Money laundering is big business. Criminals use money laundering to cover up funds acquired through illegal activity and make it appear as if they were generated through legitimate and legal means. The fraudster aims to conceal that the funds exist, how he or she acquired them and where they are stored. Whether it’s Walter White using A1A Carwash as a front for his drug business or the Zeta cartel running a horse-racing farm, the ways to launder money are limited only by the fraud organization’s imagination.
People launder money for two principal reasons. First, the money can lead a traceable pathway to their fraudulent activity. Second, the cash itself is susceptible to take-over from law enforcement authorities and therefore needs to be protected. To a smaller degree, tax evasion is another reason. No good criminal wants their briefcase full of cash taken away. Regardless of the reason why, the operational steps of money-laundering involve three stages:
- Movement – Move the funds away from explicit connection to the illegal activity
- Disguise – Obscure the money audit trail and sever the link to the original crime
- Return – Reunite the money with the owner from what appears to be legitimate sources
Often times these stages are also referred to as placement (movement), layering (disguise) and integration (return).
Movement of funds away from its source is the first step in the process. This step is the initial entry of the money or proceeds of a crime into the financial ecosystem. The cash is moved into circulation through banks, casinos, shops and other cash heavy businesses (e.g. restaurants, night clubs). Movement can be carried out through many processes such as:
- Purchasing assets – The purchase of assets with cash where the primary purpose is to transfer the illegal profits from bulk cash to an equally valuable but less conspicuous form
- Blending funds – Using a justifiable cash focused business to mix “dirty” funds with the legitimate income
- Exchanging currency – Buying foreign money with illegal funds through foreign currency exchanges
- Gambling – Buying casino chips, cashing out the chips and taking check payment or claiming the proceeds as gambling winnings
It is at the movement stage that federal legislation has been put in place (e.g. Bank Secrecy Act, OFAC regulations) to prevent launderers from depositing or converting large sums of cash at financial institutions or taking cash out of the country. This stage is also where money launderers are the most exposed since introducing large amounts of cash and a high volume of small transactions (in order to stay under $10K limits) into the financial system raises red flags.
After introducing the money into the financial system, the fraudster carries out a series of financial transactions, one transaction after another, all designed to hide what they are doing. During this step, the laundering organization adds layers such as moving funds electronically across international borders, reselling assets, investing in overseas stock markets and diverting funds to offshore accounts, shell companies and paying front men. The disguise stage of the process represents the most challenging area of detection. Due to the many layers, it’s hard to trace the funds, especially if the money is moved multiple times from one institution to another. Finding all of the individuals involved, and how they are linked and connected, requires lengthy forensic investigations and advanced correlation algorithms.
Fraudsters know what they are doing. Investing in inconspicuous institutions and spreading activity across many institutions are effective ways to remain under law enforcement’s watch. Many successful money laundering operations have gone through institutions that most people would never consider as fronts for illegal operations. Who would suspect a family-friendly water park, a resort management company and a charity foundation for cancer? One of the reasons why organized crime syndicates such as drug cartels have continued to flourish is because of their infiltration into hundreds of institutions. They coordinate with so many types of organizations across many countries that eliminating one institution will not hinder their practices.
The final stage in the laundering process is the integration of the money back into the economy in such a way as to make it look like a legitimate business transaction with an audit trail. Reuniting the funds with the owner can happen a number of ways including;
- Buying property – Use shell companies to buy property where the revenue from the sale would be considered legitimate
- Providing loans – Criminals lend themselves their own laundered proceeds in an apparently legitimate transaction
- Faking invoices – Overstate their income, which comes from over-invoicing to allow inflow of illegally obtained money
Financial crimes unit and anti-money laundering (AML) investigators know that inherent in the money-laundering process is the requisite that the owner and origin of the funds be hidden. They recognize this and understand at the same time that the owner needs some way to maintain control of the funds. An indirect connection will always exist throughout the process. Looking for these connections between transactions and institutions can turn out to be key in uncovering and busting a money-laundering scheme.
We’re going to continue to dig deeper into the issue of AML here on the blog, but if you’re in the New York area and would like to learn more about Anti-Money Laundering and Compliance, please register for our Trust and Safety Meetup here.