Inflation: A breeding ground for financial crime

According to the World Bank’s Global Economic Prospects report, inflation is expected to remain above central bank targets in most emerging markets and developing economies over the next few years.

Targeting the vulnerable

Inflation has ripple effects on individuals and businesses, posing a wide variety of threats to the economy. It not only affects a country’s financial stability but also results in increased financial crime rates.

Amid soaring cost-of-living pressures, many people resort to unlawful activities such as theft, embezzlement, robbery, or money laundering. With the depreciation of currency, the profit margins of drug dealing surge at an alarming rate. Stagnating living standards, in the long run, lead to a heightened risk of social unrest, increased crime, and corruption, heightening the challenge law enforcement agencies and governments alike face.

The latest report on human trafficking from the United Nations Office on Drugs and Crime revealed during an economic downturn criminals target the vulnerable, resulting in an increase in potential victims of modern slavery, human trafficking, and sex trafficking.

In times of inflation, loan sharks may seek to exploit desperate individuals—in particular, vulnerable and marginalized borrowers—by offering loans with high interest rates, property in collateral, and/or harsh repayment terms, resulting in a cycle of debt that becomes impossible to break. It is essential to identify such unlicensed lenders. Governments, financial institutions, and law enforcement agencies must work together and provide support to those who need it most while cracking down on such illegal operations.

Hidden threats to global trade

The effects of inflation are not limited to the domestic market but can have far-reaching implications for international trade and the global economy. For example, inflation can be exploited by criminals carrying out overpriced trade transactions to mask their illicit activities, which can complicate the detection of the funds being laundered.

Overpricing and inflation can significantly affect a nation’s foreign currency reserves and overall economic stability as trade-based money laundering (TBML) can lead to a loss of foreign exchange reserves, distort trade statistics, and create imbalances in the country’s balance of payments, potentially contributing to an economic crisis. Banks and customs authorities should pay special attention to the threat of TBML in times of inflation.

A marathon, not a sprint

Recovering from inflation is not a one-size-fits-all process but is influenced by factors such as the severity of inflation, government policy, and the overall economic health of the country. Recovery may take several years or even decades in extreme cases, particularly for emerging markets and developing economies.

For example, Argentina took several years to recover from its hyperinflation crisis in the 1990s, while Zimbabwe is still grappling with the aftermath of its hyperinflation period in the late 2000s.

Given the current crisis—which shows no signs of abating—governments should adopt immediate and effective policies to combat inflation and prevent financial crime arising from it. Effectively managing inflation and combating financial crime are long-term endeavors for any country, and protecting the integrity of our financial systems requires resilience, endurance, and commitment from all stakeholders.

Rezaul Karim is a compliance professional working at an international bank. He has extensive experience in the field of financial crime compliance.

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