade, are giving criminals ample opportunities to manipulate legitimate trades to guise illicit transactions, the report says.

Trade-based money laundering involves using trade transactions to conceal the origins of illicit funds. It typically involves the misrepresentation of the price, quantity, or quality of goods or services to move money across borders and disguise the proceeds of crime.

In response to the rise of trade-based money laundering in Asia, industry players are collaborating to address the issue. The Asian Development Bank’s Trade and Supply Chain Finance Program, for example, is collaborating with the UNODC on the goAML system. The software is used by financial intelligence units in nearly 70 countries to collect, analyze, and disseminate data to prosecute financial crimes, including money laundering and trade-based money laundering.

APAC companies turn to AI and behavioral biometrics

To counter increasingly complicated acts of money laundering, banks and institutions across the region are embracing new technologies, including generative artificial intelligence (gen AI), explainable AI and behavioral biometrics, the Forrester report says.

Though still in early stages, the report notes that some banks are starting to use gen AI to enhance risk management insights and scores. The technology is also being utilized in core transaction monitoring and risk decision-making processes.

Last year, Google Cloud launched a AI-driven AML product. The technology makes use of machine learning (ML) to help clients in the financial sector comply with regulations that require them to screen for and report potentially suspicious activity. It already has some notable users, including London-based HSBC, Brazil’s Banco Bradesco and Lunar, a Denmark-based digital bank.

Other banks are also using behavioral biometrics as additional layers to detect mule accounts before an actual money transfer occurs.

Behavioral biometrics refer to fraud detection technology that identifies individuals based on their unique patterns of behavior rather than physical characteristics. Unlike traditional biometrics such as fingerprints or facial recognition, which rely on static physical features, behavioral biometrics analyze dynamic and often subtle actions and interactions to establish an individual’s identity, making them highly effective in enhancing security and preventing unauthorized access.

Increase in public and private collaboration on data sharing

The Forrester report notes that collaboration between financial institutions and regulators, particularly through data sharing as one of the major trends in tackling money laundering in Asia Pacific.

One notable example is the collaboration between the Monetary Authority of Singapore and six major banks in the country, which led to the launch of COSMIC in April 2024. COSMIC is centralized digital platform designed to facilitate sharing of customer information among financial institutions to combat money laundering, terrorism financing and proliferation financing.

Similarly, in Hong Kong, the Fraud and Money Laundering Intelligence Taskforce was established in May 2017, providing an intelligence-sharing platform for early detection and prevention of money laundering and serious financial crimes.

Finally, in the UK, the Economic Crime and Corporate Transparency Act, enacted in October 2023, promotes better data sharing between financial institutions, regulators, and law enforcement agencies to identify and disrupt money laundering networks.

Financial crime poses a significant challenge globally, with the UNODC estimating that a staggering US$800 billion to US$2 trillion is laundered annually worldwide. Regulatory scrutiny has intensified, leading to increased costs associated with financial crime compliance. LexisNexis estimates that the cost of financial crime compliance in APAC will approach the US$45 billion mark in 2023, showcasing the substantial investment required to meet stringent compliance requirements. The study, commissioned by the data analytics firm, also found that most firms saw their annual compliance costs rose by 11% to 20% in 2023. About one-fifth of the firms polled said their costs rose by more than 20%.

 

Featured image credit: edited from freepik