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E-Banking System and their relation to Money Laundering and Terrorist Financing

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By Kunle Ajiboye

Here, e-banking refers to any financial transaction carried out for a person through a financial institution by electronic means, with a view to making an amount of money available to a person at another financial institution. In some cases, the sender and receiver could be the same person. E-banking transactions occur within the national boundaries of a country, or alternatively from one country to another. Given that it does not involve the actual movement of currency, they are a rapid and secure method for transferring value from one location to another. The rapidness of moving funds through e-banking makes it attractive to terrorists whose activities are mostly conducted online. Complex electronic transfer schemes can be used to create a deliberately confusing audit trail, to disguise the source and the destination of the funds destined for terrorist objectives. Currently, there are limited numbers of indicators to help identify potential terrorist wire transfer.

One method of money laundering through the Internet would be to establish a company offering services payable through the Internet. The launderers tends to “use” those services and charges for them using credit or debit cards tied to accounts under his control (located perhaps in an offshore area), which contain criminal proceeds. The launderer’s company then invoices the credit card company which, in turn, forwards the payment for the service rendered. The launderer’s company may then justify these income payments for service rendered. In this example, the launderer’s actually controls only the invoiced accounts and the company offering service through the internet. The credit card company, the Internet service provider, the Internet invoicing service, and even the bank from which the illegal proceeds begin this process, would likely have no reasonto believe there was anything suspicious about the activity, since they each only see one part of it. Indeed this method is virtually the same used in many fraud cases with the difference being that, in the latter; the bank accounts billed belong to innocent third parties rather than the perpetrator of the Scheme.

Terrorists use wire transfer to move the funds intended for the financing of their activities. The financial support structure revealed after the September 11 attacks in the United States, that the essential role played by wire transfers in providing the hijackers with necessary financial means to plan for and eventually carry out their attacks. The continuing development of world-wide networks such as SWIFT has enhanced the reliability and efficiency of inter-bank payment systems, allowing a large number of transactions to be processed daily. Within the retail banking sector, services such as telephone and internet banking, allow customers to execute transactions on a non-face-to-face basis from any location with telephone or via the internet.

Advances in payment system technology have twofold impacts in relation to the potential abuse by terrorist financiers and money launderers. On the one hand, electronic payment systems provide greater security for transactions by permitting an increased ability to trace individual transactions, through electronics records that may be automatically generated, maintained and/or transmitted with the transaction. On the other hand, these advances also create characteristics that may be attractive to a potential terrorist or money launderer. For instance, the increased rapidity and volume of wire transfer along with the lack of consistent approach in recording key information on such transactions, maintaining records of them and transmitting necessary information with the transactions, serve as an obstacle to ensure traceability by investigative authorities of individual transactions.

A further compliance is presented by transfers that take place through non-bank financial institution such as money remitters, bureau de change or other similar types of businesses. In some countries, these businesses perform wire transfer function either directly with counterpart businesses in their own country, or abroad through conventional financial institutions (i.e banks). Again, differences in requirements for record keeping or transmission of information on the originator of transfers conducted on through such businesses may be used to the advantage of terrorists or other criminals desiring to move funds without being easily detected by authorities.

A simple network for transmitting terrorist funding can be set up by merely taking advantage of the difference in the monitoring regime of various countries. If no records on the originator of the transaction are kept at the starting point of the wire, or the information is not further transmitted by an intermediary along the way, investigators will not have access to information that may help to establish terrorist links.

One characteristic is the use of false identities, “straw men” or front companies in transactions to provide clean names and thus avoid detection. Another characteristic is to channel funds through several different financial institutions, such that the wire transfer appears to come from different and seemingly unrelated sources. There appears to be some use of wire transfer through non-bank financial institutions or alternative remittance services by terrorists (informal money or value transfer systems) conceived with the idea that avoiding mainstream financial institutions will help terrorist funding like the proceeds of non-terrorist  criminal activity remain undetected by financial monitoring systems or investigative authorities.

Conclusion

For the implementation of an effective e-banking platform, it is important to address the security and privacy risks associated with the products and ensure that adequate measures are put in place to mitigate these inherent risks.

The following should be considered:

▪ Strategic and proactive approach to information security, staff expertise and building best practice controls whilst improving these as the markets develops.

▪ Active use of system based security management and monitoring tools. 

▪ Adopt crisis management processes to cope with Internet related incidents.

▪ Ensure that information is adequately managed in a clear and comprehensive manner. 

These would ensure that the vast benefits and opportunities, of e-banking products are maximized for customers, Banks and regulators.

Kunle Ajiboye LL.B, B.L, IDC, CRMCP, CAMS, MICA has 18 years’ experience in the financial services sector. He has worked for different international and local Banks in Nigeria as a Money Laundering Reporting Officer and Head of Compliance.

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