Tackling Illicit Finance: The Ecosystem Approach

It is globally recognised that illicit finance, which involves money derived from illegal activities or used for illegal purposes, undermines economic growth, exacerbates poverty, and fuels instability and conflict in both developed and developing countries¹. In consequence, illicit finance is rising on the global political agenda to the extent that multilateral institutions such as the International Monetary Fund have outlined how policymakers need to better understand the economic impact of crime and consequences of illicit flows in financial systems². This trend is evident in the Foreign, Commonwealth & Development Office’s (FCDO) UK International Development Strategy and is exemplified by expenditures from the UK Overseas Development Aid and Integrated Security Fund (ISF)^{3 & 4}. Significant spend on overseas civil society and cross-sector government capacity building initiatives demonstrate a recognition that it is not sufficient for the UK to reform its own systems and controls in isolation. In actuality, recent global events have demonstrated that there is a clear demand for a unified global effort and bilateral partnerships to jointly tackle illicit finance threats impacting the UK.

In the past few years, geopolitical issues have brought increasing attention to the use of sanctions, in particular financial sanctions, as a political tool and form of intervention. Sanctions are restrictive measures that can be implemented to support foreign policy and national security objectives, as well as maintain international peace and security. They are intended to promote compliance with international norms, deter undesirable activities, and address threats to peace, security, or human rights. To act as a collective, governments must ensure their own systems are equipped with the controls needed for an effective sanctions regime. Moreover, the effectiveness of sanctions implementation demonstrate how both Governments and the private sector depend upon a coordinated response to prevent sanctions evasion or circumvention via third countries in order to create a tangible difference in delivering foreign policy objectives. The sanctions and export controls imposed by the UK and the EU on Russia and Belarus have had a profound impact on EU member states with substantial financial connections to Russia and have highlighted how countries have had to focus their efforts to rectify gaps in their systems⁵. Mounting global pressures have demonstrated that a robust financial sanctions regime cannot operate without an existing and well-functioning anti-money laundering (AML) system and relevant reforms in place ranging from AML supervision through to enforcement.

Nevertheless, the need for identifying and delivering targeted, and effective reforms that deliver illicit finance system-wide transformation has increased now more than ever. To understand what those sets of reforms should look like, and how to best provide technical assistance to relevant stakeholders to help detect and prevent illicit finance, Deloitte uses an “Ecosystem Analysis” that can help jurisdictions transform their broader illicit finance regimes.

What is an Ecosystem Analysis?

An illicit finance ecosystem analysis identifies and illustrates all the organisations involved in tackling illicit finance within a national system. This includes those responsible for policy-making, coordination, prevention, disruption and enforcement.

It also documents the interactions between these organisations and serves as an opportunity to identify system-wide enhancements. Understanding and effectively navigating this ecosystem is crucial for illicit finance stakeholders to implement a meaningful, coordinated response. By analysing the interactions and relationships between these actors, an ecosystem analysis can provide insights into the strengths and weaknesses of the illicit finance regime to identify regulatory, legislative and operational areas that could be improved. A holistic approach to understanding the illicit finance regime, an ecosystem analysis can contribute to a more effective and sustainable system for combating illicit finance and promoting economic development.

Where do we use an Ecosystem Analysis?

An Ecosystem Analysis has a wide range of uses. The analysis can be used to support governments to understand the policy, coordination and legislative reform needed, which has been the focus of Deloitte’s work with HMG’s Serious and Organised Crime Network (SOCnet) - an innovative overseas network of organised crime and illicit finance policy officers covering over 100 countries. SOCnet has facilitated joint organised crime threat assessments in Europe, supported legislative change to target illicit financial flows in the Americas and delivered capacity development initiatives to partner countries. Through this project Deloitte worked with SOCnet and a foreign government to develop a ‘Sanctions Ecosystem’ to support the creation of a new Sanctions Unit.

The Ecosystem’s purpose was to identify relevant stakeholders in the sanctions system, illustrate the relationships between stakeholders, and understand potential gaps in the country’s broader illicit finance system which underpins a sanctions regime. To understand what those potential barriers to reform could be, the team considered what the key functions of a successful and well-functioning sanctions regime would look like – these included the ability to:

• issue impactful policy initiatives and coordinate activity where there is overlap with other types of sanctions (i.e. trade, immigration, and transport sanctions)
• withstand threats from professional enablers that intentionally facilitate sanctions evasion and 
• disrupt or take enforcement action against sanctions breaches

To create the Sanctions Ecosystem, the Deloitte team conducted desk-based research on organisations’ roles and responsibilities, analysing FATF Moneyval reports, National Risk Assessments, and additional documentation. The team interviewed various stakeholders in the system from AML supervisors to law enforcement agencies and policy makers to gather their views on their role in the wider system as well as their perspective on barriers to effective sanctions implementation.

To understand institutions’ collective role in the wider system, the organisations were grouped into the Financial Action Task Force (FATF) system groups. The three categories, in the sanctions context included:

1. Policy, coordination and cooperation:  Organisations that agree the list of sanctioned entities / designated persons, amend policy & legislation, circulate decisions with relevant bodies, and coordinate actions domestically and internationally. This group was comprised mainly of policy and decision-makers who oversee the legislative framework and coordination of sanctions activity at a strategic level.
2. Prevention: Organisations that prevent the facilitation of sanctions evasion through issuing guidance or implementing robust controls and frameworks. These organisations work to prevent the proceeds of crime and funds from entering the financial and non-financial sector. This group was comprised mainly of supervisors, financial institutions and licensing bodies that implement sanctions legislation and policy.
3. Disruption and enforcement: Organisations that detect and disrupt threats. Criminals and facilitators are deterred from evading sanctions and legal action is taken. This group was comprised of law enforcement agencies and the judiciary.

