Money Laundering Techniques

Money laundering techniques are those methods involved in making money generated through criminal activity without a legitimate source. This ensures the free flow of money through the financial system to be funded for illegal activities. The use of such techniques is an offense.

These techniques make it difficult for legal authorities to track the funds and their utilization.

They undermine the integrity of the financial systems and have adverse effects on the economy. Involvement in one can lead to reputational damage, severe financial penalties, and legal actions. Laundering is a crime and disrupts world peace.

Money laundering techniques involve methods and instruments used to transfer illegitimate funds into the legitimate financial system. Money laundering aims to mask the true source of funds and utilize it for unlawful activities. Obscuration of the actual source of funds makes it hard for law enforcement agencies to identify and stop the funds. The activities that often lead to money laundering are fraud, corruption, drug trafficking and organized crime.

The process of money laundering involves three stages. They are placement, layering and integration. Placement is the stage where crime proceeds are introduced into the financial system. The layering stage involves engaging a series of movements of funds to longer distances from the sources. The third stage is integrating or reintroducing laundered money into the economy as legitimate sources.

The processes and techniques involved adversely affect the financial system and economy. It erodes public trust and increases crime. Due to the erosion of trust, investments do not happen, reducing economic activity and growth. It may lead to instability in the markets. This also increases the regulatory burden of financial institutions and lawful agencies. Furthermore, they increase corruption and inequality, resulting in tax evasion and thus restricting the government's income.

Given below are some of the techniques involved in the laundering process. 

• Placement: Techniques under it involve structured payments, gambling and business. 
• Structured payments or money mules or smurfing: This involves the use of illegal money to be distributed to many people to be made into small deposits. These are later transferred to different locations.
• Gambling: The funds are used to buy casino chips, play and give back the chips and request a check for transfer. This is masked as casino winnings. Fraudsters otherwise own the casino to pretend that the money is an income from the casino.
• Businesses: Fraudsters open up cash-intensive businesses such as clothes or restaurant shops and pretend that it is an income from there.
• Layering: Layering is done through trade-based money laundering techniques, jurisdiction hopping and breaking the trail.
• Trade-based money laundering: Trade-based money laundering techniques happen when fraudsters take control of export-import companies and execute extra invoices when in need of money. The money will be sent to the destination as goods payment.  
• Jurisdiction hopping: Fraudsters make numerous transfers through several jurisdictions. This delays the law enforcement from tracing the money.
• Break the trail: The asset's forms are changed here. Cash from one account is transferred to another. It is then converted into stock and later into another currency. This is then used to buy diamonds and other precious materials only to be bought and sold.  
• Integration: This involves back-to-back loans and a buys-low and sell-high strategy.
• Back-to-back loans: They are loans bought by fraudsters to be taken from a foreign friend for a long period. They also negotiate with banks to deposit money in one branch and get loans from another. The deposit is used as collateral, making people believe it's a loan.
• Buy low- sell high: It is a technique used to buy valuable pieces or assets. They involve an agreement with a real estate seller to pay 10% first and then 90% through cash. This becomes proof of a cheap purchase and makes sales later by giving them illegal money, and this is shown as an expensive sale.

The following are some of the techniques used to detect the laundering activities.

• Checking for unusual financial activities different from transaction patterns.
• Deposition of cash in large sums without justification.
• The customer evades inquiry or KYC verification.
• There are discrepancies in the provided information.
• Third parties have involvement in the deposition of funds in large numbers. This is without a source of private funding.
• Financial transactions have an increasing trend of complications.

Let us look at some examples to understand the concept better.

Example #1 - A Hypothetical Example 

Imagine Dan, a smuggler who trades arms and ammunition in the black market. He makes a lot of money but this is illegal. The cash he made now cannot be deposited with the banks as he does not have proof of their sources. After much deliberation, he thinks of cleaning his dirty money.

Dan opened a small company that exports raw materials for making iron furniture. He then makes fake invoices of large imports and exports to make a legitimate source. Now, he can approach the bank to get his funds deposited with a source.

This is, however, illegal, and being caught would give him years of punishment, and his wealth would be confiscated. 

Example #2 - A Real-Life Example

A Europol report reveals that Europe's criminal networks are increasingly using new and sophisticated methods of money laundering. This poses a significant financial and economic threat. It estimates a rate of 70% of criminal elements engaging in such activities. They are masking the funds through legitimate businesses and using technology to blend things in. This has led to the establishment a parallel economic system that relies on shell companies, offshore firms and online banking to move funds quickly. The size of the activity is large and hence requires international cooperation.

Given below are techniques that can be used to prevent laundering activities 

• Know your customer policies (KYC policies): Institutions shall adopt KYC policies. It involves verification of the identity of clients, the nature of activities and assessment of their risk levels.  It is done through documentation of checks, screenings and constant monitoring of activities. This helps in early detection in case of anomaly.
• AML or anti-money laundering software: AML software is a good option for detecting activities of laundering. This software often uses advanced algorithms and machine learning to identify patterns and monitor transactions. They help in flagging activities for further investigation. It reduces the risk of errors and prompt identification. This software assesses, detects and monitors transactions.
• Employee training programs: Employees of institutions shall be trained to identify indications of fraud happening. The training shall cover money laundering basics and the existing techniques and procedures utilized to combat it. Well-trained employees help prevent the damage from existing and spreading.
• Regular audit checks: Institutions shall conduct regular compliance checks and audits to ensure the effectiveness of anti-money laundering measures. The process shall involve checking of KYC process, efficacy of transaction monitoring systems and compliance with regulations.
• Collaboration with law agencies: Sharing information and cooperating with enforcement agencies shall help in combating money laundering. The collaboration shall extend to local, regional, national or even international agencies.