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Denys Teteruk
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AML consultant
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In this article, we intend to make a compelling case regarding the current macroeconomic environment and its potential benefits for the banking sector. We strongly believe this is a golden opportunity for banking entrepreneurs to pursue their aspirations and apply for a banking license. The numbers show that the present economic climate is more conducive to the banking industry when compared to the past five years. Therefore, we urge you to seize this opportunity and turn your banking dreams into a reality! We will provide a succinct overview of the key metrics and underlying factors driving this opportunity so that you can make an informed decision. Let’s delve into the details together!

Table of Contents:

  1. Inflation, Interest Rates, and Bond Yields in 2022-2023
  2. The Benefits of Higher Interest Rates and Yields for Banks
    • 2.1 Recent Headlines
    • 2.2 Empirical Evidence
    • 2.3 The Case of Silicon Valley Bank (SVB)
  1. Correlation Between New Banking Licenses and Short-Term Rates: What Entrepreneurs Should Know
  2. How COREDO Can Assist You in Capitalizing on the Current Economic Climate

Inflation, Interest Rates, and Bond Yields in 2022-2023

The year 2022 was characterised by a turbulent landscape for interest rates. The increase in short-term interbank interest rates witnessed a coordinated move by the central banks of advanced economies, which was unprecedented since the 1970s. Previously, none of the major countries had implemented policies that would lead to an increase in their respective policy rates. However, this scenario shifted significantly, with 43 out of the 57 major countries (accounting for 75%) raising their policy rates (as indicated in the graph below).

The Top Reasons for you to get a banking license, 2023

Source: Bank of International Settlements, Central bank policy rates

In March 2021, the central banks of Brazil, Denmark, Russia, and Turkey initiated the trend of raising interest rates with an increase of 0.75%, 0.1%, 0.25%, and 2.0%, respectively. The next month, Iceland followed suit with a 0.25% increase, and in May 2021, the Czech Republic, Mexico, and Hungary increased their rates by 0.25%, 0.25%, and 0.3%, respectively. The trend continued with other central banks joining later. The Federal Reserve of the United States (USA) increased the Fed funds rate by 0.25% in March 2022, while the European Central Bank (ECB) raised the MRO rate for the first time with a 0.5% increase in July 2022. The policy rates for the ECB, the Federal Reserve, and the Bank of England are illustrated in the figure below.

The Top Reasons for you to get a banking license, 2023

Source: BIS, Policy rates

The reason behind the increase in short-term interest rates by central banks is the rise in consumer price index (CPI) inflation, which is usually countered by central banks in a countercyclical manner. This correlation is depicted in the graphs below. The first graph illustrates the percentage of countries with escalating inflation and tightening (increasing) policy rates. The correlation between the two is apparent.

The Top Reasons for you to get a banking license, 2023

Source: Bank of International Settlements, Central bank policy rates

The following two graphs depict the progression of the median policy rate shift among these 54 economies, as well as the median inflation change. Interestingly, it appears that in the most recent period (as indicated by the second graph), central banks are responding more to previous inflation rates rather than inflation responding to previous interest rate decisions made by central banks.

The Top Reasons for you to get a banking license, 2023

Source: Bank of International Settlements, Central bank policy rates

The surge in inflation has triggered a sharp rise in bond yields in several countries, as is typically observed. As of the end of March 2023, the yields on bonds from significant advanced economies, excluding Japan, hover in the range of 2-4%.

The Top Reasons for you to get a banking license, 2023

Source: Yardeni Research

The Benefits of Higher Interest Rates and Yields for Banks

The following sections present recent headlines and empirical evidence that support this claim.

Recent headlines

As evidenced by headlines in the financial news, the current rise in interest rates is proving to be beneficial for banks and those with banking licenses.

The ECB Financial Stability Review from November 2022 states that rising interest rates have improved the short-term profitability outlook of euro-area banks. In the United States, bank profits rose by 7.8% in the second quarter of 2022 from the previous quarter, with the growth attributed to the rise in interest rates and expansion of loan balances, as reported by Investopedia in September 2022. FitchRatings reported in June 2022 that the profitability of most UK banks is expected to strengthen due to the rising interest rates, with their funding costs expected to increase less than their lending rates. Deutsche Bank also reported a big jump in profit in October 2022, despite the slump in deal-making. However, as ABC News Australia reported in November 2022, rising interest rates are a double-edged sword, with potential risks to borrowers and banks alike.

