Ascend Legal offers practical (AML) Anti Money Laundering courses
The challenge of managing money laundering risks in a global marketplace is one that demands a co-ordinated approach and a common understanding of evolving and emerging trends in both regulation and criminal activity.
It is important for any AML professional to recognise, develop and maintain a risk-based and comprehensive anti money laundering/counter terrorist financing framework to mitigate and prevent the threat. Understanding your customers (Customer Due Diligence) and responses such as reporting suspicious activity are also vital tools in your AML armoury.
Give employees the knowledge they need to reduce your risks
Protect yourself and your business by investing in anti-money laundering training that increases the understanding of the AML rules and guidelines as they pertain to various industries including, banking, insurance, real estate, financial planning, securities, gaming organizations, and more.
What is Money Laundering?
Money laundering refers to the illicit process of concealing the origins of illegally obtained money, which often stems from activities like drug trafficking, corruption, embezzlement, or gambling. This is achieved by converting the tainted funds into seemingly legitimate sources. The act of money laundering is considered a serious offense in various jurisdictions, and its definition may vary depending on the country’s laws. Usually associated with organized crime, money laundering plays a crucial role in the operations of criminal networks.
In the United States, money laundering involves engaging in financial transactions to mask the identity, source, or destination of unlawfully acquired money. In the United Kingdom, the definition is more comprehensive under common law. It encompasses “taking any action with property of any form, which is either entirely or partially derived from criminal activities, with the intention of concealing its criminal origins or obscuring the true ownership of the property.”
Previously, the term “money laundering” was primarily associated with financial transactions connected to organized crime. However, contemporary interpretations, driven by government and international regulatory bodies like the US Office of the Comptroller of the Currency, have broadened the scope. Now, it includes “any financial transaction that results in an asset or value due to an illegal act,” potentially encompassing activities like tax evasion or falsified accounting. In the UK, the scope is not limited to money but extends to any economic asset.
The perpetration of money laundering is diverse and involves various parties, such as private individuals, drug dealers, businesses, corrupt officials, members of criminal organizations like the Mafia, and even states.
With the increasing complexity of financial crimes and the growing importance of financial intelligence in combating global crime and terrorism, money laundering has become a significant subject of political, economic, and legal discussions. It’s essential to note that money laundering itself is inherently illegal; the activities generating the illicit funds are almost always criminal in nature (otherwise, there would be no need to launder the money).
According to the United States Treasuring Department, the following definition is provided:
DEFENITION: Money laundering is the process of making illegally-gained proceeds (i.e., “dirty money”) appear legal (i.e., “clean”). Typically, it involves three steps: placement, layering, and integration. First, the illegitimate funds are furtively introduced into the legitimate financial system. Then, the money is moved around to create confusion, sometimes by wiring or transferring through numerous accounts. Finally, it is integrated into the financial system through additional transactions until the “dirty money” appears “clean”.
Methods to be aware of!
Money laundering presents itself in various forms, and while the methods used can be diverse, they can generally be categorized into several types. These include:
1. Structuring (Smurfing): This tactic involves breaking down large sums of cash into smaller deposits to evade suspicion and bypass anti-money laundering reporting requirements. In some cases, individuals may use smaller amounts of cash to purchase money orders or other bearer instruments, which are then deposited in small increments.
2. Bulk Cash Smuggling: Here, cash is physically smuggled to another jurisdiction and deposited into financial institutions that offer greater bank secrecy and less stringent anti-money laundering measures. Offshore banks are often preferred in such instances.
3. Cash-Intensive Businesses: Criminals utilize businesses that predominantly deal in cash transactions to deposit illicitly obtained funds. These enterprises, which sometimes operate openly, mix illicit cash revenue with legitimate earnings, making it challenging to detect discrepancies.
4. Trade-Based Laundering: One of the newer and more intricate forms of money laundering, this method involves manipulating invoices to disguise the movement of money. Industries like the art market have been accused of being ideal vehicles for this type of money laundering due to the subjective value of artworks and the secrecy surrounding auction house transactions.
5. Shell Companies and Trusts: Trusts and shell companies are employed to conceal the true owners of money, as they are not always required to disclose their beneficial owners. Criminals may act as fictitious owners or use these entities to obfuscate the flow of funds.
