There are three stages in money laundering. The first stage, placement, is when illegally obtained funds are introduced into the legitimate economy. The second stage, layering, is when criminals hide the origins of the illicit funds by re-distributing them in multiple ways which obscure the source. The third stage, integration, is when the illicit funds are extracted and used, now disguised as legal currency.
Money laundering techniques
There are as many as twelve - and possibly more - defined methods of money laundering, which fit into four generic typologies, namely “bank methods, smurfing (also known as structuring), currency exchanges, and double-invoicing.” New technologies and varying approaches by criminals in different regions of the world add to anti-money laundering (AML) practitioners’ collective headache, as new methods- and variations upon old ones- are detected. Below is a selection of money laundering techniques , with an introduction to how AML practitioners are combatting them.
- Smurfing. Also known as structuring, this is when illicitly obtained funds are broken down into small amounts, then deposited into and transferred between multiple accounts. This can be within one institution or across several. The amounts are calculated to avoid triggering suspicious transaction reports (STRs). To see how one Columbian gang laundered $100 million in a year, read this.
- Money muling. This technique involves multiple participants transferring illicit funds (sometimes recruited, and/or without knowing that they are breaking the law) through their accounts, via online resources, or even through courier services, on behalf of criminal entities, usually for a stipend of the money involved. Ireland’s police service, or Gardaí, held a Fraud Week earlier this year to educate the public on the dangers and consequences of money muling. You can find out more here.
- Bulk Cash smuggling. Here, the proceeds of crime are physically moved across international borders, or from one jurisdiction to another with less stringent regulations. For an example of one such attempt, recently foiled by UK Border Force officials, read this.
- Blending funds. This entails investment into businesses with high cash flows, such as laundromats and carwashes, which intermingles illicit funds with legitimate money until the two income streams are indistinguishable from each other. A good example of this technique of money laundering is the one which probably gave rise to the term during the USA’s Prohibition Era of the 1920s and ‘30s, which we covered elsewhere in our knowledge hub.
- Trade-based money laundering. Money launderers use this technique to integrate the proceeds of crime into the legitimate economy by purchasing goods at inflated or deflated prices, often internationally. Another variation is to make legitimate investments in legal financial streams, such as trading in stocks and bonds, or purchasing interests in established businesses. Additionally, crooks sell or buy high-value items such as property and real estate, or other high value luxury item, since large amounts of money can exchange hands, often with relatively little scrutiny. Fine art is particularly vulnerable to this complex technique because of its subjective perceived value. If you would like to know how the UK’s new AML regime is combating trade-based money laundering in the art world, read this.
- Shell companies. This is when dummy companies (‘shells’) are created by money launderers to hide illegal funds and avoid paying taxes. The relative anonymity around declaring the true identity- beneficial corporate ownership- of such entities makes this possible. For an example of how Canada is countering the use of shell companies to launder money and avoid tax, read this.
- Round Tripping. Here, crafty accountancy methods transfer funds to offshore enterprises or jurisdictions with weaker AML controls, before being returned as direct foreign investment to circumvent tax obligations. In Europe, the seismic fall of fintech giant Wirecard is an example of this money laundering method. You can read more about the scandal here.
- Bank Capture. This is when the money launderers themselves gain control of a financial institution. They then move funds around without scrutiny and can transact with other, above-board banks to legitimise their funds. This might present severe financial risk to partnering legitimate institutions, which can held liable.
- Casinos. Criminals use casinos to launder money by swapping illegally acquired cash for gambling chips, playing the tables or machines for a short period, then cashing the chips for a cheque or receipt. The cash is then claimed as a return from gambling (other forms of gambling are also employed to launder money using similar techniques). To see how Australia is clamping down on the use of casinos to launder money, read this.
- Black Salaries. This money laundering technique involves ‘cash-in-hand’ payments of salaries to unregistered workers, often using illegally obtained and untaxed funds.
- Tax Havens. There are various jurisdictions around the world regarded as tax havens because of financial regulations favourable to a variety of investors for tax evasion or minimisation purposes, including criminals. To see how one such tax haven, Guernsey, is stepping up its AML enforcement, read this.
- Transaction Laundering. This growing problem in the e-commerce sphere occurs when illicit businesses hide illegal online sales and purchases through legitimate merchants, who are either complicit or unknowingly been exploited. You can learn more about this relatively new frontier of financial crime here.
The fight against money laundering
Additional to the framework of money laundering techniques described above, we have seen in a previous blog how criminals are exploiting the increasingly sophisticated technologies and the digitization of money to invent new or hone old techniques, with the impact being felt globally.
We have also glimpsed the measures implemented by those law enforcement, regulatory and AML entities charged with preventing, detecting, and combating this financial crime. Money laundering and other financial crimes wreak havoc upon individuals, societies, economies, and countries.
Globally, regulators have responded by increasing and strengthening the reporting requirements expected of financial institutions, and fines issued to those who do not measure up saw the global total of AML breach penalties reach almost $9 billion (£6.5 billion) in 2020. It has never been more important for businesses in the sector to assess, improve, and constantly update their AML infrastructure.
How you can partner with Napier to fight money laundering
Napier represents the next generation in AML compliance services for the financial sector. Below are some of the ways in which Napier can support your company in combatting money laundering
Our updated Client Activity Review (CAR) automatically and continuously integrates every customer’s data into a unique, comprehensive view. This includes transaction-monitoring, payment variations, or financial screening results - for instance, altered beneficial ownership status and KYC data. This single, automated control centre has an all-encompassing 360° view of customers which detects, alerts, and enables your business to triage any behavioural changes or anomalies if they occur. Learn more about it here.
If you would like to know more about how Napier can guide your company on its AML compliance journey, you can contact us or book a demo of our technology.