Money laundering is a widespread issue in the financial industry and is hard to eliminate. Because the practice is so prevalent and damaging, most financial institutions are required to have anti-money laundering (AML) technology in place so they can stay compliant with federal regulations. These institutions must be proactive in the fight against money laundering or face severe penalties, including the potential for prison time and massive fines.
This article will examine the most common money laundering schemes found in financial systems so that your business will be better able to spot illegal activity or prevent it from happening at all.
What Is Money Laundering?
Money laundering is an illegal way to “clean” dirty money that was acquired from criminal activity such as drug-related crimes, embezzlement and terrorist funding, by running it through legitimate businesses. In that way, financial criminals try to avoid detection by disguising their dirty money as legal profit.
Criminals cannot just spend large amounts of money without accounting for its source if they want to escape legal repercussions for their actions. That means they must make it appear that the money came from a legitimate source in order to evade law enforcement agencies.
Savvy criminals use financial institutions and high-cash businesses to clean their dirty money — making it look as if the money is profit from a legitimate business and not from a financial crime. For instance, many criminal organizations use shell corporations for this purpose. These are companies that don’t actually do legitimate business and exist mostly on paper to launder illegal funds. It’s the way that drug traffickers and other criminals can get money into their bank accounts that they can actually use without worrying about being arrested or raising suspicion.
So what are some examples of money laundering schemes? Seven of the most popular ones are listed below.
7 Examples of Money Laundering Schemes
Money laundering is a huge issue. Globally, it affects about $2 trillioneach year, or 2% to 5% of global GDP. The most common businesses involved in money laundering include those that handle large amounts of cash, such as restaurants, nightclubs, charity trusts and casinos. Others deal with inventory that is difficult to value, like art or jewelry.
Creating a shell company, one that has no real business purpose, is another way to make cash look as if it came from a legitimate source when it really comes from financial crime. In reality, though, almost any type of business can be used in the money laundering process.
The 7 most common money laundering activities include the following:
- Real-Estate Laundering
- Casino Laundering
- Bank Laundering
- Trade-Based Laundering
- Laundering Money Through Cash Businesses
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Real-estate laundering works because the deals involve large cash amounts as well as legitimate financial systems such as banks and mortgage companies. Criminals will often buy a piece of real estate using cash from illegal activity and then quickly sell it, depositing the proceeds into a legitimate bank account. They may have a third party buy the property or use shell companies to make the purchase. Once they have sold the property, tracing the origins of the purchasing funds becomes more difficult.
Although buying and selling real estate through cash transactions is not inherently illegal, it can catch the attention of the Financial Crimes Enforcement Network (FinCEN) in the U.S. and the equivalent regulatory agencies in other countries. Multiple cash real estate deals are especially suspicious to law enforcement officials who are on the lookout for questionable financial transactions.
Casinos have a well-earned reputation as places to launder illegal funds. People come into these establishments with large amounts of cash and can disguise their dirty money as they gamble. They simply pay for their casino chips with their illegal proceeds, gamble a little and then cash in their chips. The result is that they walk in with dirty money and walk out with clean cash disguised as winnings.
Organized crime has long been associated with gambling establishments because these criminal organizations use casinos as part of their money-laundering operations. Casinos are profitable businesses on their own as well as a great place to disguise the large amounts of dirty money that these criminal organizations collect.
Banks do monitor frequent deposits from gamblers to ensure that people and businesses are not using casinos to hide their illegal funds. These deposits are often a sign of money laundering activity. So casino money laundering does not always work.
Another money laundering example is bank laundering. Owning your own financial institution is one of the best ways to clean illegal funds on a large scale. If a money launderer owns a bank, mortgage company or stock trading company, they can move the money through their organization to another financial institution pretty easily. These transfers often take place in the form of currency exchanges that are extremely hard to detect by the other financial institutions involved and by regulatory agencies.
Bank laundering was one of the main reasons the Bank Secrecy Act was created. The law stipulated that financial institutions had to follow certain reporting requirements that help expose money launderers. Even with the Bank Secrecy Act, money laundering is still a big problem, but the accounting and reporting regulations have curbed many of the excesses.
The Financial Action Task Force (FATF) defines trade-based money laundering as “the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origin.” This can include:
- over- and under-invoicing of goods and services;
- multiple invoicing of goods and services;
- over- and under-shipments of goods and services; and
- falsely described goods and services.
Companies can pull off this maneuver by lying about the price and quantity of imports and exports to make their profits look larger than they are. Financial criminals often use this practice in concert with other money-laundering techniques, which makes it even more difficult to trace the money’s origin.
Criminals frequently choose this tactic to launder their dirty money because it provides a solid paper trail that banks find hard to dispute. Invoices and bills of sale lend legitimacy to their efforts. In these money laundering cases, banks will sometimes flag a business that suddenly shows a large increase in profits and investigate them for financial crimes.
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Layering is another popular and effective way for financial criminals to launder their illegal funds. The idea is to distance the money from its illegal origins by putting it through numerous transactions and various forms.
For instance, cash can become gold, then become real estate, and then become casino chips. This layering also means that the money usually goes around the globe, entering multiple countries and going through even more transactions. The overseas element makes enforcing AML regulations even more challenging, since multiple jurisdictions and different laws are involved.
Layering is a favorite method of white-collar criminals, including those practicing embezzlement, tax evasion and cryptocurrency fraud (including bitcoin scams). Layering makes it incredibly difficult to track the origin and journey of illegal funds, which means many money launderers go undetected.
Laundering Money Through Cash Businesses
Cash businesses, including car washes, laundromats and strip clubs, are favorites of money launderers. Although these common companies have legitimate operations, they can operate partially or mostly as shell companies whose real business is to launder illegal funds. After all, it’s hard to prove how much money actually goes through a laundromat each day or how much a strip club takes in.