6. Round-Tripping: In this technique, money is deposited in a controlled foreign corporation, preferably in a tax haven with minimal record-keeping. The funds are then sent back as foreign direct investments, bypassing taxation.
7. Bank Capture: Criminals gain control of a bank, preferably in a jurisdiction with weak anti-money laundering controls, and utilize it to move money without scrutiny.
8. Invoice Fraud: Criminals deceive companies by providing fraudulent payment details, leading to the transfer of money into illegitimate accounts.
9. Casinos and Gambling: Illicit cash is converted into casino chips, and a brief period of gambling is undertaken. The winnings are then collected in the form of checks or receipts to falsely portray the proceeds as gambling winnings.
10. Online Job Marketplaces: Money launderers can post token jobs on platforms like Freelancer.com and Fiverr, sending funds to be held in escrow. They or their associates can then pose as freelancers, complete the jobs, and claim the funds.
11. Black Salaries: Companies may pay unregistered employees in cash using dirty money.
12. Tax Amnesties: Money launderers may take advantage of tax amnesties to legalize unreported assets and cash hidden in tax havens.
13. Transaction Laundering: This involves processing illicit credit card transactions for other businesses, using the payments ecosystem to hide the fact that the transactions occurred.
Money laundering, with its numerous and ever-evolving methods, remains a significant challenge for governments and financial institutions globally.
Crypto Currency and Money Laundering
In theory, electronic money was envisioned to offer a seamless way of transferring value without divulging identity, similar to untracked banknotes or anonymous wire transfers involving numbered bank accounts. However, in practice, the record-keeping capabilities of Internet service providers and other network maintainers have hindered achieving this goal. While some cryptocurrencies have emerged with the aim of enhancing transaction anonymity, their success in this regard, and consequently their potential benefits for money laundering, remain subjects of controversy.
Cryptocurrencies like ZCash and Monero, commonly known as privacy coins, use techniques such as proofs and obfuscation of information (ring signatures) to provide unlinkable anonymity. Although they may not be suitable for large-scale criminal activities, privacy coins like Monero have found use in laundering money gained through smaller criminal endeavors.
Beyond traditional cryptocurrencies, Non-Fungible Tokens (NFTs) have also been exploited in money laundering schemes. Money launderers utilize NFTs for Wash Trading by creating multiple wallets for a single individual, orchestrating fictitious sales, and eventually selling the corresponding NFT to a third party. Due to the relatively anonymous nature of transactions on NFT marketplaces, these wash trades have become increasingly popular among money launderers, leading to potential regulatory pressure on auction platforms to comply with anti-money laundering legislation.
Another tool employed by cybercriminals for laundering funds is cryptocurrency mixers. These services blend cryptocurrencies from various users, obscuring the origins and ownership of the funds and providing enhanced privacy on public blockchains like Bitcoin and Ethereum. While the legality of mixers remains disputed in many jurisdictions, their use has drawn attention from authorities and regulatory bodies.
The increasing adoption of digital currencies for criminal activities prompted efforts to strengthen anti-money laundering laws, as witnessed in Australia. Bitcoin, with its decentralized and protocol-based nature, has been exploited by criminals seeking to evade national laws. The use of decentralized digital money allows users to bypass Know Your Customer (KYC) requirements by leveraging services like Tor to obscure transaction origins. However, many digital currency exchanges are now implementing KYC programs under the threat of regulatory action from their operating jurisdictions.
In the past, cybercriminals employed digital currency exchanger services, such as Liberty Reserve, to launder money anonymously. This approach allowed them to convert dollars into a digital currency, conduct transactions discreetly, and eventually convert the digital currency back into cash. The shutdown of Liberty Reserve in 2013 and the subsequent charges against its founder and others were a significant development in the fight against money laundering.
Moreover, online gaming platforms like Second Life and World of Warcraft have also been misused for money laundering. Players can convert real money into virtual goods, services, or virtual cash, which can then be converted back into real money, allowing for illicit funds to be concealed and moved through the gaming world.
Efforts to address the potential misuse of digital currencies for criminal purposes are ongoing, and regulatory bodies are increasingly monitoring the crypto landscape to curb money laundering and related illegal activities.
