Unmasking Predicate Crimes: How Banks Can Combat the Roots of Financial Crime

It can be argued that the global banking sector needs to do more to identify predicate crimes rather than focusing solely on money laundering (ML) risk. Predicate crimes are the underlying offenses that generate illicit proceeds, such as fraud, bribery, corruption, drug trafficking, and human trafficking. Money laundering is merely a mechanism to disguise the origins of these illicit funds, so addressing predicate crimes can have a broader and more impactful role in financial crime prevention.

Why Banks Should Focus on Predicate Crimes

Holistic Financial Crime Prevention

Predicate crimes are the root cause of financial crime, generating the proceeds that are later laundered. By identifying these crimes, banks can prevent money laundering at its source. A broader focus ensures that the financial system is not inadvertently facilitating serious offenses like terrorism, human trafficking, or environmental exploitation. Addressing predicate crimes creates a more robust defence against criminal networks.

Compliance with Evolving Regulations

Regulatory frameworks, such as the Financial Action Task Force (FATF) recommendations, increasingly require financial institutions to focus on detecting and reporting activities tied to predicate crimes. Enforcement actions often cite banks for failures in identifying links to these crimes, highlighting the growing regulatory emphasis on addressing the underlying offenses.

Reputation Management

Banks that fail to identify and prevent involvement with predicate crimes face significant reputational risks, particularly in cases tied to high-profile offences like corruption, human trafficking, or environmental crimes. In a world where consumers and investors are increasingly prioritising ethical behaviour, failing to address these issues can result in public backlash and financial consequences.

Improved Risk Management

Understanding predicate crimes provides banks with a clearer and more comprehensive view of financial crime risk. This enhanced understanding can improve transaction monitoring systems, strengthen due diligence processes, and support targeted employee training. A focus on predicate crimes also helps uncover sophisticated criminal schemes, such as trade-based money laundering or the misuse of shell companies.

Types of Predicate Crimes & Their Indicators

To effectively address predicate crimes, banks need to understand the wide range of offences that generate illicit proceeds. These include:

• Fraud

Fraud encompasses crimes such as financial fraud, credit card fraud, insurance fraud, securities fraud, tax fraud, and identity theft. For example, criminals may use Ponzi schemes or phishing attacks to generate illicit funds. Banks can identify fraud through patterns such as large or frequent transfers, use of false documents, or sudden changes in account ownership.

• Corruption & Bribery

Corruption involves the misuse of power for personal gain, often through kickbacks, bribes or illicit payments funnelled through shell companies or offshore accounts. Indicators include transactions involving politically exposed persons (PEPs), unexplained wealth, or high-value asset purchases without a legitimate income source.

• Tax Crimes

Tax crimes include evasion, fraudulent tax returns, and false claims. These crimes often involve under-reporting income or creating fake invoices. Suspicious activity may include businesses with unusually low declared profits compared to transaction volumes.

• Drug Trafficking

Drug trafficking generates significant cash proceeds that criminals attempt to integrate into the financial system. Methods include breaking large deposits into smaller amounts (smurfing) or using cash-intensive businesses. Indicators include frequent cash deposits just below reporting thresholds or deposits from areas associated with drug trade.

• Human Trafficking & Exploitation

Human trafficking involves labour or sexual exploitation, with traffickers often using personal accounts or cash-heavy businesses as fronts. Suspicious patterns include payments to high-risk regions or frequent withdrawals aligning with trafficking operations.

• Terrorism Financing

Unlike other predicate crimes, terrorism financing may involve legitimate funds used to support terrorism. Examples include donations funnelled through fake charities or small-value transactions designed to evade detection. Indicators include frequent transfers to high-risk jurisdictions or accounts with no apparent economic purpose.

• Environmental Crimes

Environmental crimes, such as illegal logging, wildlife trafficking, and smuggling of natural resources, generate proceeds that are often laundered. For example, funds may be channelled through export/import businesses. Suspicious activity includes payments involving high-risk industries or discrepancies between the value of goods and payments.

• Cybercrime

Cybercrime includes ransomware attacks, online scams, and theft through hacking. Proceeds are often laundered through cryptocurrencies or offshore accounts. Banks can identify these crimes by monitoring accounts linked to high-risk cryptocurrency exchanges or sudden spikes in account activity.

• Organised Crime

Organised criminal groups engage in smuggling, extortion, counterfeit goods, and other illicit activities. Proceeds are often directed through seemingly legitimate businesses. Indicators include unusual transactions involving entities with criminal associations.

• Trade-Based Money Laundering (TBML)

TBML involves the misuse of trade transactions to disguise proceeds, such as over-invoicing or under-invoicing goods. Banks can detect this by identifying inconsistencies in trade documents or transaction values.

• Smuggling

Smuggling includes the illegal movement of goods, people, or cash across borders. For example, criminals may smuggle gold or other high-value items and launder proceeds through bank accounts. Suspicious activity includes cross-border transfers with no clear business rationale.

• Illicit Arms Trafficking

Arms trafficking involves the illegal sale of weapons, with proceeds often passing through shell companies or offshore accounts. Indicators include transactions with high-risk jurisdictions or unusual levels of activity for certain businesses.

• Modern Slavery

Modern slavery includes forced labour, debt bondage, and exploitation of vulnerable individuals. Banks can detect this through unusual payment patterns, such as multiple deposits into the same account from unrelated sources.

How Banks Can Address Predicate Crimes

Banks need to adopt a comprehensive and proactive approach to effectively address predicate crimes. This involves leveraging technology, enhancing operational processes, and fostering collaboration with regulators, law enforcement agencies, and other financial institutions. Below is a detailed explanation of strategies banks can use to identify, mitigate, and prevent predicate crimes.

