Containment Measures for Organized Crime: How Lending by Criminal Groups During the Pandemic May Impact Anti-Money Laundering Policy
As the pandemic has constrained funding for small business owners, crime groups have offered low-interest emergency loans. How might anti-money laundering policy respond?
By: Cassandra M. Allen, Staff member
As the COVID-19 pandemic has continued to rage, lockdowns have slowed existing investment projects. As the prospect of deeper recession has discouraged future project financing, global investment flows have dried up. Foreign direct investment fell 49% in the first half of 2020, and the outlook for the remainder of the year looks equally bleak. As funding has evaporated around the world, accessing domestic financing has often proved challenging. While some countries moved to provide emergency funding to businesses in need at the beginning of the pandemic, many states are now unable to continue to cope with the continued strains that the pandemic has placed on the economy. Owners of small and medium-sized businesses — faced with lockdown restrictions, limited operations, and limited access to funding from banks — have strained to continue carrying on business.
Organized Criminal Groups as Emergency Lenders
Organized criminal groups have stepped in to fill some of the financing vacuum left by the pandemic. With limited funding options available, businesses with liquidity problems may be able to secure loans with low or no interest rates from organized criminal groups. A prime example of such a group is the Camorra, an Italian organized crime group that has been highly active in small business lending in the past.
With the advent of COVID-19, the Camorra group has quickly exploited the crisis by lending money with a zero percent rate of interest. Such criminal groups begin by offering loans with limited or no interest and then drive up interest rates, sometimes to as high as 300%. This loansharking practice enables the Camorra group to invest profits earned from other illicit activity (such as drug trafficking or smuggling) and generate even greater returns. The Camorra is able to offer low to no interest on the loans because failure to pay can result in the crime group repossessing the borrower’s business to use it for money laundering purposes, or perpetrating far more serious harm, including killing the borrower. Furthermore, these lending practices are not limited to the Italian mafia: cartels in Mexico have adopted similar approaches.
Small Business Lending and Money Laundering
As organized criminal groups offer their services to businesses in need, their power in territories and sectors they do not dominate increases. With this greater influence, the opportunity to launder money increases as well. As small businesses that are beneficiaries of criminal group loans open, these shops may provide ideal opportunities for money laundering. Small businesses, such as restaurants and shops, are often favored by organized crime groups because they are cash-heavy, which renders it easier for illicit income to be intermixed with legal income. Additionally, investing in these businesses provides a means for crime groups to move illicit profits away from their initial source.
The problem of increased money laundering resulting from organized crime has led multiple U.S. institutions (including the Financial Crimes Enforcement Network and the Securities and Exchange Commission) to issue advisories for financial institutions to be on high alert for a potential increase in “illicit financial activity.” The intergovernmental Financial Action Task Force (“FATF”) has warned that criminals are “taking advantage of the COVID-19 pandemic to carry out financial fraud and exploitation scams” and encouraged financial institutions to “remain vigilant.”
Reshaping Anti-Money Laundering Policy
In the aftermath of organized criminal organizations’ loan sharking and engaging in other forms of criminal economic enterprise, how might anti-money laundering law be reshaped? The FATF provides some potential policy suggestions for combating money laundering in the midst of the pandemic.
Simplifying Customer Due Diligence Measures
While the proposal of simplifying customer due diligence (CDD) requirements as a means of combating money laundering may seem counterintuitive, the FATF proposes such a strategy as a means of making lending more accessible. The FATF encourages applying simplified CDD measures where the identified risk of money laundering is lower, such as for accounts created specifically to facilitate government payments to individuals or businesses.
Additionally, the FATF recommends introducing guidance that there may be “legitimate reasons for customers not providing information for ongoing due diligence or ‘know-your-customer (KYC) refreshers’ (e.g., if they are confined, under quarantine or ill)” and that “the usual processes for dealing with these situations (including exiting the customer relationship) may not be appropriate at this time.” Ensuring that small businesses and individuals can access lending and financial services during the pandemic instability is crucial to undermining the demand for loans provided by organized crime groups.
Supporting Electronic and Digital Payment Options
As lockdown orders have restricted in-person access to banks, the FATF encourages financial institutions to offer customers access to digital/contactless payment solutions. Some examples of these solutions include increasing contactless limits, increasing point of sale purchase limits, and raising maximum limits for e-wallets, in order to encourage the use of contactless payment methods and reduce the spread of the virus.
Encouraging the use of contactless payments also decreases the use of cash in point of sale transactions. Organized criminal groups rely on cash-heavy transactions to “launder” their funds. Promoting the use of contactless payments may reduce the cash available for such groups to launder.
Partnering with Non-Financial Businesses
The FATF has encouraged financial investigation units to communicate beyond the financial sector with designated non-financial businesses and industry associations in order to help combat money laundering. These organizations may be able to alert financial investigation bodies to unusual behavior within their industries.
Additionally, some countries have been successfully engaging with non-profit organizations to help limit money laundering. Particularly when humanitarian aid is made available, these organizations can help to ensure legitimate distribution of the funds and prevent the funds from being diverted for money laundering purposes.
In the context of loan sharking, nonprofit organizations may be able to play a powerful role in alerting financial investigation units to loan sharking by organized crime groups. In Naples, Italy, the San Giuseppe Moscato Foundation is a Catholic nonprofit that fights loan sharking by providing bank loans to those unable to obtain them from banks. Its frontline position may enable San Giuseppe Moscato and other charitable organizations to play a key role in monitoring if and when organized crime steps in as a lender of last resort.
The Upshot
From upending economies to disrupting day-to-day life, the novel coronavirus has imposed significant strains on society. Organized crime groups have seized this stress as an opportunity to expand their reach by making loans to businesses in need. These loans may provide further opportunities for the crime groups to launder money through the legitimate businesses to whom they’re lending.
To confront this danger, the Financial Action Task Force has recommended new measures to increase access to financing and limit cash transactions. While these measures are intended to constrain money laundering opportunities, they may also be beneficial in providing businesses the financial and community support they sorely need. The role of organized crime in lending serves as a reminder that, just as vigilance is required to combat the spread of the disease, so too is it required to limit the spread of organized crime.
Cassandra M. Allen is a second-year student at Columbia Law School and a Staff member of the Columbia Journal of Transnational Law. In 2019, she graduated with a Masters in International Affairs from the Graduate Institute of International and Development Studies in Geneva, Switzerland. Cassandra has written on welfare and community relations in post-conflict societies.