According to the Global Banking Annual Review 2022 by McKinsey, bank profitability has reached its highest level in 14 years, with expected returns on equity ranging from 11.5% to 12.5%.

This growth is attributed to a significant increase in net margins, which in turn is due to the rise in interest rates that had remained at their lowest level for a considerable time. The report highlights that global revenue increased by $345 billion in the banking industry, indicating that the rise in interest rates has had a positive impact on the sector’s profitability.

According to research by Deutsche Bank in November 2022, the European banking sector is experiencing a period of positive impact, which is described as a “sweet spot”. This is due to interest rate increases by central banks in most advanced economies and strong credit growth, leading to increased revenues. Though loan loss provisions have started climbing, they remain relatively low.

While growth in administrative expenses, individual banks’ tax and litigation payments, as well as Russia-related losses have reduced net income, the industry is still expected to have a decent full-year result. The report also suggests that higher-for-longer interest rates may support banks’ business prospects in the medium term.

Empirical evidence

According to a study conducted by Kohlscheen, Murcia and Contreras in 2018, higher long-term yields and a steeper domestic yield curve have a positive impact on bank profitability in emerging markets. The domestic yield curve is the difference between long-term yields and short-term interest rates, and a steeper yield curve indicates that long-term interest rates are higher relative to short-term rates. This study supports the idea that higher interest rates can benefit banks by improving their profitability in emerging markets.

English et al. (2012) found that a 100 basis point increase in interest rates can increase the median bank’s net interest income relative to assets by nearly 9 basis points. This indicates that banks can benefit from higher interest rates, as it can increase the spread between the interest rates they pay on deposits and the interest rates they earn on loans, leading to higher profits.

Borio, Gambacorta, and Hofmann’s (2015) study found that there is a positive correlation between the level of short-term rates, the slope of the yield curve, and the banks’ return on assets (ROA). They discovered this by analysing data from 109 large international banks based in 14 major advanced economies from 1995 to 2012. Additionally, they concluded that banks’ profitability is negatively affected by unusually low short-term interest rates near zero or slightly negative, especially if combined with a flat yield curve.

According to an FDIC study, it is conventional wisdom that the median net interest margin (NIM) for the typical community bank tends to increase when short-term interest rates increase and decrease when short-term interest rates decrease. This finding supports the view that higher interest rates are good for bank profitability and those having banking licenses.

Claessens, Coleman, and Donnelly’s (2017) study, which analysed a sample of 3,385 banking license holders from 47 countries between 2005 and 2013, found that a 1% drop in interest rates leads to a decrease of 0.08% in net interest margin (NIM). The effect is more pronounced at low rates, with a 0.2% decrease in NIM. The authors also observed that low rates have an adverse impact on bank profitability but to varying degrees.

Meanwhile, a Bank for International Settlements (BIS) report (2018, p. 11) confirms the positive correlation and statistically significant relationship between banks’ NIM and the lagged variables of the three-month interest rate and the slope of the yield curve. Notably, the report also shows that the effect is small in the short term but significant in the long term. Additionally, Klein (2020) discovered that the short-term interest rate positively correlates with the retail margins of euro-area banks. However, she noted that the positive relationship between the short-term rate and NIM is only valid when the interest rate is less than 2%.

The Top Reasons for you to get a banking license, 2023

Source: Klein (2020)

Hoffman et al. (2018, p. 27) suggest that contrary to popular belief, approximately half of the banks in their study would actually benefit from a rise in interest rates in terms of both net worth and income. They attribute this phenomenon to a “reverse maturity transformation”, which occurs for banks that hold variable-rate assets funded by “sticky” sight deposits.

Foos et al. (2022) report that banks’ stock prices tend to benefit from positive level shifts and steepening, as well as stronger-curved yield curves, on average.

