The rise of autocracies and what it means for money laundering and terrorist financing

In recent years, we've witnessed a concerning global trend: the rise of autocratic regimes. This shift away from democratic governance has far-reaching implications, not least in the realm of financial crime. 

As autocracies gain ground, the landscape of money laundering (ML) and terrorist financing (TF) is evolving, presenting new challenges for the global financial system. 

This piece explores the intersection of autocratic governance and financial crime, examining the implications for ML/TF prevention efforts worldwide.

Understanding the autocratic trend

Before understanding the implications of autocracies on ML/TF, it's crucial to position it in the context of the current global political landscape.

Freedom House, an independent watchdog organisation, reported in its 2024 Freedom in the World report that global freedom had declined for the 18th consecutive year, quote: “Flawed elections and armed conflict contributed to the decline of democracy”. This trend encompasses both established autocracies tightening their grip and previously democratic nations sliding towards authoritarianism.

In 2023, global freedom continued to decline, with 52 countries experiencing setbacks and only 21 improving. Key factors included:

• Election manipulation or violence: Cambodia, Guatemala, Poland, Turkey, and Zimbabwe, El Salvador, Venezuela and Ecuador
• Military influence: Thailand
• Coups: Niger, Burkina Faso, Chad, Guinea, Mali, and Sudan

5 characteristics of autocracies relevant to ML/TF

Autocratic regimes often share characteristics that can facilitate or exacerbate ML/TF risks:

1. Lack of transparency

Autocracies typically operate with less transparency than democracies. This opacity can extend to financial systems, making it easier to conceal illicit financial flows.

2. Weak institutions

Independent institutions, crucial for effective AML/CTF efforts, are often undermined or controlled by the ruling power in autocratic systems.

3. Corruption

Autocracies frequently suffer from high levels of corruption, which can intertwine with ML/TF activities.

4. Limited press freedom

With restricted media freedom, investigative journalism that could uncover financial crimes is often stifled.

5. Selective law enforcement

Laws may be enforced selectively, potentially shielding regime-aligned individuals or entities from scrutiny.

5 implications for money laundering

The rise of autocracies presents several challenges in the fight against money laundering:

1. Increased use of shell companies

Autocratic regimes often create complex networks of shell companies to obscure the true ownership of assets. This makes it harder to trace the proceeds of corruption or other illicit activities.

2. State-sponsored money laundering 

In some cases, autocratic states themselves may engage in money laundering to evade international sanctions or finance covert operations.

3. Golden visa programmes

Some autocratic regimes offer "golden visa" programmes, which can be exploited by money launderers seeking to gain residency or citizenship in exchange for investment. Al Jazeera exposed the practice in Cyprus. 

4. Cryptocurrency exploitation

As traditional financial channels come under greater scrutiny, autocratic regimes and associated bad actors may increasingly turn to cryptocurrencies to move and launder funds.

5. Weakened Financial Intelligence Units (FIUs)

Autocracies may undermine the independence and effectiveness of their FIUs, hampering domestic and international efforts to combat money laundering.

5 impact on terrorist financing

The autocratic trend also has significant implications for terrorist financing:

1. State-sponsored terrorism

Some autocratic regimes have been accused of sponsoring terrorist groups to further their geopolitical goals. This can involve complex financing schemes to avoid detection.

2. Exploitation of humanitarian aid

In conflict zones controlled by autocratic regimes, there's an increased risk of humanitarian aid being diverted to fund terrorist activities.

3. Use of informal value transfer systems

As formal financial channels become more regulated, terrorist financiers in autocratic states may increasingly rely on informal systems like hawala.

4. Abuse of non-profit organisations (NPOs)

Autocratic regimes may use state power to manipulate NPOs for TF purposes or to crack down on legitimate NPOs, driving some humanitarian efforts underground where they're more vulnerable to exploitation.

5. Cybercrime and virtual assets

With increasing digital surveillance in autocracies, terrorist groups may turn to cybercrime and virtual assets for financing, presenting new challenges for detection and prevention.

5 challenges for the global AML/CFT regime

The rise of autocracies poses several challenges to the global anti-money laundering and counter-terrorist financing (AML/CFT) regime.

1. Reduced international cooperation

Autocracies may be less willing to engage in international AML/CFT efforts, particularly if these efforts could expose regime-linked illicit activities.

2. Data sharing obstacles

Autocratic control over information flows can hinder the cross-border data sharing essential for tracking ML/TF activities.

3. Regulatory arbitrage

When autocracies and democracies have different financial rules, criminals can take advantage of the differences. They might move money or business to places with looser regulations to avoid stricter controls elsewhere. This is called regulatory arbitrage.

4. Politicisation of AML/CTF measures

There's a risk that autocratic regimes could use AML/CTF measures as a pretext for cracking down on political opponents or civil society organisations.

5. Undermining global standards

If powerful autocratic states refuse to comply with global AML/CTF standards, it could weaken the overall effectiveness of these standards.

4 ways to respond to the challenge

While the rise of autocracies presents significant challenges, the global community is not powerless. Here are some potential responses you can take in retaliation and defence:

1. Enhanced due diligence

Implement stricter checks on transactions and clients linked to autocratic countries. This includes deeper investigations into the source of funds and ultimate beneficial owners.

2. Improve transaction monitoring

Develop and refine algorithms to flag suspicious patterns typical of autocracy-linked money laundering, such as complex ownership structures, PEPs, unusual ‘round trip’ transaction routes, state-owned enterprises and use of proxies.

3. Specialised staff training

Provide specialised training to team members on the specific risks and red flags associated with autocratic regimes, including political exposure and state-owned enterprises.

4. Leverage technology

Utilise advanced technology solutions that provide at-a-glance analytics and flags, incorporate AI where it makes sense, embed consistent processes through technologically-enabled compliance rules and risk assessments.

Conclusion

The rise of autocracies presents a significant challenge to global efforts to combat money laundering and terrorist financing. The opaque nature of these regimes, combined with their potential willingness to engage in or turn a blind eye to financial crimes, creates a complex and evolving risk landscape.

However, this challenge also presents an opportunity for the international community to innovate and adapt. By leveraging technology, strengthening international cooperation, and maintaining a commitment to transparency and rule of law, it's possible to develop more robust and effective AML/CTF strategies.

As we move forward, it's crucial that compliance professionals, policymakers, and financial institutions remain vigilant and adaptable. The fight against ML/TF in an increasingly autocratic world will require creativity, collaboration, and an unwavering commitment to financial integrity.

Ultimately, addressing the ML/TF risks associated with the rise of autocracies is not just a matter of financial compliance—it's an essential part of the broader effort to promote global stability, security, and democratic values. As the geopolitical landscape continues to evolve, so too must our approaches to combating financial crime.