Financial Investigations, A Vital Tool to Counter Organised Crime and Illicit Financial Flows

ARTICLE BY: TUEMAY AREGAWI DESTA (SENIOR TECHNICAL ADVISOR)

Transnational Organised Criminal Groups (OCGs) and their syndicates pose serious threats to global security, financial integrity and overall governance. As defined by the United Nations Convention against Transnational Organised Crimes (TOC), the end purpose of OCGs is to obtain financial or other material benefits[1]. Most of OCGs are primarily motivated by money, in all its forms. In 2017, a report by the Global Financial Integrity (GFI) estimated that OCGs and their networks generate between $1.6 and $2.2 trillion, dwarfing earlier estimates.

Organised criminal activities generate hundreds of billions if not trillions of dollars, out of which, a significant amount is laundered or illicitly transacted within or across borders. Proceeds of Organised crimes are also known to fuel conflicts, aggravate political instability and fund other serious criminal activities. The United Nations Conference on Trade and Development (UNCTAD) reported that the global scale of illicit financial flows (IFFs) is significantly high, with Africa losing US$88.6 billion to IFFs annually[2]. In contrast, it is estimated that only less than 1% of global illicit finance is recovered^[3], and that speaks volumes about the lack of effectiveness in tracing, investigating and recovering illicitly acquired assets. Criminals are now abusing the crypto-asset platforms which further calls for the need to build capabilities in digital financial investigation.

With this drawback, different international organisations appear to agree on the importance of financial investigation (FI) not only to investigate economic crimes but also to dismantle other organised crime, and to trace and confiscate their assets. As clearly underlined by the Financial Action Task Force (FATF) in its provisions of Immediate Outcomes (IOs) 7, 8 and 9, national competent authorities are required to investigate and prosecute money laundering and terrorist financing as well as duly confiscate proceeds and criminal instrumentalities of crime respectively. The FATF has also developed guidelines and good practices related to effective implementation of FI[4]. Similarly, the Council of Europe[5], Organisation for Security and Co-operation in Europe (OSCE)[6], and others have developed guidelines and resource packages related to FI, stressing its critical importance in the fight against all forms of organised crimes.

The European Union (EU) funded AML/CFT ESCAY Project has assisted countries in organising regional and national training, developing curricula for selected countries, and facilitating training of trainers on FI, building upon progress made during previous phases of the Project. It is anticipated that FI is going to be among the priorities of the forthcoming Projects under the Team Europe Initiative (TEI) on Countering IFFs and TOC in Sub-Sahara Africa.[7]

The objective of this brief article is to highlight the vital importance of FI in the fight against organised crimes, illicit financial flows and other profit generating crimes. In this article, I will discuss the following points:

1. Concepts of FI – review the definition, elements and processes of FI with the aim of demystifying the concept, perceptions and realities in practice.
2. Why FI – outline the rationale, purposes and benefits/advantages of FI.
3. Limitations and challenges – identify issues that limit effective application of FI in practice.
4. Way forward – outline suggested recommendations towards effective utilisation of FI in line with international standards.

DEFINING FINANCIAL INVESTIGATION

Financial investigation is fairly a newer tool or technique of investigation which initially used to investigate assets related to financial crimes such as tax evasion, corporate fraud and corruption. However, emerging perspectives argue that FI is an important investigative tool not only to investigate proceeds of crime but also help to reveal undiscovered predicate organised crimes. It can also help to produce evidence about the OCGs and their networks. FI has become more pronounced with the development of anti-money laundering and counter terrorist financing initiatives spearheaded by FATF and global anti-corruption and asset recovery movements. However, there is no single agreed definition of FI.

Different institutions and individual scholars have defined FI to slightly varying degrees regarding its scope and purpose. The Council of Europe’s training manual[8] and OSCE’s Compendium[9] definition of FI narrowly focuses on tracing, identifying, seizing and confiscating proceeds of crime. For example, see the following excerpts of definitions:

A financial investigation is one that traces the funds that support and the profits that are derived from [crime] and enables law enforcement agencies (LEAs) to seize, confiscate, forfeit, restrain or freeze the proceeds of crime – OSCE.

 or

FI is a part which is conducted in parallel with the criminal investigation and is aimed at discovering the proceeds from crime, identifying the property that can be confiscated and temporarily securing (freezing) this property to allow for future final confiscation. While the goal of the criminal investigation is to detect a criminal offence and the perpetrator and to collect the evidence for the criminal procedure, the goal of the parallel financial investigation is to confiscate proceeds from the crime – Council of Europe

Such dichotomy in defining FI separate from criminal investigation is problematic in terms of effective collection and use of evidence in an integrated manner and limits the role of financial investigation in identifying the perpetrators and their networks. The UK Police College[10] widened the scope of FI as an inquiry into “a person or a person’s financial matters” asserting that FI is not only about proceeds of crime asset recovery but should be used alongside all other investigative methods to dismantle OCGs.

