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Common Money Laundering Techniques and How to Detect Them

Common Money Laundering Techniques and How to Detect Them

Common Money Laundering Techniques and How to Detect Them

Money laundering is an ominous financial offence committed by criminals to make their ill-gotten gains generated from other crimes such as organised crime, drug trafficking, terrorism financing, and corruption (just to name a few) appear legitimate, thus enabling them to integrate the funds into the lawful economy. It is a complex and sophisticated process that requires careful planning and execution to avoid detection by law enforcement agencies and financial institutions. In this article, CompFidus Ltd delves into common money laundering techniques and how to detect them.

How does money laundering work?

Money laundering typically involves three stages: placement, layering, and integration.

  1. During the placement stage, the illicit funds are introduced into the financial system, often through cash deposits, currency exchanges, or the purchase of high-value assets. 
  2. In the layering stage, the money is moved through a series of complex financial transactions to obscure its origin and make it difficult to trace. This may involve transferring funds between multiple accounts, making international wire transfers, or investing in businesses or property. 
  3. Finally, in the integration stage, the laundered funds are reintroduced into the economy as legitimate assets, making it difficult for authorities to identify their criminal origins. 

Common money laundering techniques

Understanding common money laundering techniques is critical for businesses, financial institutions, and individuals who may unknowingly be involved in such schemes. Let’s take a look at some of the most widespread methods used by criminals to launder money.

1. Smurfing (Structuring)

One of the simplest and most widely used money laundering techniques is smurfing. This involves breaking down large sums of money into smaller, less conspicuous amounts that are then deposited into various bank accounts over time. By staying under the radar of regulatory reporting thresholds, criminals can avoid suspicion. This technique is especially common in jurisdictions with strict currency reporting requirements.

2. Shell companies and trusts

Shell companies are businesses that exist only on paper and have no real commercial operations. Criminals use these entities to channel illicit funds through what appear to be legitimate transactions. Trusts, often structured across multiple jurisdictions, can also obscure the true ownership of assets, making it difficult for authorities to trace illicit money back to its source.

3. Trade-Based Money Laundering (TBML)

TBML involves the manipulation of trade transactions to legitimise illegally obtained money. Criminals may over-invoice or under-invoice goods, inflate the value of items being traded, or create phantom shipments. For example, an importer might overpay a foreign exporter, who then returns the excess amount as “change,” effectively laundering the difference.

4. Casino laundering

Casinos provide a lucrative environment for money laundering due to the vast amounts of cash that move through these establishments. Criminals may purchase large quantities of chips with illicit cash, play for a while, and then cash out most of their chips, receiving what looks like legitimate winnings. These “winnings” can then be deposited in a bank as clean money.

5. Real estate

Real estate is another common avenue for laundering money. Criminals often purchase high-value properties with illicit funds and later sell them at a profit. This not only cleans the money but also gives the appearance of legitimate wealth accumulation. In some cases, they may sell properties between multiple entities they control, inflating prices in a technique called “flipping.”

6. Offshore accounts and tax havens

Offshore accounts are notorious for their secrecy. By moving money to countries with lax financial regulations and privacy laws, criminals can hide the origins of their funds. Tax havens also allow money to be stored and moved with little to no oversight, creating a veil of legitimacy for illicit earnings.

7. Cryptocurrency laundering

As the popularity of cryptocurrency has grown, so has its use in money laundering. The anonymity and decentralisation of digital currencies make them attractive to criminals. Techniques like “mixing” or “tumbling” are used to obscure the source of funds by pooling various transactions together and then redistributing the amounts to different addresses.

8. Bank capture

In some cases, criminal organisations go so far as to take control of an entire financial institution. By having insiders in key positions within a bank, criminals can manipulate records and transactions to funnel illicit funds through the system undetected. This method is highly sophisticated but effective for large-scale operations.

9. Hawala system

Hawala is an informal money transfer system that operates outside of traditional banking systems. It is commonly used in certain parts of the world where trust networks among family members or communities facilitate transfers. This system makes it difficult to track the flow of funds, and while it has legitimate uses, it is often exploited by criminals to launder money.

10. Purchase of luxury goods

Criminals often use illicit funds to buy high-value luxury goods like jewellery, cars, or artwork. Once purchased, these items can be sold, and the proceeds appear as legitimate income. Additionally, luxury goods are easily portable, making them attractive assets for laundering.

How to detect money laundering activities?

Although criminals employ a wide range of techniques to disguise illegal money, there are several red flags and best practices that organisations can use to spot and prevent laundering activities.

Here are some of the most effective methods for detecting money laundering techniques:

1. Unusual transaction patterns

One of the most obvious signs of money laundering is unusual or inconsistent transaction patterns. Here are a few key indicators to look out for:

  • Frequent small deposits: Criminals often break down large amounts of cash into smaller deposits (smurfing) to avoid triggering reporting requirements. Multiple deposits just below regulatory thresholds (such as $10,000 in many countries) is a common red flag.
  • Unnecessary complexity: Transactions involving multiple accounts, foreign currencies, or a series of transfers between countries that do not appear to have legitimate business reasons may be used to obscure the origins of funds.
  • Sudden, large transactions: A dormant account suddenly receiving large transfers or unexplained deposits from unfamiliar sources can indicate laundering activity.

