Davos report shows the danger in the interconnected nature of money laundering risk

Davos report shows the danger in the interconnected nature of money laundering risk

money laundering risk
money laundering risk


7 Feb 2023

While the risk report issued by the Word Economic Forum sees the category that includes money laundering risk come in behind a range of other issues, financial firms should remember the interconnectedness of this risk and the importance of it to their own operations.

The “Proliferation of illicit economic activity” risk is in position 28 in the short-term rankings of the World Economic Forum’s Global Risks Report 2023, behind issues such as the cost of living crisis, climate change-related issues and widespread cybercrime and cyber insecurity. However, financial firms shouldn’t deprioritise this risk. The WEF report itself shows how interconnected it is to many of the higher-ranking risks. More generally, this risk remains critical to financial firms because of the economic role that they play in the global economy.

Global risks landscape: an interconnections map

The WEF report defines the “Proliferation of illicit economic activity” as the “global proliferation of illicit economic activities and potential violence that undermine economic advancement and growth due to organized crime or the illicit activities of businesses. Includes, but is not limited to: illicit financial flows (e.g. tax evasion); and illicit trade and trafficking (e.g. counterfeiting, human trafficking, wildlife trade).” At the heart of all of these crimes are the cash flows that need to be laundered through financial institutions so that illicit profits can be used for normal economic activities.

Risk connections

Money laundering is a risk that arises from a range of other risks. For example, in the report’s Global Risks Landscape: an Interconnections Map on page 10, the “Proliferation of illicit economic activity” risk sits at the centre of the diagram. In that position, it is connected to high-priority risks such as “Large-scale involuntary migration”, “Natural disasters and extreme weather”, “Erosion of social cohesion”, “Collapse of a systemically important supply chain” and “Failure to stabilize price trajectories”.

Moreover, the WEF report breaks out a couple of risks separately and shows their specific interconnections. For example, on page 23, when discussing the risk of the “Erosion of social cohesion”, the “Proliferation of illicit economic activity” is shown as medium for risk influence and low for relative influence. And on page 43, where “Widespread cybercrime and cyber insecurity” is discussed, the “Proliferation of illicit economic activity” is shown as a medium-sized for both risk influence and relative influence.

This interconnectedness shows that the “Proliferation of illicit economic activity” is often a result of the growth of other types of risks, and in this way, it is quite special. This means that as other types of risks strengthen, financial firms should always be asking themselves what the impact will be for the “Proliferation of illicit economic activity”.

Money laundering focus

While the “Proliferation of illicit economic activity” risk exists for all organisations, it hits financial services firms particularly hard. This is in part because of the central role that financial firms play in the transmission of money around the globe, and in part due to the thick rulebooks that exist for money laundering prevention for that industry.

The WEF report shows that key stakeholders, including the regulators who oversee anti-money laundering programmes, are aware of the interconnection between these various risks and the “Proliferation of illicit economic activity”. So, it’s important for compliance teams to consider their anti-money laundering programme in an interconnected way, across the range of risks that their firm faces. Firms need to be aware of not just the obvious AML risks, such as non-compliance – but how that risk may arise out of the likelihood and impact of other, connected risks.

Anti-money laundering (AML)