The impact of money laundering and terrorist financing activities result in financial and reputational losses, which means cash outflow and loss of business and customers. Reputational losses are related to the image of the entity. Therefore, these losses are always considered significant because once they occur, they ruin the overall reputation of the entity. Customers start losing interest in the entity and transfer to other entities for their specific needs.
Customers always lose interest in those entities where money laundering and terrorist financing incidents are reported because these activities are recognized in criminal law and vary according to jurisdiction and compliance requirements proposed by the local standard-setting bodies. Money laundering is the processing of criminal proceeds to disguise their illegal origin. Money laundering enables criminals to enjoy profits and funds without jeopardizing their source.
Impact of Money Laundering and Terrorist Financing on Institutions and their Customers
When a criminal activity generates substantial profits, the individual or group involved must find a way to control the funds without attracting attention to the underlying activity or the persons involved. Criminals do this by disguising the sources, changing the form, or moving the funds to a place where they are less likely to attract attention. The term money laundering describes the activity of concealing or disguising the identity of illegally obtained proceeds. This activity aims to make the illegally obtained proceeds appear to have originated from legitimate sources.
Criminal activity is usually undertaken to generate revenue or provide a benefit to those undertaking the activity. Organized groups undertake significant criminal activity, and laundering is the process of disguising the illegal origins and ownership of the criminal property to enable the criminals to use and enjoy it without jeopardizing themselves or attracting unwelcome attention, such as from law enforcement. The main purpose of money laundering is to take advantage of criminal activities. Money laundering is the result of almost all profitable crimes.
Entities that continuously fail to appropriately counter or overcome the risks of money laundering and terrorist financing activities are usually blocklisted by the regulatory authorities. Such causes the loss of existing business in the form of loss of customers or market share and the possible shutdown of operations, causing turnovers of skilled employees, layoffs by management, and economic problems for the associated stakeholders.
The loss of a significant number of customers means the loss of revenue and a significant decline in profitability, leading to business shutdowns and entity operations. Such incidents cause entities to go into the liquidation process, where the relevant local company liquidation laws and regulations are to be complied with to distribute assets and settle liabilities.
Final Thoughts
Money laundering and terrorist financing have significant impacts on financial institutions and their customers, including reputational damage, legal and regulatory sanctions, increased compliance costs, increased scrutiny of customers, restrictions on certain types of transactions, and increased reporting obligations.