Paul (2022) discovered that most United States banks with a banking license have a positive income gap, representing the difference between assets and liabilities that mature or reprice within 12 months. This gap indicates how a bank’s net interest income reacts to fluctuations in interest rates. Many banks hold adjustable-rate loans, while their liabilities are non-maturing deposits, such as current or demand deposits and savings accounts, which have slow-to-adjust administered rates. Consequently, the positive income gap value results from this fact.

The Top Reasons for you to get a banking license, 2023

Source: Paul (2022)

The European Central Bank’s 2017 analysis of interest rate risk in the banking book (IRRBB) among 111 large euro area banking license holders provides further evidence. The analysis showed that in a scenario of both short- and long-term rates going up (“parallel up”), banks’ net interest margin (NIM) would improve, while in a scenario where both rates went down (“parallel down”), the net interest income (NII) would worsen.

The Top Reasons for you to get a banking license, 2023

Source: ECB sensitivity analysis of IRRBB — stress test 2017

Banking professionals are well aware of the positive effects of rising interest rates on their profitability, as evidenced by a survey conducted by the European Banking Authority (EBA) among 60 major euro-area banking license holders. The graph below shows the survey results, indicating that 77% of respondents estimated a “rather positive” impact on their profitability over the following 6-12 months, while 10% believed it would be “very positive”. Only 8% of respondents thought the impact would be “rather negative”. The positive-to-negative response ratio was 10.8-to-1, further highlighting the industry’s sentiment towards the relationship between rising interest rates and bank profitability.

The Top Reasons for you to get a banking license, 2023

Source: EBA Risk Dashboard, Risk Assessment Questionnaires (RAQs), Spring 2021, published Q1 2022

The reason why banks benefit from rising interest rates is quite simple. When short-term interest rates increase, the spread between the rate banks charge on loans and the rate banks pay on deposits also increases, which leads to an increase in net interest margin (NIM). As shown in the graph below, the spread is not constant, and it rises with short-term interest rates. This is a well-established fact in the banking industry, and it’s important to note that banking license holders have market power in retail deposit markets. This limited pass-through of market rates to deposit rates also contributes to the increase in NIM. (Hoffmann et al., 2018, p. 12; Kirti, 2017, p. 13).

The Top Reasons for you to get a banking license, 2023

The loan-deposit spread (LDS) can be calculated as the difference between the interest rates on loans and the interest rates on deposits. Specifically, for non-financial corporations, it is the difference between interest rates on loans of all maturities and the interest rates on overnight deposits held by non-financial corporations. For households, it is the difference between interest rates on loans for house purchases with an original maturity more significant than 10 years and interest rates on overnight deposits held by households. The data source for this calculation is the ECB Statistical Data Warehouse, MIR: MFI Interest Rate Statistics. Since fee and commission income accounts for less than 30% of the euro-area banking license holders’ revenue, changes in interest rates have a dominant impact on their profitability.

The Top Reasons for you to get a banking license, 2023

Source: ECB Statistical Data Warehouse, SUP: Supervisory Banking Statistics

The relationship between the rate charged on loans to non-financial corporations and the yield on euro area benchmark bonds is depicted below, showing a close correlation between the two. Hence, the same principles that apply to the loan-deposit spread (LDS) also apply to bond yields.

The Top Reasons for you to get a banking license, 2023

Just to clarify, “NFCs” is an acronym that stands for “non-financial corporations”.
The data referred to in the previous message are for the euro area, and the source is the ECB Statistical Data Warehouse.

The Case of Silicon Valley Bank (SVB)

It’s important to note that interest rate risk is relevant not only to traditional commercial banks but also to other financial institutions such as savings banks, cooperative banks, investment banks, and asset managers. All of these institutions can be impacted by changes in interest rates, as they hold assets and liabilities that are sensitive to interest rate movements.

As for Silicon Valley Bank (SVB), it’s an interesting case study of the importance of managing interest rate risk. It’s worth noting that the losses suffered by SVB were due to a mismatch between the maturities of its assets and liabilities rather than simply due to rising interest rates. The fixed-rate government bonds that SVB held were longer-term assets, while the variable-rate deposits used to fund them had shorter-term maturities. This meant that SVB was exposed to interest rate risk, as rising interest rates made its longer-term assets less valuable. When SVB was forced to sell its bond positions before their maturity date, it could not recoup the total value of those assets.

