The global inflation crisis has had a considerable impact on the average citizen both domestically and abroad over the better part of the past two years. Despite the obvious related consequences such as elevated prices for goods and services, energy (gas, oil and electricity) and even housing, there has been a proportionate increase in crime – both conventional and of the white-collar variety – as a byproduct during this period. While inflation figures in the United States have started to show signs of easing from the all-time highs reached in 2022, the latest figures for several of the world’s largest economies – most of which have been impacted by both local and global developments such as the ongoing war in Ukraine – remain troubling and show no signs of leveling off any time soon. The state of desperation created by a change in one’s financial situation and the difficulty in making ends meet can be tempting to the less virtuous members of society and can subsequently lead them towards nefarious activities such as theft, robbery, embezzlement and/or money laundering. Given these unique circumstances, the economic downswing in which we remain mired has created opportunities and vulnerabilities that financial criminals have aimed to exploit, with many doing so successfully. A global rise in fraud, phishing, and hacking exploits, as well as various new outlets available for laundering the proceeds from human and drug trafficking (the International Compliance Association (ICA) notes that the depreciation of currency caused by a rise in inflation leads the profit margins of drug dealing to surge exponentially) have culminated in a criminal environment that is unparalleled from a historical perspective.
The threats created by inflation are not limited to one or even a few countries. As the world has become increasingly interconnected financially, economic changes across a few regions have ripple effects that can be felt globally for decades to come. While mostly a positive as a whole, the unfortunate reality is that this growing web of relations between jurisdictions has also allowed for the proliferation of “trade-based” money laundering (TBML), a practice which puts the entire international market at elevated risk. The Financial Action Task Force (FATF), an intergovernmental organization which created policies to combat money laundering and other forms of financial crime around the world, has highlighted TBML as a significant channel of criminal activity that has become an increasingly important money laundering and terrorist financing vulnerability for the United States and its counterparts. The FATF defines TBML as the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins and subsequently avoid detection.2The end goal of course is to make it so that it becomes impossible to tell where the legitimate funds end and illegitimate funds begin. And when used in conjunction with more conventional money laundering efforts, these transactions are often undetectable.
All told, TBML can be carried out via a number of methods, including the misrepresentation of prices (i.e. over- and under-invoicing), as well as the quantity and/or quality of imports and exports, respectively.2 This can also include multiple invoicing of the same goods/services by reusing existing documentation in order to receive multiple payments. The aim of this process as a whole is not necessarily the movement of the involved goods, but rather the movement of the oft-dirty money the trade transactions facilitate. With respect to inflation, this practice has thrived via the manipulation of pricing for material goods. Criminals carrying out overpriced trade transactions to mask their illicit activities can complicate the detection of the funds being laundered, while overpricing itself can significantly affect a nation’s foreign currency reserves and overall economic stability as TBML can lead to a loss of foreign exchange reserves, distort trade statistics, and create imbalances in the country’s balance of payments, potentially further contributing to economic crisis.1 Given that in today’s society overpriced transactions can be simply chalked up to inflation without creating any significant red flags, normal investigations into potentially suspicious activity are often overlooked by both financial institutions and government bodies, allowing these activities to continue unimpeded.
Other risks identified by the ICA during inflationary periods include the exploitation of individuals strapped for cash by “loan sharks.” These lenders will generally offer financial support to those with poor credit or who for other reasons would not qualify to borrow from a traditional financial institution. The catch is that the loan sharks will require absurdly height interest rates or demand physical assets such as property as collateral, this under stringent repayment terms, thus resulting in a cycle of debt that is nearly impossible for a borrower to break free from.1 In these cases, the onus unfortunately falls directly on the average person who must pay very close attention to ensure that they are not doing business with unlicensed lenders which would put oneself outside of protections offered by the federal government. However, without many other options available with respect to borrowing during times of need, it is clear to see how financial crime of this variety can proliferate from both ends of the spectrum in this example.
There are signs that current inflation issues could be ongoing for several years. There are many factors involved that can affect the length of a respective inflation period, including government policy and intervention (i.e. rate hikes and “relief” programs), the severity of the inflation itself, and the overall health of a country’s respective economy. Given all of these question marks, government officials, financial institutions, and law enforcement must continue to work together in vigilance to minimize the identified crime risks and crack down on illegal operations that threaten the integrity of the global financial system.
Citations
- Karim, Rezaul. “Inflation: A Breeding Ground for Financial Crime.” International Compliance Association (ICA), 10 May 2023.
- “Trade-Based Money Laundering.” Financial Action Task Force, 23 June 2006.
