More Information on the Types of Money Laundering
This article has been an excerpt from the 2020 AML Global Compliance Report.Read the Full Report
State of Financial Crime 2023 Report
Money laundering — the “cleaning” of criminal funds to make them appear legitimate — is big business. According to the United Nations Office on Drugs and Crime (UNODC), the estimated amount of money laundered globally in one year is 2–5% of global GDP, or $800 billion–$2 trillion in US dollars. FATF notes that there are three basic channels through which the various types of money laundering occur: by smuggling funds across borders, through the misinvoicing of goods and services in international trade (known as trade based money laundering or TBML), or through the financial system.
Although smuggling still occurs, it is extremely risky to undertake in bulk, and therefore criminals have become increasingly sophisticated in techniques that abuse the complexities of trade and finance. Naturally enough, TBML has grown in tandem with the increase in globalization of the last three decades. In a study published in January 2019, a US-based advocacy and research group, Global Financial Integrity (GFI), found that the rise in TBML has been closely linked to growing trade between advanced and emerging economies in sub-Saharan Africa, the Middle East, Asia-Pacific — especially Southeast Asia — and Latin America. As such trade continues to rise, so too will the risk of TBML. Moreover, the international financial system, with a multiplying diversity of products, markets, providers and technologies for delivery, is offering launderers increasingly attractive options for different types of money laundering, creating complicated chains of international — and virtual — transactions.
Common types of money laundering continue to develop unique twists. “Cuckoo Smurfing,” featured prominently in the Australian media in 2019 due to a High Court case regarding the legal liability of parties whose accounts were abused. Where basic “smurfing” involves the deposit of structured cash to avoid detection by multiple “smurfs,” the “cuckoo” variant involves the use of an intended transaction between innocent parties to provide a cover for the transfer of value between criminals. For example, the parents of a student in country A wish to send funds — say $10,000 — to their offspring studying in country B. In parallel, a criminal group in country B also wishes to pay the same amount to a criminal group in country A. Insiders at the intermediary money transmitters will arrange for the unwitting parents’ $10,000 to be paid into an account controlled by the crime group in country A, and the funds never leave the country. Meanwhile, funds from the crime group in country B will be paid into the student’s account. Insiders maintain the relevant paperwork or system inputs to make sure that the parent-student transaction appears to happen, and the value transfer of criminal funds also goes through.
Another common technique — “Money Muling” — is also evolving. A mule is an individual who has been recruited by criminals — whether wittingly or unwittingly — to act as a proxy in the placement of criminal funds into the system. Over the last three years, authorities in North America, EU and Asia-Pacific have sought to direct media and public attention towards the problem. In the US, for example, the Federal Bureau of Investigation (FBI) launched a major campaign in March 2019 against 600 suspected money mules, proceeding to arrests and seizures in September 2019.
Law enforcement agencies have noted the role that vulnerability plays in the exploitation of money mules by criminal gangs. In the US, the FBI has shown particular concern about the rising use of elders on low income, while in the UK and Europe, there have been ongoing worries about the rise in muling by youths and young adults. According to a September 2019 report from CIFAS, the UK’s fraud prevention body, the number of muling cases involving 14- to 18-year-olds has grown by 73% in two years. One of the other noticeable trends in muling is its increased nexus with cybercrime and the internet. In 2016, research by the EU police agency, Europol, showed that 90% of transactions identified in a major money mule investigation were linked to the proceeds of cybercrimes, including a wide variety of e-commerce frauds.
At the same time, the ubiquity of mobile technology and social media have created new opportunities for the various types of money laundering, including mule recruitment amongst the young, either directly or through “social engineering”: the act of tricking someone into divulging information or taking action, usually through technology. In the US, for example, the FBI has recently highlighted the significant role that online dating sites are now playing in recruiting mules through emotional manipulation.
Although the vast majority of placement and money laundering layering is still undertaken in fiat currencies (i.e., the US dollar, the Euro, etc.), VAs (especially cryptocurrencies) are emerging as a growing component in the complex process of layering funds. With “conventional” cryptocurrencies such as Bitcoin increasingly arousing regulatory interest, 2020 will likely see an ongoing displacement of criminal interest towards “privacy” cryptocurrencies, such as Monero, which allow users greater anonymity.
Over the last year, types of money laundering involving privacy cryptocurrencies have become increasingly common; the proceeds of a cyber fraud or blackmail might be initially collected on Bitcoin, but are then traded through several cryptocurrency exchanges for a variety of other cryptocurrencies, including privacy coins, and then cashed out. The use of such techniques ensures effective “black holes” in the layering process that are impossible to trace, posing particular KYC risks for crypto-to-crypto exchanges and any FI that might be involved in cashing out crypto for fiat currencies.
Unless sensitive regulation can be developed to finesse the concept of privacy in the direction of transparency, any businesses dealing in such assets, or dealing with businesses that do, will be vulnerable to potentially untraceable funds. Indeed, industry fears are such that even before regulation, leading cryptocurrency exchanges such as OKEx Korea, BitBay and Coinbase have started to take pre-emptive action by delisting several privacy cryptocurrencies already.
Another area to watch will be peer-to-peer (P2P money laundering) online marketplaces, where individuals provide access to unused assets in return for payment. The vulnerability of this area has been highlighted by money laundering cases involving the misuse of property renting platform AirBnB and the car-sharing/taxi service Uber. In both cases, asset “providers” colluded with criminals selling “fake” rentals and car journeys, from which they took a cut. A recent study of online gaming by the Royal United Services Institute (RUSI) published in October 2019, also highlighted games’ laundering potential, as online players can often trade “in-game” articles that can then be converted back into fiat currencies in the non-virtual world.
In terms of “integration,” the real estate market is likely to remain a major issue in 2020. The problem of criminal funds flowing into the property markets of major western cities has been a growing operational concern amongst compliance professionals over the last decade, as opaque corporate vehicles have been used by anonymous ultimate beneficial owners (UBOs) to buy up prime real estate. Major US cities, Sydney, Hong Kong, Vancouver and London are believed to have been — and remain — criminal targets. In March 2019, for example, the provincial government of British Columbia published an expert report which estimated that C$5.3 billion worth of real estate transactions in the province over the previous year, most in the Vancouver area, had been funded by the proceeds of crime, including overseas corruption.
As affected governments bring in measures to tackle this problem, such as unexplained wealth orders (UWOs) — already in use in Australia and introduced in the UK in January 2019 — there is likely to be a “displacement” effect, with funds rippling out to the property markets of smaller cities and other jurisdictions. The EU Parliament has recently highlighted cases in the Czech Republic, France, Finland, Greece, Portugal, the Netherlands and Germany. Germany’s booming property market has been of particular concern since Transparency International (TI) released a report in December 2018 estimating that €30 billion of unidentified funds had entered the German property market in 2017. In November 2019, the German parliament agreed to a new law that would tighten AML rules for the property sector, but these remain likely to take some time to implement.
Political uncertainty is also likely to have a similarly displacing effect on funds that have previously flowed from China into Hong Kong’s property market. With ongoing protests against the city’s administration, the risk of direct Chinese intervention remains a live possibility in 2020, and in the last two quarters of 2019, Singaporean and Australian real estate agents have been reporting a substantial increase in interest from potential Chinese buyers. The likelihood is that criminals will use the cover of such market “surges” as an opportunity to make property investments of their own.
This article has been an excerpt from the 2020 AML Global Compliance Report.Read the Full Report
Originally published February 27, 2020, updated November 4, 2022
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