This highlights the importance of managing interest rate risk by carefully matching the maturities of assets and liabilities. It also underscores the need for financial institutions to have robust risk management practices in place to identify and mitigate potential risks.

Correlation Between New Banking Licenses and Short-Term Rates: What Entrepreneurs Should Know

Entrepreneurs who are interested in establishing new banks are likely to be well-informed about the impact of interest rates on the banking industry and may be more likely to seek new charters when interest rates are high. This is because rising interest rates create a more favorable environment for banks to generate profits, as they can increase their loan rates while keeping deposit rates low, which leads to a wider net interest margin. Conversely, when interest rates are low, banks may struggle to generate profits, which could discourage new entrants into the market.

Below is a graph illustrating the correlation between the number of new banking licenses granted in the United States and the Federal Reserve’s federal funds rate. Entrepreneurs perceive an increase in interest rates as a favourable economic environment to operate a profitable bank. The evidence supporting this is demonstrated in the graph by the spike in new banking licenses granted in 1981-1982, despite the fact that there were two consecutive recessions in the United States from 1980-1982. This spike occurred as the Federal Reserve’s Chairman, Paul Volcker, increased the federal funds rate to 20% in June 1981.

The Top Reasons for you to get a banking license, 2023

The data source for this graph is the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Economic Data (FRED)

Jones, Myers, and Wilkinson (2022, p. 38) explain that the issuance of new banking licenses rises with increased interest rates since higher interest rates lead to a boost in banks’ net interest margins. This is the primary source of earnings for small banks. Conversely, the number of charters decreases when interest rates decline, which compresses net interest margins.

How COREDO Can Assist You in Capitalizing on the Current Economic Climate

It is widely known that obtaining a banking license and establishing a bank is a time-consuming and capital-intensive endeavor that requires a significant amount of documentation and knowledge of banking regulations. The process typically takes 18-24 months, requires at least €30mn in initial capital (including €2.5mn in start-up costs), and involves the preparation of over 2,000 pages of documentation, including compliance with regulations such as the CRR, CRD IV, and EBA Guidelines. It is also generally necessary to seek the assistance of specialised financial practitioners with experience in banking licensing and regulations.

At COREDO, we have a wealth of knowledge and experience in this area and can assist you in obtaining a banking license in most EEA+UK jurisdictions. We offer a free consultation to identify and analyse your options for obtaining a license and provide guidance on the regulatory requirements associated with the banking licensing process in the most appropriate jurisdiction for your needs. Contact us today to learn more.

As environmental, social, and governance (ESG) concerns take centre stage in the investment world, some investors consider Bitcoin (BTC) a potential ESG investment. While the cryptocurrency has been known for its high volatility, it has also gained a reputation for being a relatively low-carbon footprint investment. This has led some to speculate that Bitcoin may be the greatest ESG investment ever.

In recent years, Bitcoin mining has come under scrutiny for its energy consumption, with many critics arguing that the process of “mining” Bitcoin requires an unsustainable amount of energy, primarily derived from coal. However, recent studies have shown that Bitcoin mining may not be as energy-intensive as once thought. In fact, a significant proportion of BTC mining relies on off-grid energy sources, including zero-emission energy.

According to one study, over half of the Bitcoin network (52.2%) is powered by zero-emission energy sources. Some mining enterprises even use 90%-100% zero-emission energy, and a handful use emission-negative sources. These findings challenge the notion that Bitcoin mining relies solely on coal and suggest that the cryptocurrency may have a lower environmental impact than previously assumed.

But Bitcoin’s potential as an ESG investment goes beyond its environmental impact. The cryptocurrency has also had a significant positive impact on a global scale, particularly in underbanked regions where traditional banking systems are unreliable or non-existent. Bitcoin has enabled people in these regions to participate in the global economy, transfer money across borders, and access financial services that would otherwise be out of reach. This has the potential to improve financial inclusion and reduce poverty, making Bitcoin an attractive investment for socially conscious investors.

