Out-of-control money laundering is making IS rich

Islamic State is now the richest terrorist group in history – and that’s because its finances “combine old-fashioned looting and pillaging with high-tech illicit funding,” says Freddie MacMahon.

Writing in CityAM, the strategy and innovation director of Anomaly42 said that money and assets gained through smuggling, extortion and looting are brought into the financial system through money laundering, reinforcing the group’s network and influence. Because they are so closely linked, money laundering and the financing of terrorism are treated as the same by the inter-governmental Financial Action Task Force.

MacMahon points to the increasing sophistication of criminals and deficiencies in modern correspondent banking as reasons behind the spiralling problem of money laundering – which is thought to amount to $3.59 trillion a year. The moment that more than one bank is involved he says, this becomes “a breeding ground for financial crime” because “it becomes far easier for dubious transactions to slip through the net.” In correspondence banking, one bank facilitates payments and transactions for another, making it a prime target for criminals.

Banks often rely on a chain of trust that’s fundamentally flawed. One bank will believe, or sometimes choose to believe, that another is doing the necessary Know Your Customer (KYC) checks on a client. But all too often nobody is doing it, or it’s being done on a “lite” basis. Financial criminals repeatedly exploit this buck-passing,” he wrote.

This, combined with introducing multiple steps between each beneficiary and the original (fraudulent) transaction, creates “intricate transactional ecosystems” that money launderers can use to disguise their criminal activity, make it very hard for banks to keep track, and make it unclear in which jurisdictions the fraud was actually committed in.

While many governments around the world are trying to clamp down on the problem, and compliance specialists are being snapped up by financial institutions, these complex data ecosystems are too complex to be exposed manually, says MacMahon.

To properly tackle money laundering, they need to fundamentally rethink correspondent banking and KYC. The way to do this is to embed a technological capability that can deliver an aerial view of even the most complex transactional ecosystems,” he said.