News

The quality of suspicious activity reports filed by Italy’s financial institutions has markedly deteriorated in the past 18 months in line with industry’s growing reliance on automated compliance systems, according to the country’s financial intelligence unit.

Unita’ di Informazione Finanziaria, or UIF, found in an annual report this month that even the largest and most sophisticated financial institutions have frequently fallen into the trap of over-relying on new, untested software to meet their anti-money laundering and sanctions compliance obligations.

“Such a tendency, in the absence of careful scrutiny … is negatively impacting the completeness and intelligibility of the financial intelligence flow,” UIF noted in the 146-page report, which advises that institutions bolster their knowledge of AML software to avoid submitting “impoverished” filings.

Automated monitoring systems that lack careful calibration frequently fail to produce high-quality data, Nicola Pecchiari, professor of accounting at Universita Bocconi in Milan, and a forensic investigations specialist, told ACAMS moneylaundering.com.

“They are often perceived as a way to free managers of some of their responsibilities … but automated systems should constantly be fine-tuned by experts,” Pecchiari wrote in an email. “There’s a lot of talk of big data, but human intelligence at the moment is irreplaceable.”

By numbers

In 2019, 6,708 banks, money services businesses and other entities covered by AML rules submitted nearly 106,000 SARs, an 8 percent increase over the previous year.

Prepaid card providers, money transmitters and other intermediaries contributed to the overall jump in volume by filing 52 percent more SARs in 2019, according to UIF. Gaming firms filed nearly 30 percent more, while banks and the postal service, which provides basic financial services, continued to account for nearly two of every three SARs in Italy.

Cryptocurrency exchanges filed 20 SARs last year, up from only two in 2018.

“Onsite inspections that for the first time involved this latter sector have helped advance awareness of the money laundering risks it is exposed to,” UIF Director Claudio Clemente said in virtual remarks on July 1.

National and local government agencies, which in Italy are subject to AML rules, filed an “extremely limited” 47 submissions last year after filing 43 in 2018. Accountants, attorneys, notaries and other professionals filed a marginal 5 percent of all submissions.

By type

SARs flagging possible terrorist financing declined nearly 30 percent in 2019 after peaking at a combined 1,066 the previous year, while reports noting indicia of proliferation financing spiked from 18 in 2018 to 86 last year.

According to UIF, the drop in terrorist financing-related SARs should be viewed in the context of the Islamic State group’s loss of territory, funding and international appeal over the past three years.

“There is always a question of priorities,” Pecchiari said. “But one should not underestimate the risk that terrorist and criminal organizations may maintain ties, for example in the drug-trafficking realm.”

On the same day that UIF presented its report, financial investigators in the southern Italian city of Naples seized 14 tons of amphetamines and other narcotics that Islamic State adherents in Syria allegedly manufactured to raise funds. Authorities placed the total value of the seized goods at around €1 billion.

For the first time last year, beginning in April, UIF instructed financial institutions to report related cash transactions with a combined value of €10,000 or more in a single month, and which are conducted in installments of at least €1,000 apiece.

According to UIF, the filings, which flagged an average of 4.2 million cash transactions each month for a combined value of more than €22 billion in 2019, show that even sophisticated institutions struggle with collating and submitting accurate data, especially for transactions below €5,000, which in turn suggests that suspicious activity and clients may also escape detection.

“In several cases, even upon feedback by the UIF, there have been notable difficulties in correcting the data,” the agency reported.

Money laundering-related filings continued to comprise a near totality of all submissions last year.

Both domestic and foreign crime syndicates, especially from Nigeria and China, continued ranking among the largest threats to the integrity of the Italian financial system, with at least 10 percent of last year’s SARs flagging the types of schemes they regularly orchestrate: tax fraud, trade misinvoicing, and attempts to launder money through prepaid cards and remittances.

Embezzlement of public funds through fraudulent procurement processes and corruption, most recently in connection to government subsidies for housing and aiding migrants and asylum seekers, also remain a significant concern.

Suspicious withdrawals of cash via foreign bank cards at ATMs throughout Italy constitute a “significant phenomenon,” the agency claimed. Hungarian-issued bank cards were used to withdraw €46 million from May to September 2019, followed by €2.8 million with Slovakian cards and €1.1 million with Polish ones.

Criminal organizations typically launder their proceeds outside of Italy, especially in certain Eastern European jurisdictions that lag in the implementation and enforcement of European AML standards, said Pecchiari, the Bocconi University professor. They then use local lenders to repatriate their laundered profits back into Italy, he said.

“At that point, to bring the money back to Italy you can either use Italian firms that operate in those countries, to issue fake invoices for example, or you have to withdraw it with debit or credit cards,” Pecchiari said. “Evidently [crime syndicates] discovered that controls on withdrawals were non-existent and increased their volumes, but this put them on the radar.”

UIF also received multiple tips on dubious investments flowing into Italy’s agricultural and real estate sectors through complex corporate structures and foreign and domestic accounts involved in handling hundreds of billions of euros, especially from Russia and former Soviet states, that first passed through lenders in the Baltic region.

COVID-19

This year, the novel coronavirus pandemic has stood front and center in Italian financial institutions’ regulatory reporting. From mid-February to mid-June, at least 350 SARs have flagged suspected fraud, usury and other financial wrongdoing linked to the health crisis and its economic ramifications.

“The situation of urgent need in which many individuals have found themselves favors organized criminals’ ability to occupy spaces where the state is perceived as absent, thereby augmenting their penetration of the social fabric through offers of financial support and protection in exchange for illicit services and silence,” UIF Director Clemente said.

The spike in pandemic-related financial crime in Italy comports with a broader trend in Europe as well as overseas, including in the U.S.

Contact Valentina Pasquali at vpasquali@acams.org