Of course, Bitcoin has risks, and investors should always conduct thorough due diligence before investing. But with its potential as a low-carbon, socially impactful investment, Bitcoin may be a game-changing ESG investment opportunity.

Despite the prevailing apprehensions regarding the cryptocurrency’s energy consumption, Bitcoin has yielded substantial returns for its investors and may also be deemed a commendable ESG (Environmental, Social, and Governance) investment.

If you possess a conventional finance background, you would be well-versed in the concept of ESG investment. The term ESG, an acronym for environmental, social, and governance, pertains to a set of criteria employed by conscientious investors to evaluate potential investments. Typically, investors interested in ESGs prioritise financial gains and endeavour to ensure that their investments positively contribute to the world.

After considering all of these factors, it seems reasonable to propose that Bitcoin (BTC) has the potential to be one of the most remarkable ESG (Environmental, Social, and Governance) investments of all time. Importantly, the digital currency has not only provided significant gains for its investors (currently, BTC has appreciated by seventy-one per cent (71%) in 2023, three hundred forty-two per cent (342%) over the previous three years, and an incredible forty-four thousand four hundred four per cent (44,404%) over the last decade), but it has also had a significant and positive impact on a global scale.

Higher bitcoin volume, lesser fossil fuels

If we were to increase our Bitcoin investment while simultaneously decreasing our reliance on fossil fuels, it could lead to a more sustainable and eco-friendly future.

Bitcoin seems to be among the limited industries, both nationally and internationally, that do not depend primarily on coal for its energy supply. According to a recent study, a significant proportion of BTC mining heavily relies on off-grid energy sources, with 52.2% of the Bitcoin network being powered by zero-emission energy.

At least 29 mining enterprises utilise 90%-100% zero-emission energy, and another 12 use emission-negative sources.

When compared to the primary electrical grid in the U.S., which derives only 36.7% of its energy from zero-emission sources, it becomes evident that almost every significant industry in the U.S. depends on a grid that is predominantly powered by fossil fuels. In contrast, Bitcoin mining operations are predominantly powered by zero-emission sources, making it an outlier in this regard.

Additionally, Bitcoin’s consistent demand for electricity stabilises the electrical grid by utilising any surplus energy produced, thereby enhancing the operational efficiency of power plants and reducing energy costs for consumers.

Is Bitcoin the new Game-changer in ESG Investment?


A Shoot up on Energy efficiency

Besides its predominant reliance on clean energy sources, the Bitcoin network is also notably more energy-efficient than traditional financial systems. Bitcoin mining accounts for less than 0.2% of global energy consumption and only 0.09% of the world’s CO2 emissions. Compared to gold mining, which is often compared to Bitcoin as a store of value, Bitcoin mining consumes less energy and does not produce heavy metal pollutants. Thus, adopting a Bitcoin standard as a replacement for the legacy financial system or gold could have a significantly positive impact on the environment.

Furthermore, the consistent demand for electricity by Bitcoin mining operations also has the potential to stabilise the electrical grid by absorbing any excess energy generated. As a result, the operational efficiency of power plants can be enhanced, leading to reduced energy prices for consumers.

Is Bitcoin the new Game-changer in ESG Investment?


A Boost on Innovation

By incentivising technological innovation, Bitcoin encourages the development of new clean energy solutions that could have broader applications beyond just the cryptocurrency industry. As more companies compete to offer the most energy-efficient mining operations, it could lead to significant advancements in clean energy technology, ultimately benefiting the environment and society as a whole.

The most significant environmental impact of Bitcoin could be its role in promoting the adoption and innovation of clean energy sources. The adverse effects of methane gas on the environment are 25 times worse than those of carbon dioxide (CO2). According to the Climate and Clean Air Coalition, reducing methane emissions is considered the most effective strategy to slow climate change over the next 25 years.

Interestingly, two of the largest methane producers are oil fields and landfills, and Bitcoin mining can contribute to mitigating these sources of pollution.

Vespene, a Bitcoin mining company, has introduced an innovative method of utilising the methane produced from landfills to power their mining rigs. This approach ensures that methane emissions are eliminated, thereby promoting environmental sustainability. Notably, Bitcoin mining with methane-vented power has proven to be more efficient in mitigating carbon emissions than any other renewable energy source currently available. The process of mining Bitcoin from vented methane has been found to remove 13 times more emissions from the environment than what coal puts into it.