From a wider perspective, the FATF[11], described that FI:

• Is an enquiry into the financial affairs related to a criminal activity that helps to identify and document the movement of money during criminal activity, and to establish the link between the origins of the money and beneficiaries, to provide information about and proof of criminal activity.
• Involves the collection, collation and analysis of all available information with a view towards assisting in the prosecution of crime and in the deprivation of the proceeds and instrumentalities of crime; and
• Should be proportionate, non-discriminatory, legitimate, accountable and necessary.

The definition provided by FATF is more comprehensive in its scope and integrative in its purpose in investigating both the predicate offence as well as proceeds of crime. Its clear emphasis on the importance of observing human rights throughout the process of FI is also an essential reminder although it might be seen as obvious by many. Finance or material benefit derived from criminal activities includes all kinds of assets, whether movable or immovable, tangible or intangible, physical or virtual and values in documents or other representations[12].

The next session on rational, purpose and benefits will further elucidate why FI is vital in the fight against organised crime, money laundering, corruption and other criminal activities that generate financial proceeds.

RATIONALE, PURPOSE AND BENEFITS OF FINANCIAL INVESTIGATION:

Effective targeting of illicit financial transactions and proceeds is necessary not only to deprive criminals of their ill-gotten benefits but also to thwart TOC and terrorist activities. One of the most effective ways to disrupt and dismantle TOC criminal networks is to identify, trace, freeze and confiscate the money they got and spend through effective financial investigation. As early as the 1970s, the US Justice Department introduced financial investigation to successfully investigate crimes that generated proceeds as a seventh technique next to “(1) the development of informants, (2) use of undercover agents, (3) laboratory analysis of physical evidence, (4) physical and electronic surveillance, (5) interrogation, and (6) where permitted by law, wiretapping.”[13]

The FATF Guidance outlines that it is essential for LEAs to have the ability to conduct effective FI and have access to financial and other information to effectively counter ML, associated predicate offences and TF offences. FI can also serve as a tool to detect predicate offences and to identify OCGs, and individuals or legal persons that take part directly or indirectly in the criminal activities and movement of proceeds of crimes. Gathering of intelligence on illicit wealth and financial transactions and converting it to admissible evidence is vital to ensure effective prosecution and conviction of OCGs as well as take dissuasive sanctions against financial and non-financial institutions that are directly or indirectly involved in the offence. Researches have also revealed that FI is not limited to economic crimes and asset recovery, rather it is an important tool that can significantly disrupt serious and organised crime and contribute to producing evidence to undercover predicate offences.[14] The Association of Law Enforcement Forensic Accountants (ALEFA) also underlines that FI “should be used not only for asset tracing, but for the purpose of identifying evidence, detecting criminal networks and determining the scale of criminality”.[15]

Case Example: Purpose of FI in THB Cases:

1. Calculation of criminal profits
2. Identify victims of human trafficking
3. Establish compensation for victims
4. Tracing money flows
5. Investigation of commercial structures
6. Investigating an Organised Crime Group (OCG)
7. Locating criminal profits in country of origin
8. Investigation of financial transactions
9. Tracing and seizing assets in country of origin.

The EU Council’s training manual, underscores the role and benefits of integrated parallel FI including collecting evidence on the perpetrator and the criminal offence (part of the traditional crime investigation), identifying amount and type of illicit properties and instrumentalities that are subject to confiscation, and determination of conditions for temporary measures (asset freezing, seizure and securing). The manual further elucidates that by targeting the finance, FI serves as a powerful deterrent. By targeting kingpins and enablers and taking away profits from criminals removes the incentive to commit future crimes as the illicit profits allow them to infiltrate and corrupt the legal economy. FI is instrumental in realising the very principle of the rule of law and moral principle that crime should not benefit anyone. FI can also contribute to compensation of victims of crime, witness protection and whistle blowers by using finance recovered and confiscated.

