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.
From Schools of Crime to Criminal Hubs? Prisons and Organized Crime in Latin America and the Caribbean
Ernesto Schargrodsky
Santiago Tobón
We analyze the current situation of prisons in Latin America and the Caribbean. Many prisons in our region have ceased to be neutral holding facilities and, instead, operate as recruitment centers, financial nodes, and command posts for the region’s major criminal organizations. Drawing on comparative data, case studies, and prior scholarly work, we document four mechanisms that turn overcrowded and weakly supervised prisons into ‘criminal hubs’: recruitment of new members, extraction of illicit income, coordination of violence and alliances, and enforcement of internal discipline. We then show why these dynamics erode the three classic justifications for imprisonment. Incapacitation fails when bosses run extortion and trafficking networks from their cells; deterrence fails when prison time is an expected milestone in a gang’s career; resocialization fails when survival behind bars depends on joining a criminal group. Finally, we outline a policy agenda that reserves confinement for truly high‑risk offenders; substitutes electronic monitoring and other community sanctions for low‑risk cases; invests in better-managed facilities that offer dignified living conditions, accelerates trials to shrink pretrial detention; delivers evidence‑based resocialization opportunities such as cognitive behavioral, vocational, and educational programs; and severs illicit communications through rigorous staff oversight and technology. Implemented together, these steps can loosen the grip of organized crime on prison systems and restore prisons’ roles in public safety.
