Cartels, Cash, and Capital Flows

1. Update the institutional risk assessment

The first step for a financial institution is to undertake or update its institutional risk assessment. This will enable it to understand the threat presented by cartels and their money laundering networks, and then to assess and then manage the risks. The risks are different depending on the type of financial institution: banks, crypto firms, and money services businesses (MSBs) and payment processors, will have visibility of different risk indicators and typologies and are exposed to different aspects of cartel operations.

Some examples of these differences and their implications for the institutional risk assessment include:

• A retail bank may have visibility of large or structured cash deposits being made at its branches, as well as the larger financial flows as the laundered proceeds are funneled together and moved via wire transfers. Its controls could focus on client relationships such as client due diligence, understanding the expected activity of that client, and using data analytics to identify outlier activity.
• A crypto business would need to understand the digital assets and transaction types that correspond with cartel activity. For example, where digital assets are used, retail payments often use bitcoin (FinCEN) whereas cartels laundering and moving larger volumes of funds increasingly use stablecoins like USDT (blockchain analytics firm TRM Labs).
• An MSB is a transaction-driven rather than account-focused business, and its services may be used to fund payments made for precursor chemicals.

In addition, as with all illicit finance risk assessments, considerations include how the financial institution is exposed to cartel and related money laundering risks through:

• Geography/jurisdiction: the markets in which the financial institution and its clients operate and how these are exposed to cartel and money laundering risks
• Sectors: the sectors in which the financial institutions’ clients and counterparties operate
• Products/services: that the financial institution offers, such as retail banking including cash deposits, crypto products, or remittances

The risk assessment must then inform the processes and systems that comprise the internal controls program of the financial institution.

2. Ensure processes and systems are updated and operating effectively

Since cartels were already designated, even prior to the categorization as FTOs, an institution’s existing controls should already be operating effectively to identify and respond to risk indicators. These controls include due diligence on clients, screening against lists of designated entities and individuals, transaction monitoring to identify risk indicators, and investigations of unusual activity. Investigations may be proactively generated by internal alerts or intelligence-led based on information provided by law enforcement and government Financial Intelligence Units. 

Many of the methods used by cartels are shared with other types of illicit activity and should already be built into preventative and detective controls. For example, cartels use front and shell companies to launder the proceeds as well as obscure the source and destination of shipments of precursor chemicals. Front and shell companies are also used in sanctions evasion, export control evasion, and many types of money laundering. 

Processes and systems must be regularly updated to ensure they remain up to date on evolving threats and risks. This can be achieved by regularly testing automated systems to ensure they are operating effectively and providing training to staff to ensure their knowledge and skills are current. 

For example, traditionally cross-border payments were considered a key indicator of money laundering as illicit networks attempted to move and launder proceeds. As cartels and CMLOs increasingly use “mirror transfers”, cross-border payments are no longer required, and financial institutions can no longer rely on cross-border payments to identify cartel activity. This adaptation in criminal methodologies should feed into automated controls and investigative methodologies. 

3. Deliver customized staff training based on role 

Training for staff should be customized to how cartel and money laundering activity could present to their role and should link back to risk indicators and typologies. Training should use up-to-date, relevant examples to enhance engagement and knowledge retention, and should be delivered through regular refreshers as well as annual baseline training.

Some examples of customized training relevant to cartel risks are:

• Relationship managers in retail branches are best positioned to identify money mules depositing cash and structuring payments. They will need to understand the profile and characteristics of individuals used as money mules by CMLOs, such as students, hospital workers, laborers, or delivery drivers, where the cash volumes cannot be explained by their income.
• Compliance teams designing and configuring automated monitoring controls should understand how “chemical abstract service numbers”, which uniquely identify chemical substances including fentanyl precursors, may be used in payment instructions so they can use these as alert criteria.
• Due diligence and investigative teams should understand how some trafficking networks photoshop corporate names and logos onto images of the same building, in an attempt to make them appear to be legitimate and well-established suppliers.

4. Monitor alerts and advisories for updates, then action them 

Advisories and alerts are regularly issued by government Financial Intelligence Units and other sources, such as FinCEN’s recent financial trend analysis on fentanyl-related illicit finance. Additional sources include analysis and summaries by educational institutions, policy advisors and thinktanks, among others.

Financial institutions should establish processes to identify updates, review them, and apply them within their organization. For example, when an alert with red flags is published, the institution should evaluate which ones are relevant to its business, and how they will be applied within its controls. Some red flags may be suitable to be implemented as automated controls, whereas others may not be sufficiently distinctive and are instead of value as context during an investigation. Institutions should follow a structured approach to assessing and applying red flags, like this one on export controls which can be applied equally to other illicit finance domains.

Institutions would be well advised to consider using advanced data analytics to look beyond red flags to identify new and as-yet-unidentified risk indicators. Data analytics tools can compare groups of clients by entity type, sector, and geography, to identify outliers which can then be investigated to identify whether the unusual patterns are the result of illicit activity.

5. Engage in public-private intelligence sharing

In addition to regulatory filing requirements such as Suspicious Activity Reports (SARs), financial institutions and public sector organizations should engage in additional initiatives to share intelligence on cartel risks, typologies, and indicators.

Depending on the regulatory provisions and restrictions on intelligence sharing, this may be at the “strategic” or “typology” level, which involves sharing patterns and trends, or at the “tactical” or “operational” level, in which information about specific clients, transactions, and investigations is shared.

The public sector – including law enforcement and government Financial Intelligence Units – has a critical responsibility. While financial institutions can identify unusual activity, leads from law enforcement are critical to provide context for whether this is actually cartel activity. Law enforcement can also provide additional detail that can be used to adapt and fine-tune automated controls, resulting in greater accuracy and more efficient use of resources for both financial institutions and public sector partners.

This article outlines some of the key actions financial institutions should take as part of their counter-cartel programs, which should be expanded and adapted as required depending on the institution’s risk assessment

Cartels and their illicit finances represent significant threats to societies globally and require joint and effective action to respond. This goes beyond compliance: it is about national and collective security, and protecting lives.