With the growing market share of cryptocurrencies and other forms of virtual assets and risks of abuse by OCGs and their networks, FI remains critical.  The share of all cryptocurrency activity associated with illicit activity has risen for the first time since 2019, from 0.12% in 2021 to 0.24% in 2022. Chainalisys reported that despite the fact that the share of illicit cryptocurrency in percentage of the total transactions is still estimated to be low in terms of volume, it is increasing year on year – hitting an all-time high of $20.1 billion in 2022[16]. The same report claimed that Criminals laundered $8.6bn of cryptocurrency in 2021, up by 30% from the previous year. These assertions clearly show the vital importance of FI to counter TOC and IFFs in an integrated manner.

In general, effective FI can play a critical role in the success of achieving Immediate Outcome 7, 8, and 9 which aims at punishing perpetrators, deprive criminals of their illicit profits and deter criminals. As underscored by multiple FATF standards and guidelines, investigative authorities are required to undertake parallel financial investigations to successfully prosecute and convict perpetrators as well as recover and confiscate proceeds and instrumentalities of crime.

To sum up, FI has enormous benefits in the fight against corruption, TOC, ML/TF and other serious crimes and enhances overall effectiveness of national AML/CFT and counters IFFs by:

1. Identifying the extent of criminal networks and/or the scale of criminality
2. Tracing the proceeds of crime, terrorist funds or any other assets that are, or may become, subject to temporary measures and confiscation.
3. Developing reliable and admissible evidence that can be used in criminal proceedings; and
4. Revealing undiscovered predicate offences and identifying other extended criminal networks and financiers.

 LIMITATIONS AND CHALLENGES IN FINANCIAL INVESTIGATION:

Only 1% of all FATF-Style Regional Bodies (FSRBs) reviewed countries are effectively prosecuting and convicting money laundering offences; and none are pursuing ML investigations in line with the associated risks^[17]. This is perhaps contributed, among other things, by the lack of effective utilisation of financial intelligence and FI that targets both the predicate offences but mainly on criminal proceeds and illicit transactions. Traditionally, criminal investigators have been reluctant to apply FI as an investigative tool which in turn, limited them from getting important evidentiary value that could be secured through effective utilisation of the tool. Primarily law enforcement agencies in the ESCAY region rely on traditional crime investigation tools focusing on predicate crimes.

The limitations and challenges of effective application of FI as a crucial tool to dismantle OCGs and combat ML/TF and IFFs can be discussed from two points – Institutional and individual or technical elements – as summarised below.

Institutional Limitations and Challenges:

To a large extent, FI is not considered as one of the crime investigation tools. This limitation can be exhibited by the lack of the following:

1. Absence of or limitation in consolidated/comprehensive training curriculums on FI which not only limits the technical expertise and confidence of investigators to use the tool but also inhibits the likelihood of placing it within the culture of investigators.
2. Absence or limitations in formulating and implementing standard operating procedures on the application of FI in police or other investigative agencies.
3. Lack of clear legislations, regulations, policies and guidelines at national and operational levels which should set clear lines of operations and guide LEAs and Prosecutors to use FI as necessary tools.
4. Absence or limitations of clear organisational and structural arrangements like the establishment of FI units (as a separate body) or within different investigation departments which is likely to be caused by the lack of clear policy and guidance on FI.
5. Limited cooperation, coordination and information exchange between LEAs and financial intelligence Units (FIUs), competent authorities, specialised services like accounting forensic units

Technical Expertise (Individual)Limitations and Challenges:

Individuals involved in leading, managing or supervising investigations and particularly crime investigators play an important role in the success or otherwise of investigations, prosecutions, and conviction of serious and organised crimes. The limitations and challenges of effective application of FI can be summarised as follows:

1. Limitations of knowledge and skills on FI for the very reason that investigators and prosecutors are often not trained in the subject matter in regular training programmes.
2. Possibly, the fear of risks that OCGs pose on investigators and prosecutors by investigating assets of criminals might also inhibit application of FI.
3. Lack or limitation of understanding the value of evidence that FI can provide, perhaps contributed by lack of knowledge and/or cultural issues.

Recognising the above challenges and shortcomings that countries face, the European Union’s AML/CFT ESCAY Project has developed curricula and training of Trainers on FI as part of its institutional capacity building initiatives following multiple demands by different jurisdictions. The Project also organised many regional and national training courses that benefitted hundreds of officers drawn from the ESCAY region. The Project also supported a number of countries in developing a multi-agency approach in the investigation and prosecution of ML/TF and related crimes.

