A Guide to Anti-Money Laundering for Crypto Firms

What is Money Laundering?

Financial Crime Knowledge & Training

Money laundering underpins most forms of organized crime by disguising illicitly-obtained financial assets as “clean” and allowing nefarious groups or individuals to profit from illegal activity. While the amount of money laundered globally in one year is estimated to equal between $800 million and $2 trillion, more than 90% of this amount goes undetected, jeopardizing the global economy and its security. 

Because of this, money laundering is a high priority for the legislators and officials who oversee the world of finance. New anti-money laundering strategies are constantly being created to track down and stop money launderers, and the technology used to do so is evolving at a rapid pace.

What is money laundering?

The Financial Action Task Force (FATF) defines what is money laundering as “the processing of criminal proceeds to disguise their illegal origin”. Some of the major contributors to money laundering are organized crime, drug trafficking, and smuggling, all of which can generate a substantial amount of money that requires “cleaning” before the criminal can use it in a legitimate financial system without being detected.

Across the globe, financial institutions such as banks, capital market firms, and insurers are some of the most favored channels used to launder illicit funds. One reason that money laundering can be so difficult to track down is that it is necessarily related to other crimes. Criminals will often attempt to transfer money through several countries to obscure its illegal origin, involving multiple people and multiple bank accounts. 

Of course, this means that criminals typically committed another crime through which they obtained the illicit funds they then sought to launder. When multiple counts of money laundering and interrelated criminal activity become interwoven like this, a complex network of illicit activity is created that is problematic to fully track and break down.

How Does Money Laundering Work?

While the ways criminals can launder money are diverse, the methodology remains generally consistent. The three stages of money laundering are:

Placement

The initial placement stage refers to the introduction of illegal cash or money obtained through illegal activity into a legitimate financial transaction system. Cash deposits, wire transfers, and other financial instruments are used at this stage to move the funds away from being directly associated with the crime.

Layering

The next stage is where legally sourced money is “layered” or entwined with the illegal funds that have been placed in the financial system. The intent at this stage is to obscure the audit trail of the financial sum involved, which can look like the criminal buying and selling stocks, commodities, and real estate, often across multiple borders. 

Integration

The final money laundering stage is reached when the “dirty” money and the “clean” money have been combined to the point that all of the funds appear legitimate. When the criminals have a seemingly legal explanation for the placed and layered financial assets, the funds can be received from their original illicit source through means that do not draw attention, allowing them to use the funds freely in the regular monetary system.

Examples of money laundering

When it comes to money laundering, criminals can utilize a variety of methods, schemes, and techniques to move or conceal their illicit funds. Compliance teams must be able to effectively recognize money laundering typologies to mitigate against the risk of financial crime and ensure regulatory compliance as a regulated entity. Common money laundering typologies include:

Money mules

A “money 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. Things to look for include small transaction amounts and young people who may be less aware of the legal implications of their actions.

As money muling networks are often made up of large numbers of individuals across jurisdictions, when suspicions arise, firms should try to build a picture of any relevant associates. 

Smurfing

The typology of  “smurfing” involves moving large amounts of illicit money through the financial system by making smaller transactions. “Smurfs” will often spread these smaller transactions across multiple bank accounts to avoid detection and remain under regulatory reporting limits. 

As networks are extensive enough to move large sums of money quickly, smurfing is likely to be used in conjunction with money muling. To mitigate against this risk, transaction monitoring thresholds must be appropriately calibrated to the bank’s risk-based approach.  

Virtual assets

Although the vast majority of placement and money laundering layering is still undertaken in fiat currencies (i.e., the Euro, the US dollar, etc.), virtual assets (especially cryptocurrencies) are emerging as a growing component in the complex process of layering funds. 

Over the last few years, money laundering involving cryptocurrencies has become increasingly common. For example, the proceeds of cyber fraud or blackmail could be initially collected on Bitcoin, but then traded through several cryptocurrency exchanges for a variety of other cryptocurrencies, including privacy coins, before being cashed out.

Is money laundering illegal?

Whilst the illicit origins of the funds being laundered are what make money laundering schemes illegal, the act of money laundering is an offense in its own right. In addition to receiving a sentence for the predicate crime (a component of a larger crime that generates monetary proceeds), criminals can receive up to 14 years in custody for money laundering offenses, in addition to mandated fees and restrictions.  

