Blog: Mitigating Illicit Convergence in Transnational Financial Crime – Regulation Asia

Reni Hong, Sasha Lezhnev, Ben Spevack and Che Sidanius discuss efforts under way to prevent the illicit exploitation of legal infrastructures for crime.

As the web of financial crime grows ever larger and more complex – encompassing activities as diverse as human trafficking and modern slavery, illegal wildlife trading and conflict minerals – the need for global collaboration and a unified approach grows ever more urgent.

At present, fragmentation in everything from policymaking to data management hinders the efforts of state agencies, intergovernmental bodies and NGOs to dismantle this vast and illicit, yet profitable web.

There’s no underestimating the scale of the problem. As Reni Hong, CEO of The Freedom Seal Global, highlighted at a recent webinar hosted by Refinitiv, the crime of human trafficking alone affects 40 million people worldwide – mostly women and children – funnelling an estimated USD 150 billion a year to criminal networks.

Change is gradually coming, however.

“In the European Union, there’s unprecedented regulatory change on the way, and in the United States there’s a significant change underway as well, in terms of understanding and regulatory focus on due diligence,” said Che Sidanius, Head of Financial Crime Regulation & Industry Affairs at Refinitiv.

A new approach

According to the panellists, these are important first steps. Still, the road to eventual success requires a new approach.

Ultimately, to stem the tide of illicit activity, there need to be consequences for criminal networks. At the public level, sanctions and AML measures that punish entire networks are critical to slowing bad actor networks, but actions by private corporations are equally important, as they can often respond much more swiftly and effectively than governments, said Sasha Lezhnev, Deputy Director of Policy at The Sentry.

To fight the kinds of trade that send USD 4 billion worth of conflict gold flowing into international markets to fund wars and child soldiering, or decimate elephant and pangolin populations, there needs to be more focus on the “middle-tier” of the supply chain, he said.

“These middle-tier countries that are transit hubs for trafficking of conflict commodities or wildlife are a critical and highly profitable part of the chain, where there’s not as much attention being paid,” Lezhnev said. “So, for conflict gold, for example, you have Uganda, Rwanda, Cameroon, Dubai, UAE; for wildlife trafficking, you can have Uganda but also Tanzania, Thailand, Malaysia, and other countries.”

Enormous quantities of illicit products flow from these hubs, even though they may not produce them. So bolstering the use of conflict-free supply-chain audits, and failing companies and individuals that cannot pass them, is crucial. Measures such as reporting requirements for companies, proof of payment requirements, disclosure of beneficial ownership for all extractive companies, or tax harmonisation to stop incentivising smuggling can all be effective.

Illicit convergence

To this end, there are already moves under way in some parts of the world: such as the OECD’s Public-Private Alliance on Responsible Minerals Trade, the Responsible Artisanal Gold Solutions Forum, a new wildlife trafficking court in Uganda, and a burgeoning conflict-gold-free trade in Eastern and Central Africa.

For enforcement measures to become more effective, there must first be a more unified and coordinated approach to data gathering and information-sharing.

Wildlife traffickers, for example, follow the same strategies as other criminal networks, searching for vulnerabilities in systems – such as law enforcement capacity, regulatory loopholes, and insider threats – and then exploiting them, said Ben Spevack, a Senior Analyst at C4ADS. Other types of illegal activity will often coalesce around those vulnerabilities – a phenomenon known as illicit convergence.

Enforcement efforts, meanwhile, frequently do not converge or coalesce. This leads to a fragmented environment in which groups may focus on one branch of the criminal network such as conflict minerals or illegal timber without sharing what may be mutually valuable data, or focus on a single jurisdiction to fight the activities of a network that operates across many different countries.

As Lezhnev pointed out, if action is taken against a network in one country, they can just “beef up in another place”. Being able to share those linkages is, then, extremely important.

A holistic view

“In terms of solutions, adopting a holistic collaborative approach to illicit exploitation of legal infrastructure can allow stakeholders to identify and remediate vulnerabilities, which will help secure systems against multiple types of illicit activity,” Spevack said. “In addition, we can apply publicly available information to develop screening databases for issue areas with scant or disparate official data.”

Data remains a common issue. From combatting the illegal wildlife trade through to screening for Politically Exposed Persons, the same set of data problems apply, Spevack says.

Firstly, the state of data is often poor. National authorities may not release sufficient information, data may be inconsistent in content or formatting, or data from one jurisdiction may not interface well with data from another.

“Although this paints a dim picture, there’s actually a wealth of information out there,” Spevack said. “If we create an open data environment, that will lower the time requirements for compliance officers or civil society to conduct screenings or investigations, which will, in turn, reduce the ability of criminal actors to exploit financial systems for illicit activity. Our goal is to get everything unified by a common ontology.”

To reach that goal, two steps are required, Spevack noted. Firstly, enhancing partnerships between investigative organisations, including the development of legal frameworks that enable trans-national collaboration, data sharing, and consistent detailed reporting across multiple types of illicit activity. Secondly, the adoption of a comprehensive holistic approach to fighting financial crime.

Critical data

Sourcing adequate and effective data is often the first challenge – and one being addressed by the activities of groups such as The Freedom Seal, The Sentry and C4ADS, can find and collate alternative sources of data where public records are lacking or assimilate large and underutilised data sources such as United Nations reports, an important contribution to overcoming that challenge, Hong said.

Providing actionable data, in turn, both influences policymakers to take more proactive legislative steps and gives them the tools they need to enforce that legislation.

“Data convergence is incredibly effective,” Sidanius said. “It’s also about how we collaborate better in a more effective way to educate policymakers as well, which is the reason why The Sentry, The Freedom Seal and many others joined with us to form the Global Coalition to Fight Financial Crime, to engage with senior leaders to make sure the legislative framework is there for us to move forward.”

The short-term trends look promising. The new US administration appears keen to push forward on issues of enforcement and public-private partnerships, while we are seeing unprecedented levels of convergence between ESG and financial crime in the operations of organisations such the FATF, Interpol and Europol, Lezhnev said.

“One of the things we need to remember is that utilising data is great, because it’s one of the best tools we have,” said Hong, “but behind the data there are real people who have been affected.”

A recording of the above-mentioned webinar is available here.

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