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.
The Entrenchment of Organized Crime in Latin America’s Local Communities: A Review of Existing Evidence and Policy Recommendations
Elena Butti
Albert Souza Mulli
This policy document examines the different approaches used by organized criminal groups in Latin America and the Caribbean (LAC) to embed themselves in local communities. Drawing on a systematic review of academic and grey literature, the policy document argues that homicide rates and other violence indicators are often poor proxies for the degree of criminal embeddedness as organized criminal groups often establish and consolidate relationships with local communities (and the state) through a variety of different practices that respond to communities’ governance and economic needs.
To explore these dynamics, the policy document proposes an analytical framework that identifies three distinct yet overlapping realms of organized crime-community interaction: the regulatory realm (including dispute resolution, moral regulation, and informal justice), the economic realm (provision of employment, services, access to informal and illicit markets, and welfare-like functions), and the political-civic realm (infiltration of local politics, electoral processes, and regulation of civil society). The analysis shows that these practices often generate forms of local legitimacy and social contracts that blur boundaries between state and non-state authority, legality and illegality, and coercion and consent, with organized criminal groups often taking on functions traditionally associated with the state in order to gain legitimacy and enforce local order. The policy document further demonstrates that criminal groups are able to do this not solely due to the absence of the state—as frequently assumed—but often through collusion with and co-option of state institutions.
Building on the analysis, the policy document reviews available evidence on policy interventions that have empirically shown promise in disrupting or preventing the territorial expansion of organized crime across the three realms. The evidence suggests that traditional, securitized approaches, which seek to disrupt and "crowd out" organized crime by "bringing the state back in" can often deepen their entrenchment into local communities and even worsen violence. Instead, the paper concludes, enhancing effectiveness requires approaches that are more selective and sequential, which differentiate between different types of criminal groups, and focus on reducing communities’ dependence on them.
