Decoding Money Laundering Typologies: A Comprehensive Guide

In today's rapidly evolving financial landscape, money laundering has become a sophisticated operation that poses a significant challenge to both financial institutions and regulatory bodies. If you've heard the term "money laundering typologies" but aren't quite sure what it means or why it's essential, then you've come to the right place.

In this blog, we'll delve deep into what money laundering typologies are, how they're identified, and why understanding them is crucial in the fight against financial crimes. We'll also introduce you to Tookitaki's advanced solutions that help keep financial systems secure. So, buckle up as we take you through this complex but incredibly relevant topic in a way that's easy to understand.

What Are Typologies?

The term 'typologies' in the context of Anti-Money Laundering/Counter-Terrorist Financing (AML/CFT) refers to the various methods employed by criminals to launder money or finance terrorism. The nature of these typologies is dynamic and inventive, constantly evolving to outwit the financial systems in place. It's like the criminal's playbook, outlining all the different "plays" they can run to make their illicit gains appear legal.

Money laundering typologies are often sophisticated, involving multiple steps, numerous participants, and sometimes spanning across countries. They are designed to deceive and are increasingly harnessing technology for added complexity.

How Typologies Are Identified

Identifying typologies is akin to detective work. Financial institutions and governing bodies scrutinize financial transactions for suspicious patterns or inconsistencies. Advanced software, sometimes powered by artificial intelligence, can flag these anomalies for human investigation. Once identified, these become case studies that update the global understanding of money laundering tactics.

Examples of Typologies

Fragmentation of Deposits (Smurfing)

This typology involves the division of large amounts of money into smaller deposits, often termed as 'smurfing'. By doing so, criminals aim to evade detection from anti-money laundering reporting systems that flag large transactions.

This technique is often combined with 'money muling'. This utilises networks to move large amounts of money swiftly and extensively.

Mitigation Strategy: Financial institutions should tailor their transaction monitoring thresholds according to their risk-based strategy.

Utilization of Money Mules

Money mules are individuals (often unknowingly) involved in moving money as part of a money laundering scheme. In digital banking, money mules can electronically transfer illicit money using user accounts and digital wallets.

Mitigation Strategy: Institutions should build a profile of associated individuals whenever suspicions arise. Money muling networks often involve a large number of people from various countries.

Creation of Fraudulent Accounts

Fraudulent accounts are opened using false information and are frequently used to shield criminals from prosecution. Criminals may even use these accounts themselves to launder money directly, often through the guise of incentives.

Mitigation Strategy: Implement stringent identification and verification checks, including Know Your Customer (KYC) screening, to scrutinize the source of funds, beneficial ownership, and projected usage.

Identity Theft and Account Takeover Fraud

Both identity theft and account takeover fraud (ATO) involve the use of a victim's identity to conduct unlawful transactions. ATO involves a fraudster gaining control of an existing account, while identity theft involves using stolen information to open new banking accounts.

Mitigation Strategy: Establish rigorous identity verification procedures and stay vigilant for the risks posed by new technologies, like deep fakes.

Tax Evasion

Tax evasion involves the illicit attempt to avoid paying taxes or to pay less than is owed. Digital banks are often targeted by tax evaders who believe they can better hide their assets due to the ease of depositing and withdrawing money.

Mitigation Strategy: Collaborate with partners to effectively monitor international payments and set appropriate risk levels that consider "typical" transaction behavior.

Social Engineering

Also known as authorized push payment (APP) scams, social engineering involves convincing someone to divulge personal information or perform a requested action in exchange for money.

Mitigation Strategy: Perform a risk-based examination of any social engineering typologies and behaviours that make them particularly susceptible.

Terrorist Financing

Terrorist financing is a form of reverse money laundering that involves using seemingly "clean" money to finance terrorism. Digital banks are often targeted due to the speed of money transfers and the ability to conceal user identities.

Mitigation Strategy: Establish an AML risk assessment to enhance transaction monitoring and act against potential terrorist financing attempts.

Shell Companies and Trusts

Shell companies and trusts, which often do not disclose their true owner or beneficial owner, are used to store dirty money. They are ideal for tax avoidance and money laundering due to their obscurity.

Mitigation Strategy: Conduct thorough KYC/KYB checks during onboarding to verify user identities and continue monitoring for suspicious activity.

Transaction Laundering

Transaction laundering involves a merchant processing illicit credit card transactions for another business, using the payments ecosystem to hide the transaction.

Mitigation Strategy: Equip your risk and compliance team with a thorough understanding of the three stages of money laundering and how fraudsters use a business front to handle placement, layering, and integration.

Cyber-laundering

Cyber-laundering involves money laundering carried out in cyberspace through online transactions. Various methods such as e-commerce, digital currencies, online games, and crowdfunding are used by criminals for this purpose.

Mitigation Strategy: Equip your AML team with a robust monitoring solution that provides access to financial and non-financial data to intercept these transactions.

Why AML Solutions Are Necessary

The sophistication and ever-changing nature of money laundering typologies make it incredibly challenging for financial institutions to keep up. Failure to identify and report these activities can result in hefty fines and reputational damage for these institutions. 

This is where Anti-Money Laundering (AML) solutions come into play. They use advanced algorithms to scan millions of transactions per second, flagging potential issues for human review, thereby acting as an essential line of defense.

How Tookitaki Can Help

Tookitaki, an award-winning Regtech, provides an AML solution that aids digital banks in enhancing their risk coverage and seamlessly mitigating risks in the ever-evolving world of regulatory compliance. Its Anti-Money Laundering Suite (AMLS) is an operating system with multiple modules integrated to provide a comprehensive compliance solution.

Tookitaki's AFC Ecosystem, a first-of-its-kind initiative that powers financial crime prevention, combines a network of experts and a typology repository. This repository is a library of typologies and a no-code tool that aids in creating new typologies.

To learn more about Tookitaki's AML solution and how it can enhance your risk-based AML compliance programs, reach out to our team of experts.

Final Thoughts

Understanding money laundering typologies is crucial for both regulatory bodies and financial institutions. With criminals employing increasingly sophisticated methods to launder money, traditional approaches are proving inadequate. This has elevated the importance of adopting advanced AML solutions like the ones offered by Tookitaki. By staying ahead of the curve, we can significantly mitigate the risks associated with money laundering and make strides in combating this global issue.