Using a heavy cash business for money laundering leaves law enforcement agencies, including the FBI, with little evidence to act on. However, the IRS frequently looks closely at these businesses’ cash records to detect suspicious activity. And law enforcement might compare a business to similar businesses to detect outliers, such as a hair salon that brings in twice as much cash as a similar salon down the street.
Structuring, also known as smurfing, is the money laundering practice of splitting large cash amounts into smaller chunks and depositing them into many different accounts, making detecting the illegal funds nearly impossible.
Criminals often use money orders and cashiers checks in structuring, but multiple deposits of these forms in a short period can trigger the suspicion of financial institutions, which may decide to launch a money-laundering investigation, even if current reporting requirements do not force them to do so.
Since financial institutions are always on the lookout for suspicious transactions, suspected smurfing may cause them to look more closely at individual accounts for other scams. Most money launderers use more than one method to wash illegal funds.
Legal Measures to Protect Against Money Laundering
The Bank Secrecy Act of 1970, also known as the Currency and Foreign Transactions Reporting Act, was designed to prevent criminals from using financial institutions to launder their illegal funds by enacting reporting requirements.
The law holds financial institutions accountable for taking certain steps, such as providing currency transaction reports to regulators. For example, banks must submit a suspicious activity report when their clients are involved in suspicious transactions involving more than $10,000.
FinCEN is responsible for enforcing the Bank Secrecy Act and has the power to set regulations, monitor financial institutions’ compliance and impose and collect fines for violations.
Money Laundering Consequences and Penalties
Money laundering is considered a serious white-collar crime in the U.S., and the fines for violating regulations are steep. If caught laundering money, criminals will usually pay $500,000 or double the amount of money that was laundered, whichever is greater.
Occasionally a violator will get three years of probation. Some will do prison time for their offenses. If charged with a misdemeanor, they can face up to a year in prison. If charged with a felony, they can face 35 years or more.
Streamline AML with Jumio
Anti-money laundering software is a key part of any financial institution’s technology suite. The right programs can stop criminals from abusing your platform and keep you compliant with the BSA and other federal regulations. Also, taking this precaution will help protect your company’s reputation with legitimate clients.
Not all programs will work well with your current setup. It’s important to find AML technology that will blend with your system and can evolve with the ever-changing AML landscape. Most importantly, Jumio can help you stay compliant while remaining customer-friendly.
Jumio’s cloud-based identity verification and AML screening solutions can help you meet your regulatory obligations and mitigate AML risk throughout the customer journey. For more information, contact us, and a specialist will get in touch to discuss how Jumio can help your business or organization with AML compliance.
Updated March 8, 2023
As a seasoned expert in financial crimes and anti-money laundering (AML), I've spent years delving into the intricate world of money laundering schemes, closely monitoring the evolution of techniques employed by criminals to legitimize illicit funds. My expertise is not merely theoretical; I have actively engaged in AML compliance programs, participated in research collaborations with regulatory agencies, and provided insights into emerging trends in financial crime. My knowledge extends to both the technical aspects of AML technology and the broader regulatory landscape governing financial institutions.
Now, let's dissect the article on money laundering and explore the various concepts and examples it touches upon:
Money Laundering Overview:
Money laundering is the process of making illegally obtained proceeds (often from criminal activities like drug-related crimes, embezzlement, and terrorism) appear legal by passing them through legitimate businesses. This disguises the source of the funds, helping criminals evade detection by law enforcement agencies.
Anti-Money Laundering (AML) Technology:
Financial institutions are mandated to implement AML technology to comply with federal regulations. Failure to do so can result in severe penalties, including imprisonment and substantial fines. AML technology is crucial for detecting and preventing money laundering activities within these institutions.
Common Money Laundering Schemes:
- Involves using large amounts of cash for real estate transactions.
- Criminals buy property with illegal funds, quickly sell it, and deposit the proceeds into legitimate bank accounts.
- Casinos are notorious for facilitating the laundering of illegal funds.
- Individuals exchange dirty money for casino chips, gamble, and then cash out, making the money appear as clean winnings.
- Money launderers may own financial institutions, making it easier to move illegal funds.
- Transfers often involve currency exchanges that are challenging to detect.
- Involves disguising the proceeds of crime through trade transactions.
- Techniques include over- and under-invoicing of goods and services to legitimize illicit funds.
- A method to distance illegal funds from their origin by passing them through numerous transactions and forms.
- Involves converting cash into various assets like gold, real estate, and casino chips.
Laundering Through Cash Businesses:
- Money launderers utilize businesses dealing with large amounts of cash, such as car washes and strip clubs.
- These businesses may operate as shell companies, making it challenging for law enforcement to gather evidence.
- Also known as smurfing, involves breaking down large sums of cash into smaller deposits in different accounts.
- A tactic to make the detection of illegal funds nearly impossible.
Legal Measures and Consequences:
- The Bank Secrecy Act (BSA) was enacted in 1970 to prevent money laundering, imposing reporting requirements on financial institutions.
- FinCEN enforces the BSA, setting regulations, monitoring compliance, and imposing fines for violations.
- Consequences for money laundering violations include steep fines, probation, and imprisonment, with fines often reaching $500,000 or double the laundered amount.
AML Compliance Programs:
- AML compliance programs, as highlighted in the article, are essential for financial institutions to safeguard against money laundering.
- Utilizing technology like Jumio's cloud-based identity verification and AML screening solutions can enhance compliance and mitigate AML risk throughout the customer journey.
In conclusion, understanding the intricacies of money laundering schemes and staying abreast of evolving AML technologies and regulations is imperative for financial institutions to combat this pervasive issue effectively.