Asia-Pacific a money-laundering hotbed: bad actors exploit shell companies, cryptocurrency while AI chases, report says

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Shell companies and a growing market for cryptocurrency have become the new hotbeds for money laundering across the Asia-Pacific region, but new technologies such as artificial intelligence (AI) have emerged as effective tools to counter the crime, according to Forrester Research.

Varied regulatory frameworks and enforcement across Asia-Pacific countries have led to a proliferation of shell companies, allowing criminals to exploit loopholes and conceal illicit funds, the US-based researcher said in a report.

Meanwhile, growing interest around cryptocurrency in Asia – which now makes up 70 per cent of the world’s bitcoin trading volume – as well as the absence of a coherent regulatory framework, have also created opportunities for criminals to “exploit the perceived anonymity and ease of cross-border transactions that cryptocurrencies offer”.

“Money launderers employ techniques like ‘smurfing’, service mixing, offshore transactions, and exchange hopping to obfuscate transaction history and conceal funds’ origins,” Forrester analysts said.

Smurfing is the act of breaking a large sum of money into several smaller parts to avoid detection by authorities.

The report also said that trade-based money laundering is “especially prevalent” in Asia owing to the region’s status as a hub for global commerce; the region’s complex network of suppliers, intermediaries and financial institutions involved in cross-border trade gives criminals ample opportunity to manipulate invoices, overvalue goods and transfer illicit funds under the guise of legitimate trade.

“Cross-border trade involves multiple entities, so banks need to access more external data to analyse risks, adding the challenge of finding reliable external third-party data providers and sources,” the analysts said.

A report published in January by the United Nations Office on Drugs and Crime (UNODC) identified cryptocurrency and casinos as the main drivers of money laundering across east and southeast Asia.

UNODC estimated that more than 340 licensed and unlicensed land-based casinos were active in Southeast Asia as of early 2022, and most of these venues have shifted online. The global online gambling market is projected to grow to more than US$205 billion by 2030, with Asia-Pacific representing the lion’s share of the market growth at a projected 37 per cent, according to the report.

The Chinese government estimated that as of 2020, at least 5 million people took part in online gambling, leading to an estimated US$157 billion in capital outflow from the country.

A view of Hong Kong showing the Central Ferry Pier on July 18, 2023. Photo: Elson Li

To counter increasingly complicated acts of money laundering, banks and institutions across the region have been embracing new technologies, such as generative AI, explainable AI and behavioural biometrics to address new challenges.

In the generative AI space, HSBC has partnered with Google Cloud to apply the technology in the customer screening process, while Moody’s has begun adopting generative AI to summarise critical risk information and generate insights that can be shared with customers.

Increasing collaboration is also taking place between financial institutions and regulators to address money laundering issues, especially in the realm of data sharing, the report noted.

“Financial institutions can’t successfully battle increasingly sophisticated money laundering risks on their own,” said Liu Meng, senior analyst at Forrester. “There has been an increase in public and private collaboration on data sharing, with one key example being the Monetary Authority of Singapore’s [MAS’s] collaboration with six major banks in the country.”

Meanwhile, regulators are also putting in place stricter rules to combat money laundering, especially when it comes to cryptocurrency. For example, in late 2023 the MAS banned the use of locally issued credit cards to purchase virtual assets in the country, and in April this year, it revised requirements on digital payment token service providers.