A Conceptual Framework to Assess the Risk of Money Laundering in Designated Non-Financial Institutions in Emerging Market Economies

The scale of money laundering has increased recently due to various reasons. The global economic volatility brought on by geopolitical tensions, disruptions in international trade as well as misuse of emerging technologies are some of the main causes. Within this challenging environment, money launderers may exploit opportunities beyond traditional financial institutions (Akartuna, E., et al, 2023). Non-financial institutions represent a major share in many economies and have become increasingly vulnerable to such criminal activities. The Financial Actions Task Force (FATF), the global policy setter on combating money laundering, terrorist financing and financing of proliferations, has recognised the vulnerable areas and several higher risk non-financial institutions. They are named as Designated Non-financial Businesses and Professions (DNFBPs). However, the focus of country authorities on the risk emanating from the DNFBP sector is far less than the Financial sector. It provides greater opportunities to exploit such sectors for money laundering purposes, especially during periods of global unrest and economic uncertainties. This is confirmed by the worldwide poor evaluation results by the FATF on risk identification and implementation of Anti-Money Laundering and Anti-Terrorist Financing (AML/CFT) control measures in the DNBFP sector. This could be due to the lack of proper assessments of money laundering threats and vulnerabilities, i.e., the money laundering risk of the sector. One major impediment in applying regular approaches to assess risk in the DNFBP sector is insufficient data availability. This case is more critical in emerging and developing economies. In this study, I propose a conceptual “bottom-up approach” for DNFBPs to assess Money Laundering and Terrorist Financing (ML/TF) risks, considering the lack of data and informality prevailing in the sector. Within this conceptual framework, an index is proposed to assess vulnerability, and the index will allow authorities to evaluate preliminary risk levels. Further, this will help the sector to allocate required resources to combat higher ML/TF threats. In addition, based on this framework, I have identified six main challenges that affect the proper control of illegal activities in the DNFBP sector, namely, 1) lack of regulatory requirements and supervisory concerns, 2) lack of awareness of corporate management of firms and lack of technology in firms, 3) primitive state of businesses, 4) political interventions, 5) lack of government support and 6). structural issues, such as the sector not being well established in the country. Moreover, these align with factors discussed often in the country mutual evaluation report by FATF. Finally, I discuss a case study to elaborate how Sri Lanka has successfully faced such challenges during its period of introducing and implementing the FATF requirements in the country’s Non-financial sector.