The Financial Action Task Force has highlighted the growing use of underground banking systems and hawala style value transfer networks by professional money launderers and criminal organisations. The global financial crime watchdog said these informal systems can be exploited to move illicit proceeds across borders and, in some cases, facilitate terrorist financing.
In a case involving Italy, Italian authorities identified a hawala style value transfer network that was used to move proceeds linked to migrant smuggling. According to the FATF report, part of the money was channelled to terrorist organisations.
The financial flows were reportedly routed through third countries towards Syria. Authorities identified connections involving people associated with migrant smuggling, car dealerships and transnational motor vehicle trade. The same financial channels were also used to move proceeds linked to organised crime and tax offences.
The FATF said the case demonstrated how different forms of criminal activity can overlap with terrorist financing risks. Some individuals identified in the investigation had direct connections to Syria, including links to foreign terrorist fighters.
The findings were included in the FATF's latest report on professional money laundering, underground banking and hawala and other similar service providers. The report examines how informal financial networks operate and how criminals use them to conceal, transfer and settle illicit funds.
Underground banking refers broadly to informal financial arrangements operating outside, alongside or through regulated financial systems. Hawala and similar service providers can facilitate the transfer of value between individuals or locations without relying exclusively on conventional banking transactions.
These systems can have legitimate uses in some communities and regions. However, the FATF has warned that criminal networks can exploit them because their transactions may be difficult for authorities to identify and trace when appropriate safeguards are absent.
The latest FATF report examined information from jurisdictions around the world and found that underground banking and hawala style service providers are associated with a broad range of criminal activities.
The FATF said the main underlying offences identified by jurisdictions included drug trafficking, fraud, goods smuggling, tax evasion, cybercrime, corruption, human trafficking and migrant smuggling.
The report also noted that these networks are no longer associated only with traditional cash intensive crimes. They can be connected to fraud, cyber enabled crime, corruption, tax offences, terrorist financing, sanctions evasion, counterfeit trade, environmental crime, extortion, kidnapping for ransom and other forms of transnational organised crime.
The increasing diversity of criminal activity creates additional challenges for financial intelligence and law enforcement agencies. Money generated from different crimes can be combined within the same financial network, making it more difficult to determine the origin and ultimate destination of funds.
The FATF said around 80 percent of jurisdictions reported that underground banking and similar service providers are used together with other money laundering methods. These can include trade based money laundering, shell companies, front companies, virtual assets, real estate and transactions involving luxury goods and precious metals.
Such combinations can create complex financial structures in which illicit proceeds move through several channels before appearing to have a legitimate origin.
The Italian case highlighted by the FATF demonstrates how these risks can extend across multiple criminal sectors and national borders. According to the report, suspicious financial flows were identified through specific money or value transfer channels and involved connections with high risk jurisdictions.
Financial intelligence reports played an important role in identifying concentrated flows and links between different criminal activities. The information helped authorities identify connections involving migrant smuggling, vehicle related businesses and terrorist financing.
The case also illustrates the importance of international cooperation in tackling illicit financial networks. Because money can move through several jurisdictions, investigations often require financial intelligence units, police authorities, prosecutors and other agencies in different countries to exchange information.
The FATF has emphasised that effective detection of underground banking networks requires authorities to identify the people and businesses operating these systems as well as the criminal networks using them.
Professional money laundering networks can provide financial services to criminals without directly participating in the original crime. They may collect, transfer, convert or settle criminal proceeds for a fee or commission.
The FATF report found that underground banking and hawala style systems can form part of broader professional money laundering services. These services may include the use of front companies, nominees, money mules, false documentation and other mechanisms designed to conceal the ownership and movement of assets.
Criminal networks may also use legitimate businesses to make illicit transactions appear to be ordinary commercial activity. Trade related transactions, for example, can be used to move or settle value between countries while making the underlying financial activity harder to identify.
Vehicle related businesses can be particularly relevant in some cases because international vehicle trade creates legitimate cross border financial flows. The Italian case cited by the FATF demonstrates how such commercial sectors can overlap with criminal financial networks when they are misused.