However, some countries, including Germany, have made a legislative shift to separate money laundering from predicate offenses, thus expanding criminal liability beyond what was previously outlined in the country’s catalog of suitable predicate offenses.

Comply with AML regulations

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How is money laundering prevented?

Anti-Money Laundering (AML) refers to the procedures, policies, programs, and technologies that financial institutions must put in place to monitor fraudulent activity. Some AML controls include Know Your Customer (KYC) policies, record management and software filtering, holding periods, and sophisticated new technologies such as AI to monitor financial risk in real-time. 

Technological innovations have made it substantially easier to discover when the financial system is being abused, as well as to gather information about the individuals who are abusing it. Manually searching for data and monitoring accounts is tedious, inefficient, and often ineffective. Fortunately, screening systems have replaced this old-fashioned process, and have made it easier than ever before to monitor clients and determine if someone is laundering money.

To aid the fight against money laundering, many governments now legally require all financial institutions and many companies to report any suspicious activity that they notice among their customers. These institutions include banks, payment and insurance companies, casinos, money exchange companies, and numerous others. It would be impossible for governments to catch all the criminals involved in money laundering independently, and the same can be said for business and financial institutions. But when both the private and public sectors work together in order to combat this ubiquitous crime, their success rate dramatically increases. 

If a company or financial institution inadvertently completes a transaction that pertains to money laundering, it can face extensive legal and financial repercussions. Even if the mistake is entirely accidental, it may still be prosecuted. If corrupt employees actively aid money launderers, the employees are dealt with very harshly on an individual level and the institution may still incur liability. Because of these risks, most institutions go to great lengths to make sure that they properly monitor clients and their accounts. For businesses and banks, it is simply not worth the risk to be negligent and accidentally wind up involved in money laundering.

In order to further mitigate the risk of money laundering, updated and enhanced AML regulations are due to continue throughout 2022.

Anti-Money Laundering Essentials for Startups

Uncover practical tips that will help you build a compliance function that can scale with your businesses.

Read the guide
Money laundering underpins most forms of organized crime by disguising illicitly-obtained financial assets as “clean” and allowing nefarious groups or individuals to profit from illegal activity. While the amount of money laundered globally in one year is estimated to equal between $800 million and $2 trillion, more than 90% of this amount goes undetected, jeopardizing the global economy and its security.  Because of this, money laundering is a high priority for the legislators and officials who oversee the world of finance. New anti-money laundering strategies are constantly being created to track down and stop money launderers, and the technology used to do so is evolving at a rapid pace.

What is money laundering?

The Financial Action Task Force (FATF) defines what is money laundering as “the processing of criminal proceeds to disguise their illegal origin”. Some of the major contributors to money laundering are organized crime, drug trafficking, and smuggling, all of which can generate a substantial amount of money that requires “cleaning” before the criminal can use it in a legitimate financial system without being detected. Across the globe, financial institutions such as banks, capital market firms, and insurers are some of the most favored channels used to launder illicit funds. One reason that money laundering can be so difficult to track down is that it is necessarily related to other crimes. Criminals will often attempt to transfer money through several countries to obscure its illegal origin, involving multiple people and multiple bank accounts.  Of course, this means that criminals typically committed another crime through which they obtained the illicit funds they then sought to launder. When multiple counts of money laundering and interrelated criminal activity become interwoven like this, a complex network of illicit activity is created that is problematic to fully track and break down.

How Does Money Laundering Work?

While the ways criminals can launder money are diverse, the methodology remains generally consistent. The three stages of money laundering are: Placement The initial placement stage refers to the introduction of illegal cash or money obtained through illegal activity into a legitimate financial transaction system. Cash deposits, wire transfers, and other financial instruments are used at this stage to move the funds away from being directly associated with the crime. Layering The next stage is where legally sourced money is “layered” or entwined with the illegal funds that have been placed in the financial system. The intent at this stage is to obscure the audit trail of the financial sum involved, which can look like the criminal buying and selling stocks, commodities, and real estate, often across multiple borders.  Integration The final money laundering stage is reached when the “dirty” money and the “clean” money have been combined to the point that all of the funds appear legitimate. When the criminals have a seemingly legal explanation for the placed and layered financial assets, the funds can be received from their original illicit source through means that do not draw attention, allowing them to use the funds freely in the regular monetary system.