Best practice:

Install automated systems that can flag irregularities and trends in customers’ transactions. These systems can be set to alert compliance teams when suspicious patterns are detected.

2. Know Your Customer (KYC) and Customer Due Diligence (CDD)

A robust KYC process is one of the first lines of defence against money laundering. Verifying the identity of customers, understanding their financial activities, and maintaining updated records are crucial steps.

  • Incomplete or suspicious information: Customers providing incomplete or unclear information, or refusing to provide necessary documentation, may be attempting to hide their identity.
  • High-risk customers: Certain customers are inherently higher risk, such as politically exposed persons (PEPs) or individuals from countries with weak financial regulations. These customers require enhanced due diligence.

Best Practice:

Regularly update customer records, especially for high-risk individuals or entities. Implement enhanced due diligence for customers engaging in high-value or cross-border transactions.

3. Unusual business behaviour

Criminals often create shell companies or funnel funds through seemingly legitimate businesses. Detecting unusual business behaviour involves identifying companies with activity that doesn’t align with their stated purpose or industry norms.

  • High cash turnover in low-cash businesses: A business that claims to operate in a sector with low cash flow, yet frequently deposits large sums of cash, can be a warning sign.
  • Unusual payment structures: Companies sending or receiving payments through complex or unnecessarily convoluted structures may be attempting to obscure the true origin of funds.

Best Practice:

Compare business transaction patterns with the norms for their industry. Sudden spikes in activity or transactions that fall outside typical industry practices should raise concerns.

4. Trade-Based Money Laundering (TBML) Indicators

To detect TBML, it is necessary to scrutinise the documentation and invoicing of international trade transactions.

  • Mispriced goods: Significant over- or under-invoicing of goods compared to market prices can indicate an attempt to transfer value illicitly.
  • Phantom shipments: No actual movement of goods or services accompanying a transaction can signal that the trade is only a front for laundering money.
  • Unusual trade routes: Goods moving through countries with no logical connection to the business or trade partners can suggest trade-based laundering.

Best Practice:

Implement strict document verification processes. Scrutinise invoices, bills of lading, and customs documentation to ensure the value and volume of goods match declared records.

5. Untraceable or offshore transactions

While offshore transactions aren’t inherently suspicious, large or frequent transfers to and from untraceable jurisdictions may indicate laundering.

  • Layering: Criminals often move funds between multiple accounts across different jurisdictions to obscure the trail of money (a process known as layering).
  • High volumes of cross-border transactions: If a business or individual frequently sends money across borders without a legitimate reason, it could indicate laundering activity.

Best Practice:

Establish controls and procedures to carefully monitor cross-border transactions, especially those involving high-risk or uncooperative jurisdictions.

6. Suspicious use of cryptocurrencies

Cryptocurrencies like Bitcoin and Ethereum provide a new frontier for money laundering due to their anonymity and lack of regulation. Criminals can move funds across borders with fewer controls, making it difficult to trace.

  • Tumbling services: Criminals often use mixing or tumbling services to blend their illicit funds with legitimate transactions, obscuring their source.
  • High-value transfers: The movement of significant sums of cryptocurrencies with no apparent legitimate reason should raise concerns.

Best Practice:

Use specialised tools to analyse and track cryptocurrency transactions. These tools can flag suspicious activities and identify wallet addresses involved in laundering.

7. Unusual activity in high-risk sectors

High-value transactions in high-risk sectors such as real estate, casinos, luxury goods, and the art market should raise concern.

  • Real estate flipping: Rapid buying and selling of properties at inflated prices, especially with cash, can signal an attempt to launder funds.
  • Casino chips: Watch out for customers purchasing large amounts of casino chips and cashing out without significant play.

Best Practice:

Provide sector-specific AML training to employees in high-risk industries, ensuring they can recognise red flags specific to their market.

8. Reporting suspicious activity

One of the most effective ways to detect money laundering is encouraging employees and institutions to report suspicious activity. Many countries have formal systems for filing Suspicious Activity Reports (SARs) or Suspicious Transaction Reports (STRs).

  • Employee Awareness: Employees at banks, casinos, real estate firms, and other financial institutions are often in the best position to notice abnormal behaviour.
  • Frequent Filing: Organisations should ensure that SARs or STRs are filed promptly and regularly when suspicious activity is detected.

Best Practice:

Regularly train employees on how to detect suspicious activity and establish anonymous whistleblower programs to encourage reporting without fear of retaliation. You can book an AML training for your staff with CompFidus Mentoring Ltd.

Conclusion

By staying vigilant and implementing best practices across multiple areas—from transaction monitoring to trade documentation—organisations can play a vital role in disrupting money laundering schemes and ensuring compliance with anti-money laundering regulations. Reach out to CompFidus Ltd today to safeguard your business.

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