The FATF has stressed that identifying these connections requires financial institutions and authorities to examine transactions in context rather than considering individual transfers in isolation.
Terrorist financing presents an additional challenge because terrorist organisations may require comparatively smaller amounts of money than major organised crime networks. However, even relatively limited financial transfers can support activities associated with terrorism.
The Italian case shows how proceeds generated through criminal activity can potentially be redirected towards terrorist organisations. This creates an important connection between traditional money laundering investigations and counter terrorist financing efforts.
The FATF has therefore encouraged jurisdictions to strengthen cooperation between agencies responsible for combating money laundering and terrorist financing.
Financial intelligence units play an important role by analysing suspicious transaction reports and identifying patterns that may not be immediately visible to individual financial institutions.
The FATF report also highlights the importance of monitoring informal value transfer systems while ensuring that legitimate financial activity is not unnecessarily disrupted.
Authorities face a difficult balance because hawala and similar systems can provide financial services in communities where conventional banking may be less accessible. Effective regulation and supervision therefore need to focus on identifying criminal misuse rather than treating every informal transfer as illegal.
The report recommends stronger intelligence sharing, improved supervision and better understanding of the risks associated with underground banking and professional money laundering.
Technology is also changing how these networks operate. Criminal groups can combine informal value transfer arrangements with digital financial services, virtual assets, shell companies and international trade transactions.
This creates increasingly complicated financial trails for investigators. Authorities therefore need access to timely information and analytical tools that can connect transactions, people, businesses and jurisdictions.
The FATF's findings also underline the importance of cooperation between the public and private sectors. Banks, payment service providers, money service businesses and other regulated entities can play an important role in detecting suspicious financial patterns.
Suspicious transaction reporting can provide investigators with information about unusual transfers, concentrated financial flows and connections between apparently unrelated businesses or individuals.
International cooperation remains particularly important when funds move through third countries before reaching their final destination. The Italian case involving flows towards Syria demonstrates how cross border financial structures can complicate investigations.
The FATF has called for countries to strengthen mechanisms that allow financial intelligence and law enforcement agencies to exchange information quickly and effectively.
The report also provides examples from other countries showing how underground banking networks have been used in connection with organised crime and money laundering. These examples demonstrate that the issue is not limited to one region or one form of criminal activity.
The FATF's latest assessment therefore presents underground banking and hawala style systems as an important area of concern for global financial security. The systems can be exploited by criminal organisations seeking to move money outside conventional financial channels and conceal the origins of illicit proceeds.
For governments, the challenge is to identify criminal networks without unnecessarily restricting legitimate financial services. This requires risk based supervision, strong financial intelligence and cooperation between national authorities.
The findings from Italy also demonstrate the importance of examining links between different forms of crime. Migrant smuggling, vehicle related businesses, organised crime, tax offences and terrorist financing can intersect within the same financial network.
The FATF's assessment is intended to help countries identify these risks and strengthen their anti money laundering and counter terrorist financing systems.
The organisation has stressed that financial investigations can play a critical role in disrupting criminal networks. Following the movement of money can help authorities identify the people and organisations involved in criminal activity and potentially prevent funds from reaching terrorist groups.
The latest report therefore places greater emphasis on understanding the entire financial ecosystem surrounding underground banking and professional money laundering.
As criminals continue to adapt their methods, financial authorities are expected to increase cooperation with law enforcement agencies, financial institutions and international partners.
The FATF findings serve as a reminder that combating terrorist financing is not limited to monitoring conventional bank accounts. Informal value transfer systems, commercial businesses and cross border financial networks can also form part of the financial infrastructure exploited by criminal groups.
The Italian case cited in the report illustrates the potential consequences of these connections. According to the FATF, Italian authorities identified a network in which proceeds associated with migrant smuggling were moved through hawala style arrangements, with part of the funds ultimately channelled towards terrorist organisations.
The case reinforces the need for countries to strengthen financial intelligence capabilities and improve international cooperation to identify and disrupt illicit financial networks.