The Role of the Financial System in Criminal Organizations, Money Laundering, and the Design of Anti-Money-Laundering (AML) Policies: Striking a Balance between Prosecution and Prevention
Alejandro Werner
Roberto de Michele
Criminal organizations rely on the financial system to move and use their illegal profits, disguising them through a process known as money laundering. Illicit funds from crimes are first blended with legitimate business income, then transferred and layered through the financial system to hide their origin.
The global anti-money-laundering and combating the financing of terrorism (AML/CFT) framework, set by the Financial Action Task Force (FATF), was originally designed to help prosecute money laundering and related crimes, especially drug trafficking. As a result, many countries adopted frameworks focused primarily on criminal investigations. While still important, this approach is challenged by several factors, including increasingly sophisticated criminals capturing legitimate markets and, in Latin America and the Caribbean, large informal economies and heavy cash use.
Financial intelligence units (FIUs) are at the center of these frameworks and play a key role by collecting, analyzing, and sharing information on suspicious activities. However, growing operational demands and requests from other agencies have shifted their focus away from strategic analysis and feedback to the private sector.
The paper argues that the traditional prosecution-centered model overlooks the value of a strategic, preventative AML approach. This strategy would “tax” criminal activity by making it harder and more costly for criminals to use the financial system—through better detection, penalties, and system design—while minimizing burdens on legitimate users. We propose to tip the balance to preventative policy measures, especially using digital technologies to improve compliance and reduce costs. These measures are meant to complement, not replace, prosecutions. This paper ultimately reviews why AML matters, how the framework has evolved, challenges in Latin America and the Caribbean, limits of the prosecutorial model, and policy options to strengthen prevention.
Latin America and the Caribbean faces the highest levels of violence in the world—bearing a disproportionate share of global homicides despite representing a small share of the world’s population. Violence takes multiple forms, but in recent decades organized crime linked to illicit markets has become a leading driver, while remaining under-studied and too often disconnected from broader development debates.
This initiative brings together leading think tanks, policymakers, multilaterals, representatives of the civil society, and scholars in a multi-year collaboration to generate timely, policy-relevant knowledge on criminal violence in the region, with a focus on organized crime. This website hosts the resulting policy documents, notes, and research outputs.