Suggested Recommendations as a Way Forward:

Law enforcement agencies and other competent authorities mandated to undertake investigation and prosecution of forms of TOCs are required to have the necessary capabilities (systems, strategies/policies, guidelines/procedures, tools and skills) to undertake effective financial investigation, prosecution and asset confiscation, effectively utilizing FI. This piece suggests the following recommendations to alleviate the shortcomings in FI and enhance effective investigation, prosecution and conviction of OCGs and their networks and the criminal offences.

1. Ensure legislations that provide mandates to LEAs to undertake FI as provided by national constitutions and international standards including the FATF and other international instruments such as the UNTOC, UNCAC etc.
2. Develop an accredited comprehensive curriculum on FI and design and train trainers who will serve as trainers in national academies and possibly at regional level. These trained officers may also be engaged in providing technical support to crime investigators in complex FIs.
3. Establish FI units in line with national laws and institutional frameworks.
4. Regularly train financial investigators as a standalone course and/or FI of specific crimes, for example, FI of human trafficking, FI of drugs trafficking etc to ensure officers have the technical abilities to plan and undertake FI.
5. Provide LEAs with the necessary technology and tools to ensure their capability to effectively apply FI.
6. Enhance the culture of FI as part of an organisational culture through training, monitoring and evaluation, performance assessment and placing standard operating procedures to ensure the use of FI to all forms of organised crime that generate finance/assets.
7. Strengthen coordination, collaboration and information sharing at national level and internationally, with effective multiagency approach, utilising available informal and formal platforms.

In summary, LEAS or the criminal justice sector are recommended to adopt an integrated parallel financial investigation approach in congruence to their specific context. See for example the model below that is developed by the author.

See article 2/a of the UN Convention against Transnational Organised Crimes (2000), https://www.unodc.org/documents/treaties/UNTOC/Publications/TOC%20Convention/TOCebook-e.pdf

[2] United Nations Conference on Trade and Development, Tracking Illicit Financial Flows for Sustainable Development in Africa (2020), https://unctad.org/system/files/official-document/aldcafrica2020_en.pdf.

[3] Estimation by the United Nations Office on Drugs and Crime, cited on  https://www.fatf-gafi.org/publications/methodsandtrends/documents/fatf-interpol-2022.html

[4] For example, FATF Report (2012) – Operational Issues – Financial Investigations Guidance, https://www.fatf-afi.org/content/dam/fatf-gafi/reports/Operational%20Issues_Financial%20investigations%20Guidance.pdf

[5] Golobinec, R (2006) Financial Investigation and Confiscation of Proceeds from Crime: Training Manual for Law Enforcement and Judiciary, Council of Europe, https://rm.coe.int/CoERMPublicCommonSearchServices/DisplayDCTMContent?documentId=09000016806efd5f

[6] OSCE (2019) Follow the Money: Compendium of Resources and Step-by-Step Guide to Financial Investigations Related to Trafficking in Human Beings,  https://www.osce.org/files/f/documents/f/5/438323_0.pdf

[7] https://capacity4dev.europa.eu/resources/team-europe-tracker/partner-countries/sub-saharan-africa/support-africa-combating-illicit-financial-flows-and-transnational-organized-crime_en

[8] Golobinec, R (2006) IBID

[9] OSCE (2019) IBID

[10] https://www.app.college.police.uk/app-content/investigations/investigative-strategies/financial-investigation-2/effective-financial-investigation/

[11] FATF (2012, p. 7) Operational Issues – Financial Investigations Guidance, https://www.fatf-afi.org/content/dam/fatf-gafi/reports/Operational%20Issues_Financial%20investigations%20Guidance.pdf

[12] See for example the definition by the FATF or the UN Convention against TOC (2000)

[13] Nossen, Richard (no date) The Seventh Basic Investigative Technique: Analysing Financial Transactions in the Investigation of Organized Crime and White-Collar Crime Targets, US Department of Justice

[14] Gale, E and Jessica, K (2018) Exploring the Role of the Financial Investigator: Research brief, UK Home Office: https://assets.publishing.service.gov.uk/media/5bdaf40c40f0b604ecadf7ba/exploring-the-role-of-the-financial-investigator-research-brief-2018.pdf

[15]

[16] Chainalysis (2023) Crypto Crime Trends : https://www.chainalysis.com/blog/2023-crypto-crime-report-introduction/

[17] FATF (2022) Report on the State of Effectiveness and Compliance with FATF Standards, https://www.fatf-gafi.org/publications/fatfgeneral/documents/effectiveness-compliance-standards.html