Covid-19 has encouraged discussions on a variety of topics including the relationship of criminal groups vis-à-vis civilian populations during a global pandemic. Less discussed, however, are potential effects on the integrity of the financial system as a result of increased money laundering during times of economic contraction.
At the very least, the Great Recession offers one important lesson: in times of economic downturn, banks and other financial institutions will have less incentives to enforce existing regulations that prevent integrating proceeds from criminal activities into the system.
The 2012 deferred prosecution agreement between the U.S. Department of Justice and HSBC revealed how banks will work to remain profitable and will wage the risks of getting caught against the potential costs of a sanction. HSBC agreed to pay a fine for $1.9 billion, the largest penalty ever given for violating the Bank Secrecy Act, but before landing in hot water, HSBC had failed to monitor $60 trillion in wire transfers and account activity, examine risks at overseas affiliates before providing correspondent banking services, and conduct anti-money laundering checks on $15 billion in bulk cash transactions.
The investigation by the Justice Department also showed that from 2007 to 2008 HSBC Mexico shipped $7 billion in physical U.S. dollars to HSBC United States. This was more than any other Mexican bank. And between 2006 and 2010, HSBC United States helped launder $881 million from Mexican and Colombian criminal groups. While these examples represent spectacular failures on anti-money laundering efforts, the other side of the coin (if you forgive the pun) is that they also contributed in HSBC’s profitability at a time when GDP decreased, and unemployment rose.
To be sure, compliance measures related to wire transfers lack the magnetism of stories of drug lords distributing “care packages”, but if we are concerned about adaptations of criminal groups to the pandemic, we cannot overlook their financial activities. This goes beyond “guesstimating” who is the wealthiest criminal. Unlike cartoonish portrayals of “narcos” as the lords of rugged terrains, money laundering reveals the transnational scale of criminal activity. Certainly not all criminal groups will launder money with the same level of sophistication and not all money laundering will relate to drug trafficking activities.
Nevertheless, as recent research shows, people generally want to keep their ill-gotten gains in places that have effective anti-money laundering regulations because as Matthew Collin argues, once you place it in these jurisdictions you can conceal its origin “under a sheen of legitimacy and respectability”.
The effects from Covid-19 on licit and illicit economic activities remain largely unknown. However, if we use evidence from the Great Recession for guidance on anti-money laundering efforts, we can expect at least three outcomes:
- Not all criminal groups will face a liquidity crisis.
- Criminal groups that choose to launder money through the banking system will prefer jurisdictions with robust anti-money laundering regulations that help them conceal the origin of the funds.
- In attempting to remain profitable, banks and financial institutions have lower incentives for enforcing anti-money laundering regulations in economic downturns.
It remains to be seen if in 2023 there will be another deferred prosecution agreement between the Department of Justice (or its counterparts around the world) and a malfeasant (but profitable) financial institution.
* Cecilia Farfán Méndez is head of Security Research Programs at the Center for U.S.-Mexican Studies at the University of California San Diego (UCSD). Twitter: @farfan_cc