FAQs of Anti-Money Laundering

July 27, 2020

Money laundering is any act of taking illegal or “dirty” money and putting it through a cycle of transactions that “washes” the funds and “cleans” them, making the money look like proceeds from legal activities. It sounds simple, yet it can be a very complicated process that affects everyone from consumers to financial institutions.

Below we will deal with some frequently asked questions about money laundering using information from various sources including FATF, FinCEN, FINRA and FINTRAC, as well as our experts from Alessa at CaseWare RCM.

 

What is Money Laundering?

The goal of a large number of criminal acts is to generate a profit for the individual or group that carries out the act. Money laundering is the processing of these criminal proceeds to disguise their illegal origin. This process is of critical importance, as it enables criminals to enjoy these profits without jeopardizing their source.

Illegal arms sales, smuggling, and the activities of organized crime, including, for example, drug trafficking and prostitution rings, can generate huge amounts of proceeds. Embezzlement, insider trading, bribery and computer fraud schemes can produce large profits and create the incentive to “legitimize” the ill-gotten gains through money laundering.

When a criminal activity generates substantial profits, the individual or group involved must find a way to control the funds without attracting attention to the underlying activity or the persons involved. Criminals do this by disguising the sources, changing the form, or moving the funds to a place where they are less likely to attract attention.

– FATF/FINTRAC

 

How is money laundered?

In the initial – or placement – stage of money laundering, the launderer introduces his illegal profits into the financial system. This might be done by breaking up large amounts of cash into less conspicuous smaller sums that are then deposited directly into a bank account, or by purchasing a series of monetary instruments (checks, money orders, etc.) that are then collected and deposited into accounts at another location.

After the funds have entered the financial system, the second – or layering – stage takes place. In this phase, the launderer engages in a series of conversions or movements of the funds to distance them from their source. The funds might be channeled through the purchase and sales of investment instruments, or the launderer might simply wire the funds through a series of accounts at various banks across the globe. This use of widely scattered accounts for laundering is especially prevalent in those jurisdictions that do not co-operate in anti-money laundering investigations. In some instances, the launderer might disguise the transfers as payments for goods or services, thus giving them a legitimate appearance.

Having successfully processed his criminal profits through the first two phases the launderer then moves them to the third stage – integration – in which the funds re-enter the legitimate economy. The launderer might choose to invest the funds into real estate, luxury assets, or business ventures.

– FATF

 

How much money is laundered per year?

By its very nature, money laundering is an illegal activity carried out by criminals, which occurs outside of the normal range of economic and financial statistics. Along with some other aspects of underground economic activity, rough estimates have been put forward to give some sense of the scale of the problem.

The United Nations Office on Drugs and Crime (UNODC) conducted a study to determine the magnitude of illicit funds generated by drug trafficking and organized crimes and to investigate to what extent these funds are laundered.  The report estimates that in 2009, criminal proceeds amounted to 3.6% of global GDP, with 2.7% (or $1.6 trillion USD) being laundered.

This falls within the widely quoted estimate by the International Monetary Fund, who stated in 1998 that the aggregate size of money laundering in the world could be somewhere between two and five percent of the world’s gross domestic product.

Using 1998 statistics, these percentages would indicate that money laundering ranged between $590 billion and $1.5 trillion US. At the time, the lower figure was roughly equivalent to the value of the total output of an economy the size of Spain.

Due to the illegal nature of the transactions, precise statistics are not available and it is therefore impossible to produce a definitive estimate of the amount of money that is globally laundered every year.

– FATF

 

How does money laundering affect business?

The integrity of the banking and financial services marketplace depends heavily on the perception that it functions within a framework of high legal, professional and ethical standards. A reputation for integrity is the one of the most valuable assets of a financial institution.

If funds from criminal activity can be easily processed through a particular institution – either because its employees or directors have been bribed or because the institution turns a blind eye to the criminal nature of such funds – the institution could be drawn into active complicity with criminals and become part of the criminal network itself.

Evidence of such complicity will have a damaging effect on the attitudes of other financial intermediaries and of regulatory authorities, as well as ordinary customers.

As for the potential negative macroeconomic consequences of unchecked money laundering, one can cite inexplicable changes in money demand, prudential risks to bank soundness, contamination effects on legal financial transactions, and increased volatility of international capital flows and exchange rates due to unanticipated cross-border asset transfers.

