What are some largely used money laundering techniques?
Money laundering – the criminal activity of disguising the source of illegally obtained money to make it usable in the legitimate financial system– involves three steps. In the first phase, called placement, ill-gotten money is introduced to the financial system, most often by breaking large amounts into smaller deposits and investments. In the layering phase, money is transferred to various locations and accounts to distance it from the illegal source. In the final phase, called integration, dirty money is integrated into the financial system as clean money so that criminals can use it as they wish.
In each stage of the money laundering process, criminals come up with money laundering techniques. These money laundering methods, which are difficult to detect, can broadly be categorised into a few types. They include bank methods, smurfing or structuring, currency exchanges and double-invoicing. These types of money laundering techniques involve various placement techniques, layering techniques and integration techniques.
Increasing digitisation, online financial transactions and entertainment options have created new avenues for money launderers. There are also criminal entities that run money laundering businesses and profit immensely with their successful money laundering techniques. Therefore, it is important for financial institutions to understand some common methods of money laundering so that they can formulate effective policies and procedures for combating money laundering. Given below are some of the examples of money laundering. These include both traditional methods as well as modern methods.
Common money laundering techniques
Also known as smurfing, it is a method of placement whereby money is broken into smaller deposits. This method is used to beat suspicion of money laundering and to circumvent anti-money-laundering reporting requirements. In a variant of this method, criminals use smaller amounts of money to purchase financial instruments, such as money orders, and then ultimately deposit these instruments into bank accounts, again in small amounts.
2. Bulk cash smuggling
A classic money laundering example, this involves physically smuggling banknotes to another jurisdiction and depositing them in a financial institution, such as an offshore bank, with greater bank secrecy or less severe money laundering enforcement.
3. Cash-intensive businesses
In this method, criminals set up cash-intensive businesses that typically receive a substantial proportion of its revenue as cash. Then, they use business accounts to deposit criminally derived cash. Such businesses operate openly and generate cash revenue from legitimate businesses in addition to the illicit cash. Parking structures, strip clubs, tanning salons, car washes, arcades, bars, restaurants, and casinos are some examples of these businesses.
4. Investments in commodities
Here, a criminal purchases luxury and mobile commodities such as diamonds, gems and gold that can be moved to other jurisdictions in an easy manner. Real estate is another avenue where black money is often used.
5. Trade-based laundering
This is one of the newest and most complex forms of money laundering. This method involves under- or over-valuing invoices to disguise the movement of money. The art market is often criticised for being an easy money laundering channel. The subjective value of art and the secrecy norms of auction houses about buyers and sellers make it easier for money launderers to clean their money easily.
6. Shell companies and trusts
Trusts and shell companies disguise the true owners of money. Trusts and corporate vehicles need not disclose their true owner or beneficial owner in many jurisdictions. Shell companies do not have any active business operations but have a legal personality. These company accounts are used to store dirty money.
In this method, criminal money is deposited in the accounts of a controlled foreign corporation offshore, preferably in a tax haven country where anti-money laundering (AML) checks are minimal. The money is then shipped back as a foreign direct investment, often exempt from taxation. A variant on this is to transfer money to a law firm or similar organisation as fees, then to cancel the retainer and, when the money is remitted, represent the sums received from the lawyers as a legacy under a will or proceeds of litigation.
8. Bank capture
In this case, money launderers or criminals purchase a controlling interest in a bank, most often in a jurisdiction with extremely weak money-laundering controls. The criminals then move money through the banking system without any scrutiny by the law enforcement.
In this method, an individual walks into a casino and buys chips with illicit cash. The individual will then play for a relatively short time. When the person cashes in the chips, they take payment in a check or get a receipt for the money received so they can claim the proceeds as gambling winnings.
10. Other Gambling
In this method, money is spent on gambling, preferably on high odds games. Criminals may bet on every possible outcome of some event that has many possible outcomes, and the bettor will have one or more winning bets that can be shown as the source of money. The losing bets will remain hidden.
11. Black Salaries
A company may have many unregistered employees without written contracts, and it may pay them salaries in cash. These unregistered employees are paid using dirty money.
12. Tax Amnesties
Tax amnesty is a limited-time option for some taxpayers to pay a defined amount (often a big share of the declared money) in exchange for forgiveness of a tax liability relating to a previous tax period or periods without criminal prosecution. Many use this option to legalise unreported assets and cash in tax havens. Even if the opting taxpayers lose a significant amount of money, they get a legal option to clean their black money.
13. Business email compromise
This is a systematic scam in which businesses working with foreign suppliers and doing regular wire transfers are targeted. Here, a criminal compromises legitimate business email accounts via social engineering or computer intrusion techniques to conduct unauthorised fund transfers. While the scheme is mostly used to defraud others out of money, it can also be an effective tool to layer and launder money with or without the knowledge of the victim.
14. Transaction Laundering
In this method, a merchant knowingly or unknowingly processes illicit credit card transactions for another business. Here, the payments ecosystem is used to hide that the transaction even occurred.
Often explained as money laundering in the digital age, it is the practice of money laundering carried out in cyberspace through online transactions. Criminals use methods such as e-commerce, digital currencies, online games, crowdfunding, etc. to launder money with speed and ease.
Ways to prevent money laundering techniques
Given the seriousness of money laundering, international organisations such as the Financial Action Task Force (FATF) and governments in different countries have come up with regulations, policies and procedures to curtail easy cleaning of dirty money. To enforce the regulation, they have set up different agencies who make sure that institutions are properly following the guidelines provided.
While regulators are working hard to formulate rules, considering the changing strategies of money launderers, financial institutions have the responsibility to implement and maintain sufficient AML checks and controls.
Anti-money laundering software helps them in these checks. Today, modern technologies like AI and machine learning are being used in AML compliance programs. Compared to legacy solutions, these modern solutions, called Regtech, can significantly improve both process efficiency and compliance effectiveness.
There are various Regtech solutions, such as the Tookitaki Anti-Money Laundering Suite (AMLS) that can ensure AML compliance in a sustainable manner.
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