Contents:

• What is Money Laundering
• What are the 3 Stages of Money Laundering
• Placement
• Layering
• Integration
• Examples of Money Laundering
• IDMERIT AML Solutions for Businesses

What is Money Laundering

Money laundering is a complex method of converting a large amount of illegally gained profit into lawfully acceptable form. The term ‘money laundering’ is derived from the idea of cleaning, i.e., laundering ‘dirty money’ into white money, for its integration into the financial system.

Money Laundering is considered a serious punishable offense involving all sorts of people, from corporate to street offenders. The proceeds of crime sources include felonious activities like narcotics trafficking, bribery, corruption, terrorist financing, human trafficking, etc.

What are the 3 Stages of Money Laundering

Let us discuss what are the 3 stages of money laundering. Since money laundering is a premeditated crime, it comprises i. placement, ii. layering, and iii. integration steps to make dirty money seem legitimate and bring it to the economy.

Placement

For money launderers, placement is the most vulnerable stage wherein the dirty money is surreptitiously introduced into the economy as monetary instruments or as direct deposits into the bank accounts. In the case of bank account deposits, smaller deposits below threshold levels are made to subvert reporting.

Since the money origin is illegitimate, placement involves the maximum risk. All jurisdictions worldwide have instituted stringent cash deposit measures to conform to Cash/Currency Transaction Reporting (CTR) filing obligations.

There are several ways of placing illicit money into the financial system, like loan repayment, gambling, fake invoicing, foreign exchange, and blending funds. Concurrently, money launderers exploit cash-intensive businesses that promote easy money movement, for instance, car washing, check cashing services, gaming, etc.

Opening foreign shell organizations or trusts and transferring cash below custom thresholds overseas to conceal the beneficial ownership is an intricate placement scheme that is difficult for the AML authorities to get hold of.

Layering

Once the money is placed into the bank in the first stage, the layering process disguises the illegitimate money source by maneuvering transactions and accounts. The purpose is to make it cumbersome for the authorities to follow the audit trail involving a series of domestic and off-shore transactions made using the different channels of payments.

Purchasing and selling expensive, luxurious goods – like land, jewelry, painting, etc. – is an example of layering in money laundering and is, in fact, the most favorable method for financial criminals to make use of their illicit funds.

One of the complex layering methods implies a series of irrational international transactions especially covering the jurisdictions that allow shell organizations and private banking. Abrupt holding company takeovers and real estate investments could also be set as pertinent examples here.

To move large amounts of proceeds of crime, money launderers hire professional bookkeepers to assist in fund transfers across international jurisdictions. Online remittance and crypto payments have aggravated the situation, especially with the ease of buying and selling cryptocurrency criminals misuse the exchanges to layer the ill-gotten funds and cover up their source.

Integration

Integration defines the final money laundering stage, wherein the illegally obtained money is returned to the legal financial system after completing the placement and layering stages. The criminal proceeds get washed off and integrated into banks and financial institutions as clean money.

Common integration tactics take in selling off expensive and luxurious items bought during the layering stage. Other instances are cash outflows from shell organizations, including fake payroll pay-outs, loan disbursement to shell company directors, shareholder dividends, etc.

Examples of Money Laundering

Drug trafficking is one of the most serious money laundering threats worldwide today. The narcotics industry is completely illegitimate and cash-intensive. Other examples of money laundering are human trafficking, arms trafficking, smuggling, bribery, corruption, etc.

Terrorist financing is a widely prevalent nuisance, and online payments and cryptocurrencies have intensified the situation. Many terrorist organizations today misuse digital finance to transfer terrorist funds across borders.

Other examples of money laundering comprise white-collar crimes such as corporate embezzlement and investment rip-offs, including insurance and mutual fund scams.

It must be noted that Trade-Based Money Laundering (TBML) is one of the most excruciating crimes, which is extremely difficult to trace and establish in front of the law. Today, Trade-Based Money Laundering (TBML) covers almost $2 trillion worth of global trade. Common TBML methods that money launderers exploit are over-under and multiple invoicing, over-under and inferior shipment, fake or phantom shipment, and shell company trading.

IDMERIT AML Solutions for Businesses

It is a general notion that anti-money laundering policies are meant for the banking and financial sector. But, in fact, all regulated non-financial industries like remittance, accounts, legal, insurance, investment, fintech, etc., now fall under the scope of AML-CFT obligations.

At the same time, regulations in high-risk sectors like cryptocurrencies, third-party payment processing, forex, casinos, gambling, etc., call for enhanced diligence methods to combat money laundering and terrorist financing threats arising from the ease of international transfers offered to individuals and merchants.

Combatting money laundering is a global effort; IDMERIT extends tailormade AML Solutions that operate in tandem with national and international AML-CFT guidelines. Contact IDMERIT IDMaml consultant and book a demo to understand more about AML requirements for your business.

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Trade-Based Money Laundering (TBML) exploits international trade and trade finance systems for laundering illicit proceeds. It involves a series of schemes for TBML, including falsifying invoices, commodity misclassification, forming shell companies, forging trade documents, etc., for illegally moving funds across the continents.

Currently, international financial institutions estimate $2 trillion worth of trade, out of around $20 trillion, to get laundered annually in the form of Trade-Based Money Laundering. Customs fraud is mainly synonymous with Trade-Based Money Laundering. Customs manipulations like price, quantity, and quality alterations in the import/export of the goods are involved in the TBML of illicit bulk cash across nations. This blog sheds light on the TBML methodologies, TBML red-flag indicators, and its regulatory compliance policies.

