This is the second part of a two-part series on what money laundering is and some of the ways it is done.
Money Laundering is a step every criminal must take to use money which comes from illegal activity. It includes minor drug dealers from the street and rich white-collar types who launder large amounts of cash. There are a variety of ways in which lawbreakers go about this, each tailored to different needs and amounts of cash. Without laundering money, there is no use of the criminally generated funds. The funds need to be integrated into the financial system to appear legitimate so they can be used to buy goods and services. It is very important for AML professionals to understand how criminals launder money. The two-part article describes some of the most common mechanisms used to achieve this goal. Knowing how the procedure works makes it easier to detect and prevent it.
For many, the rise of cryptocurrencies in the last decade is a dream come true. This new, decentralized digital currency was supposed to provide its users with anonymity and financial certainty coming from a finite amount of cryptocurrency. Just like gold, unlike paper currency, printed by central banks since the dawn of Bretton Woods (1944 - 1971) and bound to slowly lose value over time.
However, with these advantages comes a big downside. Crypto is a very convenient instrument for criminals to launder money. The main reason is a lack of surveillance and fewer intermediaries in crypto transactions. Virtual currencies are not connected with a person’s identity but with a private key assigned to an account. Some crypto exchanges lack procedures for checking sources of money, sanctions, politically exposed persons, etc. This is a perfect environment to conduct money laundering. Even though some regulators are banning financial institutions from dealing with crypto, this is a cross-jurisdictional problem. Fraudulent crypto transaction may just as well be conducted in a country with looser procedures and the crypto can afterwards be used as a legitimate payment method in many different jurisdictions.
Even as financial institutions are instituting countermeasures to the threats connected to crypto trading by criminals, bad actors continue to look for ways to evade these efforts. To further secure their interest they tend to use methods such as ”pooling” and ”mixing” crypto. Pooling involves joining so called mining pools and mining crypto together with other miners. Mixing is a technique enabling criminals to obscure the details of transfer of cryptocurrency to a particular individual.
While new forms of money laundering involving online banking and crypto are thriving, older methods used by criminals have not disappeared. They are still present and make it possible for criminals to launder large sums of illicit funds. What they have in common is using cash, which is a great tool to make transactions difficult to track.
Cash intensive businesses are a specific form of economic activity. Often involving a small business, which receives a major portion of its revenue in cash. Such businesses are legitimate and can generate a profit from standard business activity. The main problem is that transactions made for an account of cash intensive business (CIB) may be disguising small portions of dirty money, which after landing in the account are seen from the outside as legitimate revenue of the business. Examples of CIBs are restaurants, bars, tanning salons, barber shops, beauty salons, arcades, car washes, etc. A great example of this method of money laundering was shown in a popular series “Breaking Bad”. The main character, convinced by his lawyer, was considering buying a beauty salon or a car wash to wash money derived from selling drugs.
Casinos are also CIBs. In some cases, individuals playing in the casino are purchasing chips with illicit cash. When the chips are cashed in, for a receipt or a check. This way illicit cash is transformed into “legal” gambling winnings and the provenance of the dirty cash gets blurred.
One of the biggest problems that the AML community is facing is a lack of unity when it comes to AML standards in different jurisdictions. Each country creates its own law, which enables criminals exploit the vulnerabilities of countries with weak compliance regimes. Sometimes, this is combined with accessing corruption prone politics and leaders of financial sector, creating a true money laundering heaven. There are different ways in which this can be advantageous for criminals.
A common vehicle is the use of shell companies. This type of company does not conduct any business operations. This is why it is called a shell - there is nothing in it except the name, no employees, no product, no revenue. It is merely a legal disguise, which can be used for different purposes, both legal and illegitimate. It usually begins with contracting a law firm in an offshore jurisdiction, which is a tax haven - some of the most popular destinations are the Bahamas, Bermuda, Cayman Islands, Channel Islands, British Virgin Islands, and what may come as a surprise, rich European countries such as Luxembourg and Switzerland. The law firm helps a client to establish shell company, often proposing to hire a nominee director to register the company under his name and make it even harder to trace true beneficial ownership. Sometimes protective measures include creating a structure of shell companies often referred to as a ”Russian doll”. This is a chain of shell businesses owning each other, registered in different jurisdictions.
Shell companies are a convenient tool for avoiding paying taxes but may just as well be used to launder money or conduct illegal business; for example, financing terrorism or selling drugs. The anonymity of shell companies is however not perfect. Recently we witnessed two big scandals related to shell companies: Panama Papers in 2016 and Pandora Papers in 2021. These investigations exposed a large list of publicly known individuals who used shell companies and tax havens to avoid taxation of their wealth. The scandals raised public contempt and led to increased awareness of this procedure. Raising public awareness of this mechanism has also led to more disclosure requirements of the legal ownership of business entities.
This two-part article describes some of the most popular money laundering methods, both traditional and modern; it is in no way exhaustive.
In everyday work of an AML specialist, it is easy to overlook exactly how money laundering is orchestrated. Awareness of methods used by criminals is crucial for professionals in the field and for every participant of today’s digital economy.
Individual people are the weakest link in AML prevention chain. Susceptibility to social engineering as an individual, being prone to corruption as a politician, being unable to establish good legal countermeasures as a society or being reluctant to properly check the background of a transactional partner. This can also empower us. The more knowledgeable about money laundering dangers we have, the more we can counteract. Our awareness can in turn prevent a great deal of human suffering and societal wrongdoing, which results from criminal activity and money laundering.