Also, as it rewards corruption and crime, successful money laundering damages the integrity of the entire society and undermines democracy and the rule of the law.

– FATF

 

What is the connection between AML and society?

The possible social and political costs of money laundering, if left unchecked or dealt with ineffectively, are serious.

Organized crime can infiltrate financial institutions, acquire control of large sectors of the economy through investment, or offer bribes to public officials and indeed governments.

The economic and political influence of criminal organizations can weaken the social fabric, collective ethical standards, and ultimately the democratic institutions of society. I

n countries transitioning to democratic systems, this criminal influence can undermine the transition. Most fundamentally, money laundering is inextricably linked to the underlying criminal activity that generated it. Laundering enables criminal activity to continue.

-FATF

 

What agencies oversee money laundering in the U.K., U.S. and Canada?

The Financial Conduct Authority (FCA) is an independent, non-governmental body responsible  for regulating the U.K.’s financial services industry, including combating money laundering and other criminal activities like the financing of terrorism.

In the United States, The Secretary of the Treasury has delegated the authority to administer and enforce the Bank Secrecy Act to a Department of the Treasury bureau, FinCEN. FinCEN also is the U.S. Financial Intelligence Unit.

In Canada, financial intelligence unit and anti-money laundering and anti-terrorist financing regulator, FINTRAC plays a critical role in helping to combat money laundering, terrorism financing and threats to the security of Canada. FINTRAC is the responsible agency for overseeing money laundering.

 

What about multilateral initiatives to combat laundering?

Large-scale money laundering schemes invariably contain cross-border elements. Since money laundering is an international problem, international co-operation is a critical necessity in the fight against it. A number of initiatives have been established for dealing with the problem at the international level.

International organizations, such as the United Nations or the Bank for International Settlements, took some initial steps at the end of the 1980s to address the problem. Following the creation of the FATF in 1989, regional groupings – the European Union, Council of Europe, and Organization of American States, to name just a few – established anti-money laundering standards for their member countries. The Caribbean, Asia, Europe and southern Africa have created regional anti-money laundering task force-like organizations, and similar groupings are planned for western Africa and Latin America in the coming years.

– FATF

 

Why is Money Laundering often mentioned along with checking for terrorist links?

Money laundering refers to conversion of money illegally obtained to make it appear as if it originated from a legitimate source. Money launderers worldwide try to conceal criminal activity associated with it such as drugs /arms trafficking, terrorism and extortion.

Financial Terrorism means financial support for any form of terrorism or to those who encourage, plan or engage in terrorist activities.

Money launderers send illicit funds through legal channels in order to conceal their criminal origin while those who finance terrorism transfer funds that may be legal or illicit in original in such a way as to conceal their source and ultimate use, which is to support Financial Terrorism.

– FATF/FINTRAC

 

Where does money laundering occur?

As money laundering is a consequence of almost all profit generating crime, it can occur practically anywhere in the world. Generally, money launderers tend to seek out countries or sectors in which there is a low risk of detection due to weak or ineffective anti-money laundering programs. Because the objective of money laundering is to get the illegal funds back to the individual who generated them, launderers usually prefer to move funds through stable financial systems.

Money laundering activity may also be concentrated geographically according to the stage the laundered funds have reached. At the placement stage, for example, the funds are usually processed relatively close to the under-lying activity; often, but not in every case, in the country where the funds originate.

With the layering phase, the launderer might choose an offshore financial center, a large regional business center, or a world-banking center – any location that provides an adequate financial or business infrastructure. At this stage, the laundered funds may also only transit bank accounts at various locations where this can be done without leaving traces of their source or ultimate destination.

Finally, at the integration phase, launderers might choose to invest laundered funds in still other locations if they were generated in unstable economies or locations offering limited investment opportunities.

– FATF

 

What influence does money laundering have on economic development?

Launderers are continuously looking for new routes for laundering their funds. Economies with growing or developing financial centers, but inadequate controls are particularly vulnerable as established financial center countries implement comprehensive anti-money laundering regimes.

Differences between national anti-money laundering systems will be exploited by launderers, who tend to move their networks to countries and financial systems with weak or ineffective countermeasures.

Some might argue that developing economies cannot afford to be too selective about the sources of capital they attract. However, postponing action is dangerous. The more it is deferred, the more entrenched organized crime can become.

