Anti-Money Laundering in a Nutshell 2/2

Kevin Sullivan

Part 1.

2/ Methods of Money Laundering

• There are three major methods:

• Using the legitimate financial system (banks, money service businesses, etc.)

• Physically moving bulk cash

• Physically moving goods through the trade system.

• Anything of value can be laundered!

• Structuring helps bypass the mandatory bank reporting requirements by making multiple deposits smaller than $10k in different banks. The people doing these small deposits are called smurfs and the process is also called “smurfing”. [MK: Trying to make frequent small deposits in banks can and does raise suspicions, so the area of operation has to be quite wide.]

• Bulk cash smuggling is done via hiding cash in various holes in moving or movable objects or wrapped around body parts of couriers. The goal is making the money appear in a country with low banking standards (i.e., high secrecy) also known as sinks.

• Buying gold (and then melting, moulding, and painting it to look inconspicuous) is another way to smuggle money. [MK: this method is overrated because gold is heavy, and 1kg is worth $57k as of Oct 2021. Better than cash, but not by much.]

• Money orders (in the countries with archaic banking systems like the US). Can be bought in bulk for odd amounts (pretending to be bill payments or something equally legitimate), each money order value being below the reporting threshold. Easy to transport, often can recover if lost – in other words, a smuggler’s dream.

• Wire transfers (or multiple, creating layer upon layer) using shell / nominee companies. Lengthy and thus hard to trace, investigators need to be super confident they’re on something to pursue.

• Casinos – buying chips for dirty money and presenting them for payment makes the money clean; one can pretend it’s the winnings (that is taxable, of course, but clean). There are now tools to curb such blatant abuse (ticket in-ticket out, when slot machines have barcode records of winnings), also there is reporting for all transactions in excess of $10k. [MK: it took many years for Crown Casinos in Australia to be reliably accused on helping launder Chinese money.]

Trade-Based Money Laundering System

• MK: This is by far the most widespread method of money laundering.

• Also known as an “alternate remittance system” – using illicit proceeds to buy goods with a premium or sell goods at a loss thus misrepresenting the price, quantity or quality of imports or exports.

• Over- and under-invoicing. The falsification of the actual price of goods or services: invoicing low creates a loss of the exporter but a legitimately looking profit of an importer (follow the money, right?). And vice versa: selling something higher than it’s worth creates a legitimate profit of an exporter. This also applies to the items with value that can’t be obviously assessed and thus a phony invoice won’t be challenged.

• Black Market Peso Exchange (I’m sure there are similar tricks with other currencies and countries): drug money usually gets placed into the US banking system; this money is exchanged for Colombian pesos at an exchange rate reflecting the non-compliance (with the reporting requirements) risk. Latin American traders buy these US dollars in the US (to pay for exportable goods) and pay with pesos in Colombia (or their countries), so there’s no traceable wire transfer to intercept.

• While there have been multiple attempts to crack down on this practice, it has evolved into simply buying luxury real estate in the US instead of exporting goods to Latin America.

• Hawala (or Underground Banking System). It’s an alternative / parallel banking system for those who don’t like the scrutiny of traditional financial institutions [MK: it’s the same kind of people who bought Bitcoin for reasons other than speculation]. It runs on trust (and hence – on ethnic ties) and is cash only, so unless there’s a mole inside the ranks – there’s no way to trace the money.

• The markers of trade-based ML are:

• No logical connection between the transacting parties

• Poor or missing documentation, or the numbers don’t match the price

• Goods don’t exist

• Unusual / uneconomical shipping routes involving high-risk countries or more jurisdictions than justified. Also, several rounds of import-export.

• The use of shell companies.

• Prepaid / smart cards (or any other type of stored value cards) – they can be topped up with cash via ATMs or even mobile phone accounts. Then they can be transported anywhere. In 2021 this is already a challenge, as most financial institutions have to do extensive KYC on their clients and question their sources of funds. [MK: in countries like Russia such cards can be issued using stolen identification documents and used to collect funds from internet fraud. This is the dark side of FinTech.]

• Closed-loop cards can be anonymous and used and sometimes topped up only in the shop that issues them. Can be sold for cash.

• Open-loop cards can be funded from a bank account, money order or cash, and used anywhere.

• Reloadable open-loop cards are a gift from heaven as they can be used for anonymous cash loading/withdrawals. They are not considered monetary value and thus not subject to the reporting requirements. These cards can’t store lots of value but are very good for a rainy day.

• ATMs – can be used both ways – to deposit dirty cash and to withdraw clean cash. While there are serious AML requirements for the operators of private ATMs, they can be subleased and eventually the controls get loosened. The red flags of ATM fraud revolve around the number and volumes of transactions, the ratio of deposits/withdrawals, the average transaction size, and the usage time patterns.

• Autos – cars bought with crime proceeds can be titled to a nominal owner and later resold abroad. The documentation for a large cash transaction can be deliberately made incorrect to avoid tracing back to the buyer.

• Credit cards [MK: we’re talking about the US where these cards don’t have an associated bank account] are a rarely used tool for ML: first they’re topped up with a (for instance) bank check bought with cash to establish a credit balance (i.e., overpayment) and then the money can be asked back leading to the issuance of a bank check into the recipient’s name (i.e., clean money).

• Real estate can be bought cheaply with a loan paid for with the dirty money and then sold at full price. Or it can be bought via a chain or limited liability companies with dirty cash.

• Cash-Intense Business – some businesses are mostly cash-based (less so in 2021, but still), so injecting some dirty cash will increase their profits and launder the funds. The only way to catch this is scrutinising unusually profitable businesses (who on Earth in their sane mind would want to pay tax if it can be optimised?).

• Insurance – buying insurance and cashing it out (selling or borrowing against) prematurely is a common approach.

• Crypto Currencies – despite the hype, the major uses of them are speculation, money laundering and paying for illicit goods. [MK: I still remember the time when 1 Bitcoin could buy 1 gram of cocaine – not from personal experience, of course.] Enough said.

PS. The book became too technical, I don’t want to continue summarising it.