Financial Crime

Identifying Predicate Offenses to Strengthen AML/CFT Compliance Strategy

Understanding predicate offenses is critical for banks and financial institutions to prevent, detect, and report money laundering activities and strengthen their Anti-Money Laundering (AML) and Counter Financing of Terrorism (CFT) compliance strategies.

This blog overviews predicate offenses and explains how banks and financial institutions can prevent money laundering and strengthen their AML/CFT capabilities.

Predicate Offenses, Money Laundering, and AML/CFT Compliance

To effectively combat money laundering activities and meet AML/CFT compliance requirements, banks and other financial institutions must understand and address the predicate offenses used for generating illicit funds.

Predicate offenses are criminal activities that generate illicit funds laundered through the financial system. They are one of the critical aspects of money laundering activities and a primary source of illegal funds.

Money laundering is the process of concealing the origin and ownership of illicit funds generated by criminals through predicate offenses. The primary goal of money laundering is to allow criminals to access their unlawful funds without drawing the notice of law enforcement and regulatory authorities.

AML/CFT compliance is a set of regulatory requirements and best practices for banks and financial institutions to detect, prevent, and report terrorist funding and money laundering operations.

Predicate offenses aid in generating illicit gains. Without them, there would be no monies to launder.

Implementing an effective AML/CFT compliance plan is critical for banks to protect financial systems’ integrity and thwart money laundering and other illicit activities.

However, banks need to first understand the nature of the predicate offenses and ways to identify and prevent them to develop a robust AML/CFT compliance strategy.

Types of Predicate Offenses

Below we have listed some of the most common types of predicate offenses that criminals employ to generate and launder illicit funds through the financial system.

1. Drug Trafficking

Drug trafficking is one of the key sources of generating large sums of illicit funds across the globe. It refers to the illegal production, delivery, sale, and distribution of drugs by criminal groups.

The sum generated by drug trafficking is often used for illegal activities, including money laundering to disguise their illicit proceeds, make them appear legitimate by moving them into the financial system, and evade detection by law enforcement and regulatory authorities.

2. Human Trafficking

Human trafficking is a prime and one of the most profitable predicate offenses generating significant illicit proceeds, which are often laundered through the financial system. According to International Labor Organization, human trafficking generated $150 billion in 2020.

It involves criminal movement, recruitment, transportation, and exploitation of humans, including men, women, and children for forced labor, criminal activity, sexual exploitation, organ harvesting, etc.

3. Market Abuse & Insider Trading

Market abuse and insider trading are other predicate offenses that criminals use to manipulate the market and gain secret information from within the organization or publicly traded company. They misuse positions of authority to generate large sums of illicit funds and inject them into the financial system through money laundering

4. Corruption & Bribery

Corruption, bribery, and money laundering are interlinked. Bribery, kickbacks, and other forms of corruption generate a large sum of illegal funds. Officials in power then use money laundering techniques to conceal their funds while evading all forms of control and sanctions.

5. Tax Evasion

Tax evasion refers to the deliberate attempt of underreporting or non-reporting taxable income and making fraudulent claims on tax returns. This predicate offense helps avoid detection by tax authorities and generates significant illicit profits, which are then moved into legitimate finance.

6. Fraud & Forgery

Fraud and forgery are also predicate offenses for money laundering. These include deceptive acts of making illegal or unethical funds through investment scams, embezzlements, and Ponzi schemes, which need to be laundered.

AML/CFT Compliance to Combating Predicate Offenses

AML/CFT compliance is crucial in helping banks and financial institutions combat predicate offenses. The AML/CFT regulations mandate institutions to apply processes and controls to efficiently detect, prevent, and report money laundering and terrorist financing activities.

By implementing the measures designed to identify and mitigate risks associated with predicate offenses, financial institutions can effectively detect, prevent and report suspicious activities to the regulatory bodies, meeting compliance.

These measures include:

  • Customer Due Diligence & Enhanced Due Diligence
  • Transaction Monitoring
  • Suspicious Activity Reporting (SAR)

By implementing these measures and controls, banks and other financial institutions can ensure they are not facilitating predicate offenses and money laundering activities.

AML/CFT compliance also helps financial institutions cooperate with regulatory authorities and law enforcement bodies in investigating and prosecuting predicate offenses. This can further help the competent authorities dismantle criminal syndicates and recover the illicit proceeds of predicate offenses.

To learn more, please refer to our guide to Anti-Money Laundering (AML) in banking and finance.

Strengthen AML/CFT Compliance with Automated Transaction Monitoring and Reporting

Banks and financial institutions need to continually monitor and assess their internal controls, processes, and reporting mechanisms to ensure the effectiveness of their AML/CFT compliance strategy. In addition, they need to proactively engage with law enforcement and regulatory authorities to report information and intelligence related to predicate offenses and money laundering activities.

This can help them strengthen their overall AML/CFT compliance strategy and effectively combat predicate offenses.

Anaptyss assists banks and financial institutions understand predicate offenses and ways to identify them and co-creates a robust AML/CFT compliance program.

Interested in more specific guidance for AML/CFT compliance?

Write to us: [email protected].

Tasneem Abdulrahman

Manager - AML Compliance

Tasneem is an accomplished professional with 15+ years of experience in the global financial crime compliance industry. Her expertise spans Regulatory Compliance, AML Risk and Governance, Project Management, and Control Testing and Remediation, including audits and strategic management of operational risk events.

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