Widespread TBML Methodologies Exploited by Money Launderers

Over Invoicing, Under Invoicing – When an exporter receives more money than the value of goods sold to an importer, it’s over-invoicing. On the other side, when an importer receives more money while selling the goods in the local market after buying them at an unvalued price from an exporter, it’s under-invoicing. Both the instances trigger an extra value transferred via trade between the parties as money laundering.

Multiple Invoicing or Carousel Transactions – A money launderer misuses the legal system to produce multiple invoices for the same shipment by complicating the payments with more than one financial institution. It’s a typical multiple-invoicing method for legitimizing one payment more than once and integrating illicit money into the financial system.

Over Shipment, Under Shipment – The trade involves misrepresenting the number of goods; the over and understatement of items give the money launderers a scope to process excessive payments of illicit money.

Inferior Shipment – It involves exporting cheaper quality goods with falsified invoices and submitting bills for relatively costly goods to customs.

Front Fake Commodities – The shipment of commodities does not match with the business classification, and the trade is made to transfer the illicit money value rather than the actual goods.

Shell Companies – Offshore companies, acting as front or shell companies for organizations involved in sending excessive funds across the continents. For years, law-breakers have preferred shell companies as camouflage to facilitate TBML activities. At times, it may so happen that established companies make their foray into an entirely distinct market segment to divert their income via shell operations.

Phantom Shipment – There may be no shipment at times, and the invoices are still generated and bills passed in the customs.

Major TBML Red-Flag Checks for Customs and Financial Institutions

A joint effort of Egmont Group and Financial Action Task Force (FATF) to combat the worldwide TBML activities has set-forth imperative red-flag checks on this trade-based financial crime.

Common Anomalies – International trade-related activities involve a lot of paperwork. All the more challenging is that the financial institutions are only exposed to the official documents and not the commodities in trade. So, on the face of it, common TBML red flags involve finding anomalies in product pricing, irregular product description, and price matching with the product quantity and quality standards.

Unnatural Transactions – Financial institutions must keep a regular Transaction Monitoring on the trade activities of the parties involved; the monitoring includes the nature of transactions, business locations, background checks, the characteristics of the traded goods, etc. Unusual transactions also consist of substantial below-threshold cash payments and inexplicable third-party payments.

High-Risk Jurisdictions – Businesses set up in jurisdictions with weak AML-CFT regulations, suspicious addresses, with an indistinct online presence. All the mentioned red flags give a clear indication of out-of-sync business activity. Such entities generally have unstructured business operations with no proper payroll, marketing, advertisement, or accounting reports.

Free-Trade-Zones (FTZs) – The customs-free nature for bringing liberalization in global economic activities has paved the way for acceleration in the TBML activities as criminals are continually exploiting the eased-up trade barriers in around 3500 ports worldwide. Trade activities at the FTZs are more vulnerable to being misused for laundering money.

How Regulated Institutions Must Remain AML-CFT Complaint

Risk-Based Model – Financial Institutions (FI) must follow regulatory Customer Due Diligence (CDD) and keep their Know-Your-Customer (KYC) records updated. It is on the part of the FI to conduct proactive Enhanced Due Diligence (EDD) on the potential high-risk clients with stringent identity checks and transaction monitoring. In addition, the records must be kept updated and presented to the Financial Intelligence Unit (FIU) authorities on suspecting unusual trade activities.

Transaction Monitoring – The financial institutions that handle large trade-related activities must monitor their clients in real-time. All Suspicious Transaction Reports (STRs) and Suspicious Activity Reports (SARs) must put the financial authorities to alarm. A series of SARs and STRs trade datasets also help establish emerging TBML typologies for predictive analysis.

AI-Based Machine Learning Algorithms – All leading financial institutions utilize the best-in-class data analytics technology to monitor transactions. The Artificial Intelligence-based rule engine algorithms instantly trigger unusual events to discover trade-related suspicious activities occurring across the businesses in real-time.

Know-Your-Business (KYB) – The financial and other regulated institutions must regularly check on the businesses they are doing business with. Know-Your-Business (KYB) involves business identity verifications for genuine business onboarding. At the same time, the regulated financial institutions must authenticate the Ultimate Beneficial Ownership (UBO) for both individuals and businesses involved in trade transactions.

Sanctions, PEPs and Adverse Media – The compliance officers must screen businesses and individuals against Sanctions and PEP lists. In addition, adverse news about the owners and entities across the press and online media indicates brewing illicit activities somewhere down the line.

Conclusion 

Given the scope plus volume of today’s trade, masking illicit gains with trade-based activities has become easier for the launderers. Furthermore, there are fewer initiatives taken in the TBML AML-CFT methods than in other money laundering methods. It has been believed that the global trade system is so complex – involving many deterrents and regulatory sluggishness – that it has made laundering money for criminals and terrorists more convenient via global merchandising activities.

The unrestrained threat of Trade-Based Money Laundering has given this financial crime an Advanced Persistent Threats (APTs) risk status, which is otherwise mostly used for cybercrimes. If you are a financial or regulated institution seeking AI-Based client behavior tracking, document verification, and suspicious transaction reporting solutions to fulfil your business compliance, schedule a call with the IDMerit AML solution advisor. We offer best-in-class Fraud Protection and KYC-KYB Compliance solutions to businesses worldwide.

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