As with the damaged integrity of an individual financial institution, there is a damping effect on foreign direct investment when a country’s commercial and financial sectors are perceived to be subject to the control and influence of organized crime. Fighting money laundering and terrorist financing is therefore a part of creating a business friendly environment, which is a precondition for lasting economic development.

– FATF

 

How does fighting money laundering help fight crime?

Money laundering is a threat to the good functioning of a financial system; however, it can also be the Achilles heel of criminal activity.

In law enforcement investigations into organized criminal activity, it is often the connections made through financial transaction records that allow hidden assets to be located and that establish the identity of the criminals and the criminal organization responsible.

When criminal funds are derived from robbery, extortion, embezzlement or fraud, a money laundering investigation is frequently the only way to locate the stolen funds and restore them to the victims.

Most importantly, however, targeting the money laundering aspect of criminal activity and depriving the criminal of his ill-gotten gains means hitting him where he is vulnerable. Without a usable profit, the criminal activity will not continue.

– FATF

 

Who needs to perform anti-money laundering checks?

Employees of financial institutions, solicitors, accountants, tax advisors, insolvency practitioners, credit institutions, real estate agents, chartered surveyors, trust/service providers, gaming companies and high value dealers with the potential for a business relationship, such as automotive dealers and jewelers. The Anti-Money Laundering regulations are governed by national laws and regulations. Failure to report suspicious activity can carry a criminal sentence and lead to substantial fines from the relevant regulatory body.

– CaseWare RCM

 

What are common laundering schemes?

There are many common types of money laundering schemes, including casino, cash business, smurfing and foreign investment/round-tripping schemes.

The casino scheme works by funneling the money through gaming. The money is converted to casino chips, which are then played briefly and then converted back into cash. The chips may be converted by the launderer or by a person they hire to do the job.

The cash business scheme is a classic scheme for laundering large amounts of physical cash. There are many businesses who handle most of their transactions in cash and allow illicit cash to be inserted among their legitimate business transactions.

Smurfing refers to distributing small amounts of a larger cash amount to a series of partners who then deposit the money in incremental amounts. This is used to get around the currency reporting requirements that banks are required to observe in many countries. Small amounts that come from many partners are less likely to trigger an automatic report.

Foreign investment schemes occur because many countries are encouraged to invest in U.S.-based businesses. However, the tax authorities have little power to account for how the money used in these investments was earned. In some cases, the money comes from illegal activities. The launderer delivers the cash to the foreign investor, who then returns it by making an investment into the launderer’s own business.

Another type of laundering is called Bank Capture. This occurs when the money launderers own or run the financial institution. In this case, the money can be moved through the bank and legally transferred to other banks without investigation. This makes it difficult to catch, but can place the original bank in jeopardy for dealing with a shady institution.

Another form of laundering is through real estate laundering. Someone could purchase a piece of real estate property with cash, and quickly sell it. Any profits made would be associated with the sale and are legal.

– Investopedia.com, Moneytaskforce.com, draskovich.com

 

What is Trade-Based Money Laundering (TBML)?

TBML is defined as the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origin. There are various TBML variations that can be employed by money launderers. These include:

The purchase of high-value goods using the proceeds of crime, followed by the shipment and re-sale of goods overseas;

The transfer of funds which purport to be related to trade, or to the purchase of goods that are ultimately never shipped or received (also known as “phantom shipments”);

Falsifying the number and/or value of goods being shipped to be higher or lower than the corresponding payment, allowing for the transfer or receipt of the value of proceeds of crime (also known as over or under-invoicing);

Using the proceeds of crime to purchase goods for legitimate re-sale, with payment for goods made to drug traffickers/distributors by legitimate business owners (e.g. the Black Market Peso Exchange – BMPE); and

Using Money (Peso) Brokers, who are third parties that seek to purchase drug proceeds in the location where illicit proceeds are earned by drug cartels (e.g. Colombia, Mexico) at a discounted rate. Money brokers often employ many individuals responsible for collecting narcotics proceeds and disposing of those proceeds, as directed by either the drug trafficking organization or the money brokers who serve as professional money launderers.

Professional Money Launderers may also create and use false documentation, layer related financial transactions and establish shell and/or shelf companies to facilitate purported trade transactions. By using TBML mechanisms, PMLs can break the link between the predicate crime and related ML, making it difficult to associate the criminals with the ML activity.

– FATF 2018 report on Professional Money Launderers

 

What is the Bank Secrecy Act?