With the increasing adoption of clean energy sources and the utilisation of innovative methods such as converting landfill methane into electricity, it is possible that the carbon emissions prevented by Bitcoin mining may eventually exceed the emissions produced by the electricity used to power the network. This could have a significant positive impact on the environment and further cement bitcoin’s position as a potentially great ESG investment. However, continued efforts and innovation in this area are necessary to achieve this goal.


In this article, we talk about money laundering – its three stages and what each means. We try to comprehend the detrimental effects it poses to businesses and the economy at large and grasp the methodologies that corporations can implement to safeguard themselves against such illicit activities.

The act of money laundering (ML) inflicts significant harm upon businesses, the investment climate, and the broader economic landscape. It significantly promotes crime and corruption and triggers a considerable decline in the effectiveness of the real sector of the economy. As a result, this criminal activity manifests many other consequential outcomes.

What are the three stages of money laundering and their impact on businessesThe magnitude of this unlawful conduct on a global scale is staggering. The United Nations Office on Drugs and Crime (UNODC) reports that each year, between 2 to 5% of the world’s gross domestic product (GDP) is subjected to money laundering, amounting to an estimated sum of between $754 billion to $2 trillion.

In most countries’ jurisdictions, the act of money laundering constitutes a grave offence, punishable by imprisonment and/or substantial fines. For instance, in the United States of America, the severity of the penalty for complicity in money laundering may escalate to $250,000 and extend to a maximum imprisonment term of five years.

Numerous enterprises may remain oblivious to the reality of being utilised for money laundering. Even though not all commercial entities may be held accountable for the illicit activities carried out through them, entities obligated to comply with Anti-Money Laundering (AML) regulations, including banks, are held to a different standard. The consequences can be colossal if the illicit conduct is discovered during an audit process. As an illustration, Danske Bank was recently subject to a €470 million ($495 million) fine owing to its involvement in an international money laundering scandal.

To safeguard your business from criminals and the imposition of regulatory fines, it is imperative to delve into the intricacies of money laundering, including the prevalent schemes that are commonly employed and the measures that can be taken to prevent this.

What is money laundering (ML) and why it matters

In its most basic definition, the act of money laundering is characterised by the intentional concealment or distortion of the source of proceeds that have been illicitly obtained to create the impression that the funds were derived from lawful sources. Money laundering (ML) entails a course of action whereby funds originating from unlawful activities such as drug trafficking, bribery, or fraud are obscured from their source.

Actions to combat money laundering (ML) are frequently associated with the battle against terrorism financing (TF), as both ML and TF entail the rechanneling of funds.

As per the Financial Action Task Force (FATF) findings, a staggering amount of $1.6 trillion is laundered annually from countries with lower-income levels, with the proceeds typically emanating from political corruption. In such areas, corruption exacerbates poverty, exacerbating environmental destruction and causing economic stagnation. Due to the intricate connection between money laundering and corruption, any initiatives aimed at curbing the proliferation of illicit funds also assume a crucial role in reducing corruption on a global scale.

Activities such as illegal arms sales, smuggling, and organised crime, including drug trafficking and prostitution rings, can produce significant sums of money. Similarly, embezzlement, insider trading, bribery, and computer fraud schemes can generate substantial profits and create the incentive to “legitimise” the unlawfully obtained gains through money laundering.

When a criminal endeavour results in sizeable profits, the involved parties must find a way to maintain control of the funds without drawing attention to the underlying activity or the individuals implicated. Criminals do so by disguising the source of the funds, altering their form, or relocating the funds to a location where they are less likely to attract scrutiny.

In light of growing apprehension regarding money laundering, the Financial Action Task Force on money laundering (FATF) was established by the G-7 Summit in Paris in 1989 to formulate a cohesive international response. One of the FATF’s primary objectives was to develop a set of 40 Recommendations, which outlined the measures that national governments should adopt to implement effective anti-money laundering programs.

How much money is laundered per year?

