ASSESSING THE VULNERABILITY OF FINANCIAL INSTITUTIONS IN THE BALKANS TO ILLICIT FINANCE. Despite efforts to prevent illicit finance – such as the adoption of international frameworks, Financial Action Task Force (FATF) standards and the EU’s anti-money laundering (AML) directives – financial institutions in the Western Balkans remain highly vulnerable to sophisticated criminals and the inherent risks in the formal financial system.
Financial institutions such as banks, microfinance institutions, cryptocurrency services and money transfer services are frequently exploited by criminals to move illicit money across borders.
The region’s financial sector is bank-dominated, with a substantial proportion of foreign-owned banks, but related financial service providers – including foreign exchange offices, fast money transfer services, payment institutions and crypto exchange offices – are increasingly contributing to the evolution of the financial landscape and creating new vulnerabilities to illicit money. The financial sector in the Western Balkans is therefore characterized by a dichotomy.
On the one hand, financial institutions are intended to serve as the gatekeepers of financial integrity, with robust anti-money laundering and counter-terrorist financing (AML/CFT) standards with which to comply, including customer due diligence procedures, transaction monitoring and reporting suspicious transactions to financial intelligence units (FIUs).
On the other hand, there is considerable evidence, including from the Global Initiative Against Transnational Organized Crime (GI-TOC)’s own research in the region and Moneyval reports, that financial institutions are integral to the three-stage process of money laundering: placement, layering and integration.
Despite their strong AML controls compared to other institutions, banks are frequently used as vehicles for money laundering. The examples in this report reveal complex schemes involving international criminal organizations moving substantial sums of money through multiple jurisdictions. The growing use of cryptocurrencies provides anonymity to criminals moving illicit funds, which is exacerbated by the lack of comprehensive regulation and supervision in many Western Balkan countries.
Other financial institutions are used to launder smaller amounts of illicit proceeds. Criminals exploit money transfer services to move smaller amounts of money because of the large volume of cash transactions they handle and the limited verification processes involved. Foreign exchange offices are also misused because of their cash-intensive nature and limited oversight.
This research report also shows that, despite the apparent adherence to compliance standards, the reality of the level of compliance among financial institutions varies considerably. In general, banks demonstrate better adherence to regulations compared to other types of financial service providers.
But even in the best cases, there is a lack of systematic and comprehensive feedback from FIUs to 2 reporting entities, and the broader juridical chain shows a limited understanding of illicit finance, which hinders effective enforcement.
November 25, 2024 Published by The Financial Action Task Force 2024 Report. (Download Report)
