What is Money Laundering? A Closer Look With Examples

“If money could talk, what secrets would it reveal about its journey through the laundering world?”

Looking back to the techniques used by Medellín Cartel to invest in real estate and the infusing money from the Italian Mafias into the shell companies highlights the diversity of money laundering techniques.

And this isn’t just highlighting the techniques, but the need for efficient implementation of AML systems across all organizations to combat such techniques.

However, for compliance teams,  money laundering techniques is not painless and easy to handle because of the smart methodologies used during the process.

Let’s take a look into the different money laundering techniques used by criminals in financial institutions and how institutions easily detect such heinous activities as soon as possible.

An Exploration into Scheme of Money Laundering

If a person earns money through illegal or other criminal ways and then uses illicit practices to infuse such money into the legal channel, the practice is widely known as money laundering.

The question arises, despite dozens of techniques launderers use, are these actually deceiving?

UNODC has its take on this, where the organization in one of its reports makes it public that $800 billion to $2 trillion is laundered globally each year, and surprisingly, only 1% of these illicit funds are ever seized, and frozen by authorities.

99 out of 100 techniques used by criminals are successful in attaining illegal motives.. Isn’t it alarming for the authorities? It definitely is.

This also highlights the challenges law enforcement agencies face in tracing and prosecuting money laundering activities.

The Financial Action Task Force ( FATF)  also reveals that layering in money laundering and excessive use of shell companies are particularly designed to obscure the origin of funds making it quite difficult for authorities to connect the money to its criminal source.

How does money laundering work?

The laundering process is not just a one step process, it’s done in different phases known as three stages of money laundering.

Criminals try to mask their funds by funneling them through complex financial transactions so that they must appear as legitimate earnings.

This hidden web of deceit allows illegal profits to blend seamlessly into the legal economy. The following are the three steps involved in money laundering:

Top 4 Common Examples of Money Laundering Schemes

Do you think criminals would try to employ easily detectable techniques? They won’t.

What they will try instead are the complicated processes that help them hide the origin of funds with a mix of old and new techniques.

Structuring, trade-based money laundering, purchasing NFT and arts, investing in casinos, and gambling are some of the prominent techniques used in money laundering.

Let’s explore them!

Smurfing

Assuming that the smurfing technique will not easily be detected by the regulatory bodies gives an extra boost to the launderers opt for such practices.

That is the reason, smurfing is a preferred choice of most of the launderers. Fraudsters try to break down large amounts of money into small quantities and then deposit them into different accounts using multiple bank accounts.

Smurfing schemes are particularly followed to disguise the reporting threshold of large amounts that is in most cases 10,000 cash amounts.

Real Estate Laundering

For criminals, corrupted politicians, and human traffickers, purchasing property has always been an attractive way to launder their money and try to appear legitimate.

The reason for investing in real estate begins from large cash involved in the selling and purchasing of property.

The additional factor of making the transaction through banking channels makes it easy to infuse the money into the financial system.

This is why, In the last decade real estate money laundering became a headache for organizations, largely because of not effectively enforcing AML regulations within the organization combating process.

Criminals find it all too easy to exploit the system and they start setting up shell and offshore companies, often with the help of third-party facilitators.

Casino and Gambling Laundering

Even one of the world’s largest casinos had to face $7.45 million fines for not complying with AML regulations and violating the Bank Secrecy Act (BSA).

This significant penalty amount highlights how even major casinos can struggle with preventing casino money laundering.

The research from the ATRAC public reports reveal the shocking number of money that is laundered using the casinos in Australia every year.  According to the report, tens of millions of dollars are laundered.

How do criminals easily use casinos for laundering money?

One example of this is that they bet on low-risk games intentionally lose money, and create the illusion of genuine gambling. They might then exchange their chips for clean cash, making the money appear legitimate

Trade-based money laundering

The international trading system is very complex and even makes it difficult for the legal business to trade their goods. However, complexities create loop holes for money laundering opportunities.

Detecting money laundering in trading is quite difficult and this could be understood by the Financial Action Task Force reports on Trade-based money laundering.

This comprehensive and detailed report discusses the challenges and difficulties faced to detect and monitor money laundering activities in the international trading system.

Over-invoicing and under-invoicing are the top techniques used in trade-based money laundering. Over-invoicing by exporting goods valued at 1,000 dollars, the invoice sent with it being 10,000, or under-invoicing showing 1,000 dollars for a product valued at 1,000 dollars.

Offshore Companies

Setting up new shell and offshore companies isn’t illegal in most jurisdictions.

But one thing everyone needs to understand is that if by law something is officially legal it doesn’t reflect that all the activities performed within the jurisdiction of such a thing are also legal.

Shell companies are in most cases established and created for just illegal purposes and additionally, the extensive use of such companies for the illegal movement of money makes such organizations suspicious.

The International Consortium of Investigative Journalists reported on shell companies and also highlighted that more than 1 million shell companies are used for money laundering.

And that is the reason that establishing trusts and shell companies is the priority for money launderers.

Top 3 Ways to Fight Against Money Laundering

While everyone is talking about channels of money laundering, here is a 4 step road map to counter the damages it might pose!

Implement Proactive Screening Procedures

To make the AML  processes more efficient and instrumental, businesses of all types need to collect essential information about their clients, employees, and business partners.

Financial institutions need to have strong screening measures in place. Now wait!

I know you might be tired of listening to this, which is why we are moving ahead to answer it precisely by focusing on “how”?

Integrating AML screening solutions with strong databases can improve risk management, allowing organizations to detect risk as soon as they enter the likelihood pipeline for posing reputational and monetary damages.

Enhanced Ongoing Monitoring

Like every other AML enthusiast, you must know that the bank’s failure that makes it possible for the Mexican Drug Cartels to launder billions of dollars lies in operational inefficiency.

This became possible because banks were not implementing an adequate monitoring process, which ultimately resulted in 1.9 billion dollars in fines.

A real-time ongoing monitoring system that may offer custom risk thresholds is the need of time to effectively manage risks.

Implementation of Advanced Technology

The gaming and gambling industry and the crypto market have made the laundering process relatively easy for launderers owing to vulnerabilities in their system.

However, with advanced measures such as crypto wallet screening, digital currencies can be screened for their illicit sources of origin and your business might save itself from damages.

How Does AML Watcher Help?

In the United States alone, approximately 300 billion dollars are laundered every year, and the global amount goes way beyond trillions of dollars.

Dealing with money laundering demands a strategic approach that is informed, critical, and continually changing.

While everyone is talking about the problem, you can choose to rise above and opt for a solution to fight against the invisible curses of money laundering.