Digital technologies that are faster are more susceptible to money laundering and criminal networks, financial experts warn in response to the G20 proposal.
Industry experts have cautioned that an effort by the G20 to expedite international transfers runs the risk of encouraging financial crime and making it more difficult to execute sanctions on Russia, implemented for its war in Ukraine, and other countries under restrictions, the Financial Times reported.
Increased risks associated with money laundering and sanctions evasion
According to the Future of Financial Intelligence Sharing, a UK-based research program, plans to improve the efficiency of digital payment systems by 2027 do not account for the systems’ growing susceptibility to criminal networks and the increased risks associated with money laundering brought about by a surge in war-related economic sanctions.
In an interview with the Financial Times, Nick Maxwell, the chairman of FFIS, which published a report on the concerns, stated that “a key institutional failure at the G20 level is the lack of responsibility among payments reform policymakers to consider fraud prevention and financial crime security.”
In order to “hardwire” financial crime prevention systems into cross-border payment infrastructure and use national data to identify money laundering networks, the report called for enhanced cooperation between the public and commercial sectors.
A failure to tackle these issues could have “wide-ranging negative impacts for consumer financial safety, law enforcement effectiveness against organized crime, and national security in terms of sanctions implementation,” the expert explained.
The Bank of England predicts that the value of cross-border transactions, which include retail transfers, remittances, and wholesale payments between financial institutions, will reach $250 trillion by 2027, up from $150 trillion a decade earlier.
G20 proposed to improve the efficiency of digital payment systems by 2027
The Financial Stability Board is an international organization that oversees and provides suggestions regarding the state of the global financial system. It has created a roadmap for improving payments across borders. The World Bank, the IMF, and roughly forty central banks back the G20-led plan.
In October, the FSB released a revised version of the plan that concentrated on doable steps that will allow G20 nations to meet their 2020 goal of reducing the cost, speed, and transparency of international payments by 2027.
According to the financial watchdog’s road map, establishing shared data standards, enhancing settlement infrastructure, and bringing together legislators, supervisors, and regulators to discuss “regulatory friction” in the industry are among the “priority areas.”
The FFIS assessment warned about the lack of mitigation plans for the “increased risk of cross-border fraud and associated money laundering,” despite the road map’s intention to eliminate the “very limited time period” required to screen operations and recover resources before they are resolved.
Clearing cross-border payments in a matter of seconds reduces the time counterparties have to conduct compliance checks and stop questionable transfers.
How to tackle the necessity of enforcing sanctions
The G20 proposal, according to experts, did not significantly tackle the necessity of enforcing sanctions via real-time transaction blocking, which is a prerequisite of the majority of US sanctions programs.
The number of sanctions imposed by the West has significantly expanded following Russia’s full-scale invasion of Ukraine almost two years ago. The sanctions have severely impacted Russia’s financial institutions as a member of the G20. The Swift global payments system, which processes daily transactions worth trillions of dollars, excluded some of its largest lenders.
Several Western corporations cannot purchase specific Russian products, and Western financial systems have blacklisted hundreds of executives connected to Russian dictator Vladimir Putin.
Need to prevent Russia from bypassing sanctions
Global financial innovation should be cautious and balanced, as the benefits of improving financial transfers outweigh the risk of allowing Russia to dodge sanctions further.
Multiple journalistic investigations have revealed that Moscow has learned ways to avoid Western sanctions by exploiting other nations and shell businesses, particularly in China, the UAE, Kazakhstan, Uzbekistan, Armenia, and others. Russia, in particular, has acquired Western dual-use spare components required in the construction of weapons, such as electronics and microchips for missiles and drones.
Latest sanctions package targets sanctions evasion schemes
In December, the United States, United Kingdom, and European Union adopted the newest sanctions packages to punish corporations that assisted Russia in circumventing sanctions, deter future sanctions evasion, and eliminate any loopholes in illicit international trade.
Enforcing the sanctions regime will finally deplete Russia’s economy and halt its weapons production capacity. Such circumstances may force Putin’s leadership to halt the war in Ukraine.
The absence of sanctions enforcement will interpret Russia’s permissiveness in continuing the war in Ukraine. All of this will make it hard for Ukraine to prevail, move the conflict closer to the EU’s borders, and free the Kremlin to initiate action against European NATO member nations.