Identifying common methods of Money Laundering (ML)
We all usually have this misconception about ML that it is only done through banks. It is a partial truth. ML has it’s deep foundation in the banking sector and equally in other non-banking sectors. In my previous article, I elucidated ML in simpler terms and you can refer to the article through the link below.
Elucidating Money Laundering (ML) in simpler terms
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In this article, I would like to share learnings about the most common means of ML.
Banks are the primary entry point into the financial system. The fact that banks accept cash, wire funds, maintain deposit accounts, conduct international transactions puts them at high risk for ML. The illicit funds can be deposited into normal accounts and from there they can be easily wired anywhere in the world. This is done through a process called Structuring and is a well-known form of ML. It involves taking a large amount of cash and breaking it into smaller amounts so that it can be deposited into financial institutions without triggering reporting requirements.
Electronic Funds Transfer: Electronic transfer of money from one account to another operate with such speed and volume that international transfers of laundered money can be so easily and frequently disguised by blending them into millions of other legitimate transfers that occur every day.
Correspondent banking: It occurs when one bank acts as the agent of another bank in a foreign country. A local respondent bank will contract a correspondent bank to provide its customer with banking services in another country. Correspondent banks have little control over the customers and do not know them. They have little ability to monitor and control these customers’ transactions which leads to easy access to ML practices.
Shell banks: Shell bank is a financial entity that has no physical presence in a country. These banks are used by money launderers to launder money and disguise the trace of their payments and funds. FATF recommendations require countries to prohibit banks from dealing with shell banks. Also, the USA PATRIOT ACT requires US banks to take steps towards ensuring that they are not directly/indirectly providing correspondent banking services to shell banks.
Payable Through Accounts: This type of account allows a customer of a respondent bank in a correspondent banking relationship to conduct transactions directly through correspondent banking. These are also a risk at ML because the correspondent bank cannot perform adequate due diligence to determine the nature and purpose of the transaction or who is conducting it.
Concentration Accounts: A deposit account is used to aggregate funds from several locations into one centralized account whereas a concentration account is used by the institution to process and settle internal bank transactions. These accounts are typically used for fund transfers, private banking transactions, trusts and custody accounts, international transactions. The ML risk occurs when a bank allows a customer to conduct a transaction through the bank's concentration account anonymously.
Private Banking: These are more vulnerable to ML because they allow high net worth individuals and PEP’s ( Politically Exposed People) to engage in ML. The problem is that banks can be attracted to high fee incomes that can be generated in the private banking area and private banking representatives within the bank can become too close to and supportive of rich clients. This could lead to less vigorous enforcement of AML policy and law.
NON-BANK FINANCIAL INSTITUTIONS/NON-FINANCIAL BUSINESS AND PROFESSIONS THAT CAN BE VULNERABLE TO ML:
Credit/Debit card industry: These are less vulnerable to the placement stage of ML ( unless cash deposit to credit card account is allowed). These are basically used in the layering and integration stage. For example- a person can pre-pay or overpay a credit card and ask for a refund. Also when funds are deposited in CC or DC they can be used in any country. Money can also be loaded onto these cards and transported out of the country.
Money Remitters and Money Exchange Houses: These are high-risk entities because they deal extensively with cash. These provide legitimate services, especially to the unbanked and underbanked, they can be used by money-launderers given the ease with which these entities accept cash and transmit funds overseas. Also, this industry is not subject to the same rigorous supervision as it is imposed on commercial banks.
Insurance industry: Money launderers can use illegal money to buy a policy. Then they redeem that policy and get a lumpsum amount. This amount is further used in a series of other payments by the money launderer. Another example is the “free look” period offered by many insurance companies. This period allows the purchaser the ability to make payments, then terminate the contract and receive a refund. This can serve as a great feature to a money launderer to legitimize the funds for mainstream use.
Securities Broker-Dealer Industry: Aspects that make these susceptible to ML are the international nature, the speed at which transactions are conducted, ease of converting one security to another, ability to use securities to transfer funds around the world. Common examples are bonds and stocks. Additionally, securities account placed under the control of a trustee can serve to conceal the identity of a beneficial owner.
Casinos: The vast amount of cash present in casinos present a great opportunity for laundering funds. Gambling chips purchased are purchased with cash and checks/vouchers are issued by the casino in return. Gamblers can also request winnings transferred to an affiliated casino in another country, thus spiriting the funds out of the country.
Dealers in high-value items: Industries dealing with selling and purchasing of high-value items like precious metals, jewelry are more vulnerable to ML. Such items are bought, sold, and traded easily for large amounts of money making it easy for launderers to obscure the source of funds and blur the audit trail. Also, the transfer of jewelry makes cross-border transfers relatively simple.
Vehicle sellers: Same as other high-value items, expensive vehicles are also bought, sold, and transferred easily. Launderer pays for a vehicle with a negotiable instrument and sells the vehicle for a check or wire from a recognized entity.
Travel agencies: Money launderers pays for an expensive trip to a resort and then cancels the trip. This was he receives the refund in the form of a check from the travel agency.
Internet casinos: Money launderers take advantage of the internet casinos to transfer funds quickly under the guise of engaging in gambling activity. Offshore locations make it more difficult to obtain information about underlying transactions.
Pre-paid cards and E-cash: They are more vulnerable to ML because they are portable. transferable and anonymous. Many pre-paid cards can be loaded with large amounts of money. They are a convenient alternative to bulk cash or cross-border transfer of funds.
Trusts: These are used to hide beneficial ownership. Unlike commercial enterprises, expenditures do not have to be tied to a profit-generating function. Coupled with a fact that trusts are private instruments, it is difficult to determine during an investigation whether a transaction is legitimate or who or what is behind the trust.
Bearer Instrument: Bearer instruments including bearer share in a company consists of documents that are owned and controlled by the bearer. There is no registry of ownership, ownership of the instrument can be simply be transferred by handling the document to someone else. Due to this transferability and lack of registration, launderers can transfer the ownership of a check or other financial instruments to anyone at a moment’s notice without any record.