Examples of money laundering

When it comes to money laundering, criminals can utilize a variety of methods, schemes, and techniques to move or conceal their illicit funds. Compliance teams must be able to effectively recognize money laundering typologies to mitigate against the risk of financial crime and ensure regulatory compliance as a regulated entity. Common money laundering typologies include:

Money mules

A “money 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. Things to look for include small transaction amounts and young people who may be less aware of the legal implications of their actions. As money muling networks are often made up of large numbers of individuals across jurisdictions, when suspicions arise, firms should try to build a picture of any relevant associates. 

Smurfing

The typology of  “smurfing” involves moving large amounts of illicit money through the financial system by making smaller transactions. “Smurfs” will often spread these smaller transactions across multiple bank accounts to avoid detection and remain under regulatory reporting limits.  As networks are extensive enough to move large sums of money quickly, smurfing is likely to be used in conjunction with money muling. To mitigate against this risk, transaction monitoring thresholds must be appropriately calibrated to the bank’s risk-based approach.  

Virtual assets

Although the vast majority of placement and money laundering layering is still undertaken in fiat currencies (i.e., the Euro, the US dollar, etc.), virtual assets (especially cryptocurrencies) are emerging as a growing component in the complex process of layering funds.  Over the last few years, money laundering involving cryptocurrencies has become increasingly common. For example, the proceeds of cyber fraud or blackmail could be initially collected on Bitcoin, but then traded through several cryptocurrency exchanges for a variety of other cryptocurrencies, including privacy coins, before being cashed out.

Is money laundering illegal?

Whilst the illicit origins of the funds being laundered are what make money laundering schemes illegal, the act of money laundering is an offense in its own right. In addition to receiving a sentence for the predicate crime (a component of a larger crime that generates monetary proceeds), criminals can receive up to 14 years in custody for money laundering offenses, in addition to mandated fees and restrictions.   However, some countries, including Germany, have made a legislative shift to separate money laundering from predicate offenses, thus expanding criminal liability beyond what was previously outlined in the country’s catalog of suitable predicate offenses. [cta_card title="Comply with AML regulations" cta_img="60240" category="" bodytext="Our next-generation AML solutions help you to search, screen, and monitor clients for PEP status, sanctions/watchlist status, and suspicious activity." cta_text="Get started now" cta_url="https://complyadvantage.com/aml-screening-onboarding-monitoring/"]

How is money laundering prevented?

Anti-Money Laundering (AML) refers to the procedures, policies, programs, and technologies that financial institutions must put in place to monitor fraudulent activity. Some AML controls include Know Your Customer (KYC) policies, record management and software filtering, holding periods, and sophisticated new technologies such as AI to monitor financial risk in real-time.  Technological innovations have made it substantially easier to discover when the financial system is being abused, as well as to gather information about the individuals who are abusing it. Manually searching for data and monitoring accounts is tedious, inefficient, and often ineffective. Fortunately, screening systems have replaced this old-fashioned process, and have made it easier than ever before to monitor clients and determine if someone is laundering money. To aid the fight against money laundering, many governments now legally require all financial institutions and many companies to report any suspicious activity that they notice among their customers. These institutions include banks, payment and insurance companies, casinos, money exchange companies, and numerous others. It would be impossible for governments to catch all the criminals involved in money laundering independently, and the same can be said for business and financial institutions. But when both the private and public sectors work together in order to combat this ubiquitous crime, their success rate dramatically increases.  If a company or financial institution inadvertently completes a transaction that pertains to money laundering, it can face extensive legal and financial repercussions. Even if the mistake is entirely accidental, it may still be prosecuted. If corrupt employees actively aid money launderers, the employees are dealt with very harshly on an individual level and the institution may still incur liability. Because of these risks, most institutions go to great lengths to make sure that they properly monitor clients and their accounts. For businesses and banks, it is simply not worth the risk to be negligent and accidentally wind up involved in money laundering. In order to further mitigate the risk of money laundering, updated and enhanced AML regulations are due to continue throughout 2022. [cta_card title="Anti-Money Laundering Essentials for Startups" cta_img="" category="" bodytext="Uncover practical tips that will help you build a compliance function that can scale with your businesses." cta_text="Read the guide" cta_url="https://complyadvantage.com/insights/aml-essentials-for-startups/"]

Originally published March 9, 2022, updated June 14, 2022

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