The U.S. Bank Secrecy Act (BSA), 31 USC 5311 establishes program, recordkeeping and reporting requirements for national banks, federal savings associations, federal branches and agencies of foreign banks. The Office of the Comptroller of the Currency’s implementing regulations are found at 12 CFR 21.11 and 12 CFR 21.21. The BSA was amended to incorporate the provisions of the USA PATRIOT Act which requires every bank to adopt a customer identification program as part of its BSA compliance program.

Criminals have long used money-laundering schemes to conceal or “clean” the source of fraudulently obtained or stolen funds. Money laundering poses significant risks to the safety and soundness of the U.S. financial industry. With the advent of terrorists who employ money-laundering techniques to fund their operations, the risk expands to encompass the safety and security of the nation. Through sound operations, banks play an important role in helping investigative and regulatory agencies identify money-laundering entities and take appropriate action.

– OCC

 

Are all broker-dealers in the U.S. subject to the Bank Secrecy Act?

Yes. The Bank Secrecy Act applies to all broker-dealers. There are no exceptions. Firms should recognize, however, that AML compliance programs can and should be tailored to fit their business and risks, considering factors such as size, location, business activities, the types of accounts they maintain, and the types of transactions in which their customers engage.

– FINRA

 

What components must an AML Compliance Program have in the U.S.?

The Bank Secrecy Act, among other things, requires financial institutions, including broker-dealers, to develop and implement AML compliance programs. Members are also governed by the anti-money laundering rule in FINRA Rule 3310. The requirements include:

  1. establish and implement policies and procedures that can be reasonably expected to detect and cause the reporting of suspicious transactions;
  2. establish and implement policies, procedures, and internal controls reasonably designed to achieve compliance with the Bank Secrecy Act and implementing regulations;
  3. provide for annual (on a calendar-year basis) independent testing for compliance to be conducted by member personnel or by a qualified outside party. If the firm does not execute transactions with customers or otherwise hold customer accounts or act as an introducing broker with respect to customer accounts (e.g. engages solely in proprietary trading or conducts business only with other broker-dealers), the independent testing is required every two years (on a calendar-year basis);
  4. designate and identify to FINRA (by name, title, mailing address, e-mail address, telephone number, and facsimile number) an individual or individuals responsible for implementing and monitoring the day-to-day operations and internal controls of the program.  Such individual or individuals are associated persons of the firm with respect to functions undertaken on behalf of the firm.  Each member must review and, if necessary, update the information regarding a change to its AML compliance person within 30 days following the change and verify such information within 17 business days after the end of each calendar year.

– FINRA/SEC

 

What is a Suspicious Transaction?

Suspicious transaction means a transaction whether or not made in cash which, to a person acting in good faith – gives rise to a reasonable ground of suspicion that it may involve the proceeds of crime; or appears to be made in circumstances of unusual or unjustified complexity or appears to have no economic grounds or bonafide purpose

– FINTRAC

 

What type of transactions may be reported as suspicious or unusual?

A suspicious transaction will often be one which is inconsistent with a customer’s known, legitimate business or personal activities or with the normal business for that type of customer. Some of the types of transactions that could be scrutinized can include:

  1. Cash sales out of proportion with business/industry.
  2. Unusual use of children’s bank accounts.
  3. Personal accounts being used for business transactions.
  4. Purportedly non-taxable transactions or capital gains (large casino winnings, lottery prizes, inheritances, etc).
  5. Back-to-back transactions (including loans) and multiple transfers through conduits (especially circular arrangements).
  6. Transactions in goods and services not fitting the underlying economic profile.
  7. Purchase and use of high value property not in keeping with the individual’s economic circumstances (e.g. expensive realty, luxury vehicles, valuable jewelry and artwork).
  8. “Property flipping” where two or more transactions relating to the same property take place within a short period.
  9. Large unexplained GST refunds often followed by rapid action account transfers.
  10. Transactions (both inwards and outwards) with known secrecy jurisdictions (tax havens) without reasonable explanations.

 – Gov’t of N.Z.

 

What are Politically Exposed Persons, Specially Designated Nationals and Financial Sanctions and why do I need to check them for AML?