By its very nature, money laundering is an illicit activity perpetrated by criminals that operate outside the standard range of economic and financial data. In conjunction with other facets of subterranean economic activity, approximations have been posited to offer a glimpse into the scale of the issue at hand.

What are the three stages of money laundering and their impact on businessesThe United Nations Office on Drugs and Crime (UNODC) conducted a comprehensive analysis to ascertain the extent of illegitimate funds generated by drug trafficking and organised crimes and the degree to which these funds are laundered. The UNODC report approximates that in 2009, criminal profits constituted 3.6% of the global gross domestic product (GDP), with 2.7% (equivalent to USD 1.6 trillion) of those proceeds being laundered.

This falls within the ambit of the widely cited estimate by the International Monetary Fund (IMF), which stated in 1998 that the overall scope of money laundering across the world could be situated between two and five percent of the world’s GDP. Using the statistics of 1998, these percentages would suggest that the phenomenon of money laundering ranged between USD 590 billion and USD 1.5 trillion. At that juncture, the lower figure was roughly commensurate with the total output value of an economy comparable in size to that of Spain.

However, it is imperative to exercise caution while considering the above estimates. They are merely meant to approximate the magnitude of money laundering. Due to the clandestine nature of the transactions involved, precise statistical data is unavailable, making it impossible to produce a definitive estimate of the global amount of money laundered each year. Therefore, the Financial Action Task Force (FATF) abstains from publishing any figures in this regard.

The three main stages of money laundering

The placement stage

Illicit funds can be integrated into the financial system either directly or indirectly. In the placement stage, the most common technique used is the fragmentation of large sums of money into smaller, less conspicuous amounts, which can be deposited into one or multiple bank accounts using the ‘smurfing’ technique. Money service businesses are often utilised to execute smurfing.

Other placement methods include:

  • False invoicing involves creating invoices for non-existing goods or services to overcharge or charge for services that were never provided. The difference between the actual cost of goods or services and the overcharged amount is then transferred as laundered money.
  • Blending illegal money with legitimate money – involves depositing cash obtained through illegal activities into bank accounts with legitimately earned funds, making it difficult for law enforcement agencies to trace the illegal funds.
  • Buying foreign currency – involves converting large amounts of illegal money into a different currency, which can then be deposited into foreign bank accounts or used to purchase assets in other countries.
  • Purchasing securities or insurance using cash – involves buying stocks, bonds, or insurance policies with cash, which can later be sold for clean money.
  • Gambling and betting on sports events – can be used to launder money by placing bets with cash obtained through illegal activities and then collecting the winnings as clean money.

The layering stage

The process known as “layering” denotes the complex set of actions aimed at severing the illicit origin of money and further masking its source by creating multiple “layers” of transactions to obfuscate the trail of an audit. This sophisticated practice serves the purpose of concealing the provenance of illegally gained assets by confounding their detection and tracking.

Undertaking the layering phase constitutes the most intricate stage of this fraudulent operation. It entails a series of elaborate financial transactions, which often cross national borders via international money transfers. To execute the layering strategy, the funds can be directed through purchasing and selling various types of investments or via a chain of accounts held in different financial institutions across multiple jurisdictions. Such illicitly obtained capital is frequently diverted to countries with permissive anti-money laundering (AML) regulations or those that do not cooperate with AML investigations.

The integration stage

Once the illicit money has been successfully placed and layered, the next stage for criminals is to reintegrate, or “return,” the money to themselves in a way that obscures its illegitimate origin, rendering it “clean.” Upon completing this stage, the funds become part of the legitimate financial system and can be utilised freely by the perpetrators.

The central goal of this stage is to integrate the money into the economy without raising suspicion or drawing the attention of law enforcement agencies. To accomplish this objective, criminals may acquire assets such as real estate, artwork, precious jewellery, or high-end vehicles, among other possibilities. These types of assets can serve to legitimise the previously illicitly obtained capital, as they can be perceived as having been acquired through lawful means.

How money laundering impacts businesses and the economy

Money laundering poses a significant threat to businesses, resulting in a host of adverse consequences such as revenue loss, damage to reputation, and regulatory penalties in the millions of dollars or suspension of licenses.