The purpose of creating the Ecosystem Analysis in this example was to support UK government and the partner country during their assessment of their financial sanctions policies and implementation. In addition, the analysis supported SOCnet and the Deloitte team to identify where areas for future bilateral cooperation would be best placed to jointly tackle sanctions evasion and wider money-laundering threats. In mapping out the strategic and operational interactions, the analysis has been used to support the assessment and prioritisation of recommendations and technical assistance.

By applying our Ecosystem Analysis and through stakeholder consultation, we identified system-wide gaps that drove the prioritisation of reforms and interventions: Examples of these reforms include:

• a coordinated response to sanctions implementation including stronger public-private partnership or cooperation mechanisms between competent authorities and the private sector to share learnings and foster cross-sector collaboration 
• an improved non-conviction based asset recovery regime, and relevant legislative reform to enable law enforcement to trace, freeze and recover sanctioned assets
• an improved legislative framework for sanctions implementation – including detailed sanctions requirements that build on international guidance; and,
• the need for capacity enhancement – including advanced or specialised training for supervisors and regulated entities on sanctions implementation, as well as for law enforcement agencies on conducting sanctions investigations

When asked to comment on our Ecosystem Analysis, clients from SOCnet stated that “Deloitte’s Ecosystem analysis has been used by SOCnet to map financial sectors. This analysis has allowed HMG to easily identify key interlocutors, gaps and intervention opportunities that would have the largest impact on reducing risk across the system. This has ensured the best result for our partner countries as well as ensuring cost-effective and timely interventions for the UK Government.”

Deloitte has also previously used an Ecosystem Analysis to support other UK government departments and jurisdictions in analysing their broader AML system. Stakeholders, in their feedback, have stated that the exercise of conducting an Ecosystem analysis has helped them to simplify and digest an extremely complex landscape. The analysis enables stakeholders to better understand organisations’ roles and responsibilities not just as an institution in isolation, but in the context of the wider collective, informing decisions about where capability can best be improved to achieve system-wide reform.

How can an Ecosystem Analysis support jurisdictions with FATF evaluations?

A positive FATF evaluation is crucial for developing countries as it enhances their reputation, facilitates access to international financial systems, promotes financial stability, and encourages international cooperation and support. It is an important step towards building a robust and resilient financial system that supports sustainable economic growth and development.

With 5^th round FATF mutual evaluations on the horizon, countries should consider undertaking an Ecosystem Analysis to proactively understand system-wide gaps and develop targeted reforms that demonstrate effectiveness. As mentioned above, organisations can be grouped into FATF system groups as a way of understanding their collective role in a country’s illicit finance regime. 

Currently, targeted financial sanctions are within the FATF scope in relation to terrorist-financing or proliferation financing through Recommendation 6 and 16. However, as mentioned, a well-functioning and robust financial sanctions regime fundamentally relies on existing AML controls and systems such as beneficial ownership and transparency measures detailed in Recommendation 24. By mapping stakeholder interactions, identifying strengths and weaknesses, and addressing potential areas of cooperation and collaboration, organisations can demonstrate effectiveness in line with FATF Immediate Outcomes 1 and 2. Immediate Outcomes 1 and 2 Policy, Coordination and Cooperation focus on high-level issues such as the processes and mechanisms in place to produce and coordinate the risk assessments. Implementing cooperation mechanisms such as Public Private Partnership forums and demonstrating the outputs from such forums such as joint typologies and guidance can help demonstrate that a jurisdiction is undertaking a collective and effective approach to tackling key threats.

The overarching aim of an ecosystem analysis

In summary, conducting an Ecosystem Analysis allows jurisdictions to gain perspective, and cultivate a system-wide approach to deter and disrupt illicit financial flows. Governments, donors and multilateral institutions can use an ecosystem analysis to deliver targeted interventions, demonstrate effectiveness to bodies such as FATF, and keep themselves accountable for implementing impactful reforms.

If you are interested in discussing any of the topics in this article in further detail, please do get in touch.

____________________________________________________________________

References:

1. Transparency International - https://knowledgehub.transparency.org/helpdesk/illicit-financial-flows-fragility-and-conflict 

2. IMF -  https://www.imf.org/en/Blogs/Articles/2023/12/07/financial-crimes-hurt-economies-and-must-be-better-understood-and-curbed 

3. UK FCDO - https://www.gov.uk/government/publications/uk-governments-strategy-for-international-development/the-uk-governments-strategy-for-international-development 

4. UK Integrated Review of Security, Defence, Development and ForeignPolicy - https://www.gov.uk/government/publications/global-britain-in-a-competitive-age-the-integrated-review-of-security-defence-development-and-foreign-policy/global-britain-in-a-competitive-age-the-integrated-review-of-security-defence-development-and-foreign-policy 

5. Reuters - https://www.reuters.com/business/finance/contagion-sanctions-europes-banks-brace-russia-fallout-2022-02-22/