How Narcotics Trade In AML Is A Growing Challenge For Financial Institutions?

Have you wondered how concerned banks must be about dirty drug money? Denlean said that Narcotics trafficking proceeds represent one of the biggest challenges for AML compliance teams today. 

The illegal drug trade is very profitable, but it is also quite dangerous if its unlawful proceeds end up in the banking system. It takes a lot of work to stop illegal trading.

Every day, millions of dollars are laundered via the money generated by the illicit drug trade around the world. 

It is difficult for this money to be deployed in its cleaned version. Most kingpins and cartels try to hide their dirty money by moving it through bank accounts and businesses. 

This means that financial institutions, such as banks, are increasingly threatened by drug money laundering. 

They must have the difficult task of preventing crooks from laundering their illegal gains through the banking system. 

In this article, we will discuss the Narcotics trade in  AML and how it is a growing challenge for financial institutions.

How do traffickers move dirty cash?

Drug lords hide sources where their money is derived. They use millions of small techniques to launder money. 

They break up huge drug earnings into small lumps. Then, they mix the cash in numerous accounts. Some use front businesses to make it look like a normal trade. 

In 2023, money laundering was already accounting for about 2-5% of global GDP, or up to $2 trillion annually. The scheme helps to make the drug money appear clean.

Bonus: Find out more about our money laundering detection tools for narcotics trafficking. They help your compliance team catch hidden criminal money moves.

Drug profits flow through trade.

Narcotics traffickers make enormous amounts of money through the trade of drugs around the world. 

Their criminality subjects them to anti-money laundering laws because they cannot easily obscure their large illegal transactions. 

Narcotics traffickers engage in small discrete transactions to commingle illegitimate profits with legitimate trade. 

One way they do this through trade-based money laundering is by manipulating the value or contents of imports and exports. This facilitates the entry of drug money into legal trade.

Financial institutions must spy on the schemes in wire transfers and trade records. Trade-based laundering alone moves more than $1 trillion yearly.

Complex webs of small transactions

The money laundered by the drug cartels is mixed and combined so that their transactions can’t be traced. Such funds pass through various steps of the money laundering process. 

Global illicit financial flows are estimated to be annually between $1.6 trillion and $2.2 trillion. 

Each step makes money harder to trace. Law enforcement unravels these transactions in search of patterns of real laundering tactics. 

Financial compliance staff must be able to spot the criminal transactions hidden in seemingly normal transactions. Traffickers are not prevented from laundering money unless it is monitored very closely.

Corrupted systems enable money moves.

It can be challenging for drug lords to devise ways how to break bad and clean dirty money. Some resort to corruption to facilitate money laundering moves. 

Narcotics traffickers bribe weak spots in the system like officials or financial staff. This helps spoiled cash slip into the legitimate money flows. Their corrupt contacts act like “money laundering tactics” to bypass normal checks. 

The financial sectors must fill any cracks that these relationships create through which the money launderers pour their illicit funds. 

Finding suspicious movements in commerce

The narcotics trade generates huge profits, but AML risks if the money is introduced into the banking system. 

Another mechanism by which traffickers move funds is through the use of trade-based money laundering schemes. 

Traffickers misstate the invoices or cargo to put dirty cash into import-export transactions. The global drug trade makes more than $400 billion every year. 

This is a compelling argument for the need to put in place effective measures to combat illicit flows of funds through anti-money laundering. 

Such practices are hard for regulators to identify because international trade involves hundreds of daily transactions in large quantities. 

Tracking money requires expertise to identify amounts that could be laundered amidst normal trade funds.

Creating risk approaches for sectors

The risk of money laundering varies for banks through various sectors of business. Trade finance is subjected to particular types of threats related to trade-based techniques of laundering. 

It is estimated to amount to $2 trillion in illicit flows in 2023. Sector-specific training equips compliance officers with knowledge of typical red flags to watch out for. They can develop sector-based risk assessment models. 

This enables them to better monitor their clients’ transactions for any indication of breaking bad money laundering techniques. 

It is with a tailored approach per line of business that financial institutions can better counter narcotics trafficking and money laundering threats.

Financial crime prevention innovations

New technology helps to trace the quantity concealed by the culprits. The intricate analytical research takes less time to obtain the laundering patterns. 

It objectively integrates the minor suspicious acts. Regulators fine-tune their techniques based on the transformation nature of threats. 

There is a 15% detection rate of money laundering cases. Innovation provides long-lasting, robust defense mechanisms. 

Detection discovers criminal tricks changing with time. Solutions come from collaboration between the private and public sectors.