Inflation: A breeding ground for financial crime

Written by Rezaul Karim on Wednesday May 10, 2023

Inflation is having a significant impact on economies around the world. Prices of everyday goods and services – from food, to transportation, to housing – have skyrocketed, leaving many people struggling to make ends meet. According to the World Bank’s Global Economic Prospects report, January 2023,[1] inflation is expected to remain above central bank targets in most emerging markets and developing economies (EMDEs) 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. Amidst the soaring cost-of-living pressure, many people resort to unlawful activities such as theft, embezzlement, robbery, or money laundering. With the depreciation of the currency, the profit margins of drug dealing also 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 facing law enforcement agencies and governments alike.

The latest United Nations Office on Drugs and Crime[2] report on human trafficking reveals that, during an economic downturn, criminals target the vulnerable, resulting in an increase in the number of 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 marginalised 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.


The 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 EMDEs. 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 to prevent financial crime arising from it. Effectively managing inflation and combating financial crime are long-term endeavours for any country, and protecting the integrity of our financial systems requires resilience, endurance and commitment from all stakeholders.


About the Author

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



[2] United Nations Office on Drugs and Crime (


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