Money laundering and terrorist financing operate in tandem, often using the same financial techniques. While money laundering seeks to give illegal funds a facade of legitimacy, terrorist financing channels funds towards subversive activities. Central to both are money laundering typologies, the methods and techniques financial criminals and terror organizations use to conceal the origins and true nature of illicit funds.
Businesses must understand and be able to identify the typologies of money laundering and terrorist financing if they are to comply with their anti-money laundering regulatory obligations.
In this article, we outline common money laundering typologies, from financial transaction layering to the role of cryptocurrencies. We will also discuss the implications for financial institutions, highlighting the importance of vigilance, training, and robust internal controls.
Understanding Money Laundering Typologies
Money laundering typologies are the specific methods, patterns, and techniques criminals employ to obscure the origin of money gained illegally. They are well-thought-out strategies devised to exploit loopholes in financial systems and avoid triggering money laundering red flags.
As financial systems evolved, so did the methods employed by money launderers. In the early days of banking, simple depositing and withdrawing might have been adequate. However, with stricter regulations, electronic transactions, and global banking, the tactics have become more complex. Money launderers continuously adapt, crafting new typologies in response to anti-money laundering measures and technologies.
Recognizing money laundering typologies is paramount for businesses, especially those in the financial sector. Without a deep understanding of these typologies, businesses risk facilitating illegal activities, tarnishing their reputation, and incurring legal and financial penalties.
Common Typologies of Money Laundering
Money launderers and terrorist organizations are highly creative and strongly motivated to “clean” or hide their money. As we examine some of the most common money laundering typologies and how criminals use them, remember that there are many different variations of each of these typologies.
Financial Transaction Layering
Layering involves moving funds to various accounts, often across different banks or countries, to obscure their origin. The complexity of the transactions makes it difficult to trace the money back to its illegal source, making the funds seem legitimate.
Smurfing, also known as structuring, involves breaking down large amounts of money into smaller, less suspicious amounts. These smaller amounts are deposited separately to fly under detection threshold reporting obligations, making detection more challenging. For additional information on smurfing and layering, view our blog overviewing the 3 stages of money laundering.
Mingling is blending illicit funds with legitimate ones, often through a legal business. This confuses the audit trail and makes it hard to differentiate legal earnings from laundered money.
Trade-Based Money Laundering
Trade-based money laundering uses trade transactions to disguise the illicit origins of funds. This involves invoice manipulations like over-invoicing or under-invoicing, misrepresenting goods’ quality, or phantom shipping (claiming goods were shipped when they weren’t).
Shell companies are businesses without active operations or significant assets. They are often used to conceal business ownership from law enforcement or the public, making the movement of illicit funds more covert.
Offshore Accounts and Tax Havens
Accounts are often held in countries with more stringent secrecy laws or less stringent money laundering regulations, making it difficult for foreign authorities to identify account holders. Such accounts obscure the origins of funds, offering a safe haven for laundered money.
Purchase and Resale of Valuables
The purchase and resale of valuables provide an effective method for money launderers to legitimize their illicit funds. They acquire high-value items like art, antiques, luxury cars, and rare collectibles with illegal money. These items are then resold, sometimes across borders or through intermediaries, converting the tangible assets into cash.
The money generated from these sales can then be introduced into the financial system as proceeds from legitimate business transactions.
Real Estate Investments
Purchasing real estate is another way to convert illicit funds into legitimate assets. Buying and selling properties makes the sale proceeds appear to be legitimate earnings, while effectively laundering the money.
Abuse of Insurance
The insurance sector can be exploited as a channel for money laundering due to its complex nature and varied product offerings. Criminals might over-insure an asset and then submit a false claim to retrieve their funds plus a profit.
Alternatively, they could purchase an insurance policy with illicit funds and later cancel it, receiving a “clean” payout or refund. This method can involve life insurance, property insurance, or even endowment policies.
HOSSPs (Hawala and Other Similar Service Providers)
Hawala and other similar service providers operate an informal value transfer system, often bypassing traditional banking channels. Money is given to a hawala dealer in one location, and a counterpart in another location disburses an equivalent sum to the intended recipient. Since the system operates mainly on trust and doesn’t always leave a formal paper trail, it can be exploited to transfer illicit funds discreetly.
Casinos are common targets of a money laundering scheme. One technique involves using illicit funds to buy casino chips, playing for a while, and then cashing the chips out. The resulting funds are then presented as gambling winnings, seemingly legitimate in origin.
Bearer instruments, like bonds or drafts, have no central ledger and don’t have the owner’s name on them; instead, whoever holds them is presumed the owner. This characteristic can be exploited to launder money and move funds anonymously.
Preloaded with funds, these cards aren’t directly connected to a bank account, making transactions harder to trace. They can be used like regular debit or credit cards but with more anonymity.
Local banks provide services to foreign banks through correspondent banking relationships. These relationships can be exploited to move funds to foreign bank accounts, obscuring their origin.
Businesses dealing primarily in cash can easily mix illicit funds with daily takings. The mingling makes it challenging to distinguish between legal and illegal earnings.
Precious Metals and Gems
Buying precious metals and gems provides a tangible asset that holds value. These assets can be easily transported or sold, converting the illicit funds into seemingly legitimate proceeds.
Diversion of Funds from NGOs
Diverting funds from Non-Governmental Organizations (NGOs) involves manipulating the financial flows of charitable groups to raise terrorist funds. NGOs can be targeted due to their philanthropic nature and the vast sums they handle. Fraudulent documentation, fake beneficiaries, or complicit insiders can siphon off funds intended for humanitarian aid, channeling them instead to support terrorist operations.
Convertible Virtual Currencies (CVCs) and Cryptocurrencies
Cryptocurrencies, like Bitcoin, Ethereum, and many others, offer a decentralized digital medium of exchange. These convertible virtual currencies offer anonymity to persons controlling illicit funds and operate outside traditional banking systems, making them an attractive tool for money laundering.
Criminals can use CVCs to mask transaction trails, especially when transferring funds across borders without oversight. Additionally, virtual asset service providers (VASPS), including cryptocurrency exchanges, allow cryptocurrencies to be bought, sold, or swapped, further complicating the tracking process.
Identifying Money Laundering Typologies with Alessa
Businesses and financial institutions must be ever vigilant as criminals devise new money laundering typologies and the regulatory landscape evolves to keep pace. It’s a daunting challenge, but it becomes more manageable with the right AML software.
Alessa’s integrated AML compliance platform provides a 360° view of client risk. Alessa provides identity verification, transaction monitoring, risk scoring, regulatory reporting, and more. We help our clients identify money laundering typologies and reduce the risk of financial crime and compliance failures. Get in touch today for a free demonstration.