Enhance Data Analytics & Technology

Banks should invest in advanced technology and analytical tools to detect suspicious activities linked to predicate crimes. Artificial intelligence (AI) and machine learning (ML) can be used to analyse large datasets and identify unusual patterns or behaviours that may indicate criminal activity. Predictive models can flag high-risk transactions or accounts based on historical data and crime typologies.

Behavioural analytics can also help banks monitor customer behaviour and identify deviations from typical patterns, such as sudden spikes in transactions or frequent cash deposits. Network analysis tools allow banks to map relationships between entities, accounts, or transactions, helping to uncover links to organised crime networks or fraudulent activities. Additionally, cryptocurrency monitoring tools can trace transactions involving digital assets, which are often used in cybercrime, ransomware payments, and illicit trade.

Strengthen Know Your Customer (KYC) & Customer Due Diligence (CDD) Processes

Robust customer due diligence is essential for identifying clients or entities that may be involved in predicate crimes. Banks should apply enhanced due diligence (EDD) to high-risk clients, such as politically exposed persons (PEPs), individuals in high-risk industries, or those operating in jurisdictions with weak AML frameworks.

Verifying the ultimate beneficial ownership (UBO) of corporate accounts is critical, as shell companies are frequently used to hide criminal proceeds. Banks should also regularly update customer information to identify changes in ownership, business operations, or risk profiles that could signal criminal activity. Screening customers and transactions against international sanctions lists, terrorist financing lists, and adverse media databases further strengthens these processes.

Develop Tailored Transaction Monitoring Systems

Generic transaction monitoring systems often fail to detect the nuances of predicate crimes. To address this, banks should develop detection rules tailored to specific crimes, such as human trafficking, drug trafficking, or environmental crimes. For example, human trafficking indicators may include frequent small-value transactions from unrelated sources or payments to known high-risk locations.

Banks can also implement dynamic thresholds for transaction monitoring, which adapt to customer profiles and reduce false positives while focusing on truly suspicious activity. Geographic risk assessment models can flag transactions linked to jurisdictions associated with corruption, organised crime, or terrorism.

Collaborate with External Stakeholders

Banks cannot address predicate crimes effectively in isolation. Collaboration with external entities, such as law enforcement agencies and regulators, is crucial. Formal partnerships with law enforcement such as the UK National Crime Agency (NCA) can help banks share intelligence and gain insights into criminal methodologies. Public-private partnerships (PPPs), such as the Joint Money Laundering Intelligence Taskforce (JMLIT), facilitate the sharing of anonymised transaction data to identify emerging trends in financial crime.

Maintaining open communication with regulators ensures that banks remain compliant with evolving standards and expectations related to predicate crime prevention.

Provide Focused Staff Training & Expertise Development

A well-trained compliance team is critical for detecting and addressing predicate crimes. Banks should provide ongoing training programmes, focusing on identifying red flags for specific crimes like corruption, human trafficking, or cybercrime. Encouraging staff to obtain industry certifications, such as the Certified Anti-Money Laundering Specialist (CAMS) or International Compliance Association (ICA) qualifications can enhance expertise.

Creating internal repositories of red flags and case studies related to predicate crimes allows staff to better identify suspicious activities. Continuous learning ensures employees are equipped to respond effectively to emerging threats.

Conduct Risk Assessments & Audits

Regular risk assessments and audits are essential for identifying vulnerabilities in a bank’s systems and processes. Conducting enterprise-wide risk assessments (EWRA) helps evaluate exposure to predicate crimes based on factors like customer base, geography, and product offerings. Engaging independent auditors to review the effectiveness of anti-financial crime programmes can provide valuable insights into areas for improvement.

Random transaction testing can identify gaps in monitoring systems and ensure that high-risk activities are being detected and addressed effectively.

Leverage Intelligence from High-Risk Sectors

Certain industries are more vulnerable to being exploited for predicate crimes. Banks should enhance scrutiny in sectors such as cash-intensive businesses, trade finance, and high-risk jurisdictions. For example, casinos, real estate, and luxury goods industries are often used to launder proceeds from predicate crimes. Similarly, trade finance activities should be closely monitored to prevent trade-based money laundering, such as over-invoicing or mis-declared goods.

Improve Reporting Mechanisms

Reporting suspicious activity is a critical component of addressing predicate crimes. Banks should ensure that suspicious activity reports (SARs) are comprehensive and include detailed descriptions of the suspected predicate crime and its indicators. Proactive reporting of suspicious activities, even in the absence of clear money laundering evidence, can help disrupt criminal networks. Timely submission of SARs is also crucial for enabling law enforcement to act quickly.

Monitor Emerging Trends

Criminal methodologies evolve constantly, so banks must stay informed about emerging risks and typologies. Participating in industry conferences and forums focused on financial crime prevention can provide valuable insights into the latest trends and challenges. Collaborating with fintech and regtech companies allows banks to implement cutting-edge tools to address new threats, such as cryptocurrency-related crimes. Additionally, monitoring open-source intelligence (OSINT) can help banks gather information on criminal networks, trends, and geographic hotspots for predicate crimes.

Conclusion

By expanding their focus to include predicate crimes, the banking sector can play a critical role in disrupting criminal networks, enhancing regulatory compliance, protecting their reputation, and strengthening financial stability.

 Addressing predicate crimes requires banks to adopt a proactive, multifaceted approach. By integrating advanced technology, strengthening operational processes, enhancing staff expertise, and fostering external collaboration, banks can effectively detect and prevent the underlying offenses that lead to money laundering. This approach not only ensures compliance with regulatory requirements but also plays a crucial role in disrupting criminal networks, protecting the financial system, and contributing to global efforts to combat financial crime.