Criminalization of Money Laundering
The offense of money laundering is defined in accordance with the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances and the Convention against Transnational Organized Crime. It encompasses knowingly engaging in a financial transaction involving the proceeds of a crime with the intent to conceal or disguise the illicit origin of the property from government authorities.
In the United States, the key statutes pertaining to money laundering are 18 U.S.C. 1956 and 1957, which criminalize participating in financial transactions with the proceeds of certain crimes to obfuscate the nature, source, or ownership of said proceeds. Money laundering entails transferring unlawfully obtained funds through legitimate channels or accounts to prevent tracing their original source.
Combating Money Laundering
The term “anti-money laundering” (AML) primarily finds application within the financial and legal sectors, describing the legal measures that mandate financial institutions and regulated entities to prevent, detect, and report instances of money laundering. The impetus for AML guidelines gained global significance following the establishment of the Financial Action Task Force (FATF) and the subsequent formulation of an international framework of anti-money laundering standards. The significance of these standards escalated in 2000 and 2001 when FATF began publicly identifying countries with deficiencies in their anti-money laundering laws and international cooperation, commonly referred to as “name and shame.”
An effective AML program necessitates the criminalisation of money laundering within a jurisdiction, granting relevant regulatory bodies and law enforcement agencies the authority and tools to conduct investigations. This includes the ability to exchange information with other countries as required. Additionally, financial institutions are mandated to identify their customers, implement risk-based controls, maintain records, and report suspicious activities.
Stringent background checks are imperative to counter money laundering schemes, particularly as some perpetrators exploit intricate ownership and corporate structures to evade detection. Collaborative efforts between financial institutions and government agencies are essential to curtail such practices effectively.
In recent times, the adoption of anti-money laundering mechanisms has been augmented by the use of big data and artificial intelligence. Traditional AML systems have encountered challenges in keeping pace with evolving threats, and new technologies are assisting AML compliance officers in addressing issues like poor implementation, expanding regulation, administrative complexity, and false positives.
The Role of Financial Institutions
Financial institutions, like banks, have a responsibility to adhere to anti-money laundering laws and regulations. However, each institution may implement its anti-money laundering efforts differently. Nowadays, not only banks but also many other types of financial institutions must identify and report suspicious transactions to the relevant financial intelligence unit in their country. To achieve this, banks need to verify the identity of their customers and monitor their transactions for any unusual activity, which is commonly known as “know your customer” measures. This helps them spot any potentially suspicious behavior that might indicate money laundering.
Employees at banks, such as tellers and customer account representatives, receive training on anti-money laundering procedures and are instructed to report any activities they find suspicious. Moreover, anti-money laundering software is used to analyze customer data, classify it based on suspicion levels, and look for anomalies. These anomalies could include sudden large fund increases, significant withdrawals, or money transfers to locations with strict bank secrecy laws. Even smaller transactions that meet certain criteria may be flagged as suspicious. When the software detects these anomalies or any matches with government blacklists or transactions involving hostile countries, it alerts bank management, who then decide whether to file a report with the government.
Challenges and Privacy Concerns
Financial institutions have raised concerns about the growing costs of anti-money laundering regulations, which they believe do not always provide sufficient benefits. The Economist magazine has been critical of such regulations, particularly regarding their effectiveness in countering terrorist financing, deeming them a “costly failure,” though it acknowledges that other efforts like reducing identity and credit card fraud may still be effective.
Determining the exact costs of anti-money laundering efforts and their actual impact on money laundering remains challenging. The Economist estimated the annual costs of such efforts in Europe and North America, but the effectiveness of these measures in combating money laundering is difficult to assess accurately. Improper attention to data protection practices can also have adverse effects on individual privacy rights. Proper measures must be taken to safeguard personal privacy rights and comply with data protection laws while addressing money laundering and terrorist financing issues.
Ascend Legal provides practical courses and training to stay up to date in this ever changing field, that definitely is necessary.
Many countries are obliged by various international instruments and standards, such as the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances and the Financial Action Task Force on Money Laundering (FATF) recommendations, to enact and enforce money laundering laws. The aim is to combat narcotics trafficking, international organized crime, and corruption. Some countries, like Mexico facing increased violent crime, have implemented anti-money laundering controls as part of their efforts to address underlying crime issues.