Furthermore, the socio-economic repercussions of ML are far-reaching and damaging, with global effects such as the perpetuation of corruption, an escalation in criminal activity, erosion of foreign investor confidence, widening income inequality, and a slowdown in economic growth. These effects are particularly concerning as they can compound and exacerbate pre-existing economic and social issues, creating further destabilisation and harm.

The perceived functioning of the banking and financial services marketplace within a framework of elevated legal, professional, and ethical standards is integral to preserving its integrity. A financial institution’s reputation for integrity is among its most valuable assets.

What are the three stages of money laundering and their impact on businessesSuppose a particular institution is susceptible to processing funds generated by criminal activities, either due to the bribery of its employees or directors or by turning a blind eye to the illicit nature of such funds. In that case, it risks becoming actively complicit with criminals and thereby part of the criminal network itself. Any evidence of such complicity is bound to hurt the perceptions of other financial intermediaries and regulatory authorities, in addition to ordinary customers.

Unchecked money laundering also carries the potential for negative macroeconomic consequences, such as inexplicable changes in the demand for money, prudential risks to the soundness of banks, contamination effects on legitimate financial transactions, and increased volatility of international capital flows and exchange rates due to unforeseen cross-border asset transfers. Furthermore, successful money laundering rewards corruption and crime, damaging the integrity of society as a whole, undermining democracy, and compromising the rule of law.

Money launderers are constantly searching for new avenues to launder their ill-gotten gains. Economies with expanding or emerging financial centres, yet inadequate safeguards, are especially vulnerable, as countries with well-established financial centres implement extensive anti-money laundering protocols.

Launderers will exploit the differences in national anti-money laundering systems, relocating their networks to nations and financial systems with weak or ineffective countermeasures. Some may argue that developing economies cannot be too discriminating when it comes to attracting capital. However, postponing action is risky. The more action is delayed, the more entrenched organised crime can become.

Similar to the compromised integrity of a particular financial institution, the presence of organized crime controlling and influencing a country’s commercial and financial sectors hurts foreign direct investment.

Thus, combatting money laundering and terrorist financing is crucial in creating a business-friendly environment, which is a prerequisite for sustainable economic development.

The potential social and political repercussions of unaddressed or poorly managed money laundering are grave. Organised crime can penetrate financial institutions, seize control of significant portions of the economy through investment, or bribe public officials and even governments.

The economic and political sway of criminal organisations can erode the social fabric, shared ethical norms, and, ultimately, the democratic institutions of society. In nations transitioning to democratic systems, criminal influence can undermine the transition. At its core, money laundering is inextricably linked to the criminal activity that spawned it. By laundering funds, criminal activity is allowed to persist.

How to detect and prevent money laundering

To ensure the safety of businesses and prevent financial crime, a comprehensive Anti-Money Laundering (AML) compliance program must be implemented. Such a program should clearly define the procedures for detecting, assessing, and reporting suspicious financial activities. The following measures are key components of an effective AML program:

  • Customer Due Diligence (CDD): Before a customer is allowed to use the services of a company, they must undergo a rigorous Customer Due Diligence check. This process involves obtaining and verifying customer information, such as their identification documents, and evaluating whether they pose any potential risk of being involved in criminal activities.
  • Enhanced Due Diligence (EDD): In cases where there is a higher risk of money laundering, companies are required to implement Enhanced Due Diligence measures. One of the most critical elements of EDD is to scrutinise clients’ sources of funds to ensure they are not derived from illegal activities.
  • Ongoing customer monitoring: This is an additional layer of risk management that involves continuously monitoring customer transactions and conducting periodic checks to identify and assess any suspicious activity.
  • Independent AML audits: These audits allow businesses to identify and rectify any deficiencies and shortcomings in their AML compliance strategies before regulatory inspections to prevent penalties or fines.
  • KYT or transaction monitoring: Transaction monitoring is a continuous security process that enables businesses to detect and prevent suspicious transactions. A reliable KYT software platform can identify unusual patterns, scrutinise dubious transfers, and monitor digital or fiat currency transactions. This helps to prevent and detect money laundering activities and other financial crimes.