It is recommended that FIs have a procedure in place to check PEPs, SDNs and the HMT Financial Sanctions in the UK.  A PEP is a Politically Exposed Person, and is someone who holds a prominent public position, or is an individual linked to them. An SDN is a Specially Designated National, on a list which specifies that US Citizens are not permitted to conduct business with them. The HM Treasury Financial Sanctions list specifies individuals with whom it is prohibited to transfer or make funds available to.

 

What is Beneficial Ownership?

A beneficial owner is a person or entity who enjoys the benefits of ownership even though the title to a property or asset is in another name.

It can also pertain to a company where an individual or group of individuals can either directly or indirectly have the power to vote or influence the transaction decisions regarding a company or its shares.

 

How can you be sure of beneficial ownership in a money laundering case? 

There are corporate registries, depending where your case is centered. In the EU, each country has its own registry. From U.S. perspective, corporate formation is controlled at the state level not the federal level. Each state can set its own rules for what information it collects when an entity is domiciled there, when an entity is formed and so we have no national database of beneficial owners.

On a state-by-state basis, they may or may not be collecting that information. In most cases, they are not collecting it. They may collect the direct owner of a company that is being formed, but in many cases, it is another company and they do not go any further than that.

So the whole premise of the CDD Rule and collecting beneficial ownership data was that the institution is supposed to collect the data from the customer and then obtain and validate the identification or the identity of that person. You can do that through a driver’s license or passport, but there is nothing to say that the person really is the ultimate beneficial owner of this structure of companies.

– CaseWare RCM

 

If a potential client cannot provide reasonable details of anticipated activity, would that be a red flag for money laundering?

If it is a brand-new business for example, and they have just opened their business and they are not too sure about what they are going to be doing that is a reasonable explanation.

But they still should have something like a business plan or projections, a pro forma income statement or things like that. They should have some idea of what they are going to be doing through the accounts. Therefore, if they absolutely insist that they have no idea, then I would say that is a red flag.

 

Do Cryptocurrencies have a high money laundering risk? 

As with all financial vehicles, cryptocurrency poses AML and CFT risk. These risks can be divided into two areas: those that align with traditional AML and those that are unique to cryptocurrency. For traditional AML risks, these will include both predicate offences, such as fraud, bribery, terrorist financing, organized crime, human trafficking, and counterfeiting; as well as transaction monitoring risk such as structuring and high value transactions. There are a number of risks, however, that are unique to cryptocurrency such as:

  • use of dark web sites
  • use of PunyCode URLs
  • cryptocurrency giveaways
  • pump-and-dumps
  • use of mixing services and many others.

Additionally, many virtual asset service providers (VASPs) must be registered as MSBs (Money Services Businesses) with FinCEN. FIs receiving or sending transactions to and from VASPs should ensure those VASPs are properly registered.

CaseWare RCM has done a number of webinars on virtual currencies with experts who work intimately in this area.

Here is a link to a white paper: What FIs Need to Know About Cryptos. In addition, here are links to webinars we have done: A Regulatory Understanding of Virtual Asset Types and Their Risks and What FIs Need to know about Cryptos

– CaseWare RCM

 

Who can I contact if I suspect a case of money laundering?

In respect to investigating a company and persons involved in money laundering, individuals need to contact their local investigative authorities. If you are with a financially regulated company, you should contact your regulator by filing a suspicious activity report.

 

Should governments with measures in place still be concerned?

Money launderers have shown themselves through time to be extremely imaginative in creating new schemes to circumvent a particular government’s countermeasures. A national system must be flexible enough to be able to detect and respond to new money laundering schemes.

Anti-money laundering measures often force launderers to move to parts of the economy with weak or ineffective measures to deal with the problem. Again, a national system must be flexible enough to be able to extend countermeasures to new areas of its own economy. Finally, national governments need to work with other jurisdictions to ensure that launderers are not able to continue to operate merely by moving to another location in which money laundering is tolerated.

 

How does Alessa help fight money laundering?

Alessa provides all the anti-money laundering (AML) capabilities that banks, money services businesses (MSBs)Fintechscasinos and other regulated industries need – all within one platform. The solution integrates with existing core systems and includes:

  • Real-time due diligence
  • Transaction monitoring and screening
  • Sanctions screening
  • Automated regulatory reporting
  • Advanced analytics like anomaly detection and machine learning
  • Dashboards, workflows and case management

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Learn more from our recent webinars

Links to some of our AML-related webinars:

If you have a question about money laundering that has not been asked and answered here, please send the question to alessa@caseware.com

 

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