Every crime that starts with money, ends with money laundering. To give you an idea of the scale of the challenge, an estimated US$800 billion–US$2 trillion is laundered worldwide every year; around 2–5% of global GDP.
Banks have spent billions of dollars building new systems and controls in a bid to tackle the money laundering problem and have, to a certain extent, succeeded. Yet deficiencies remain, as revealed by the US$10.4 billion in global fines and penalties imposed by regulators in 2020. Criminals, as they always have done, continue to discover new ways to launder the proceeds of their crimes.
It is the responsibility of everyone within a business to be able to adapt to counter the threat that these new and evolving methods pose, and among the most effective ways of doing this is to begin to think like a launderer and to encourage all staff to do the same.
HR directors need to be in a position to help staff do this by acknowledging and understanding the most common methods being adopted by criminals today, in particular, the way criminals have exploited emerging technology to facilitate money laundering. Internal communication is important as is developing suitable strategies for training staff at all levels across the organisation.
What is money laundering?
Before looking at these methods in more detail, an examination of the money laundering process itself is required as a reminder of how criminal proceeds can be turned into legitimate funds. As you might be aware, it is commonly accepted that the money laundering process consists of three main stages.
- Placement – cash from criminal activity is placed into the financial system.
- Layering – usually involving a series of transactions designed to hide the source and ownership of the funds and confuse the authorities.
- Integration – where laundered funds are reintroduced into the legitimate economy, appearing to have come from a legitimate source.
The most obvious way of getting cash into the financial system is to simply deposit it into a bank account. However, the sophisticated controls now in place at banks means that these rudimentary methods are no longer effective, which is why criminals seek new ways of making their money appear legitimate.
Online banking has become a popular choice for consumers over the last ten years, and, arguably, a necessity in the last year or so due to the social distancing brought about by Covid-19. Weaknesses in online banking are exploited by criminals, who are able to gain access to other people’s bank accounts and then use for money laundering purposes. For example, in online banking, when the customer connects to the bank’s webserver with their personal ID code and enters their personal password, the system will automatically verify the person. Using this system, criminals can make transactions without going to the bank in person, avoiding any possibility of arousing suspicion from their behaviour or demeanour. Additionally, online banking can be conducted anywhere in the world, meaning launderers can control their activities regardless of location.
While banks have a distinct and closely regulated global system of legal protections and obligations, the digital currency (or cryptocurrency) market isn’t as universally protected or regulated. Many jurisdictions will make sure their territories are safe and secure for crypto transactions, but this will not be the case for all of them.
Staff need to understand that criminals can take advantage of these inconsistencies, as well as the relative anonymity of cryptocurrency transactions, for money laundering purposes – for example by transacting funds from an exchange with little or no anti money laundering (AML) regulations in place. Use of these exchanges can act as a red flag about the origin of the funds.
Another way is by using a crypto wallet, an app that allows cryptocurrency users to store and retrieve their digital assets. A single wallet could be tied to multiple banks, which would suggest a group of people moving funds rather than just one individual. Of course, high-frequency transactions of large sums into one wallet should be viewed as suspicious, and crypto wallets that don’t match the customer profile are also a red flag for suspicion.
Countries across the world are taking notice of the important role that digital currency now plays in global economies, and how it is being exploited by money launderers. Governments (including here in the UK) are looking to establish a central bank specifically for digital currencies, with the aim of securing much more control and transparency around the use of cryptocurrencies.
Smurfing is a money laundering technique used by criminals who have large transactions that they’d like to conceal. Also known as ‘structured deposits’, smurfing involves breaking up the large transaction into a series of smaller transactions that fall below the reporting threshold under which many banks operate. Banks in the UK are currently required to carry out extra checks on transactions that exceed certain thresholds so that they can verify that they are from a legitimate source. By breaking these down into smaller transactions that fall below the threshold, criminals can avoid these extra checks.
Staff should be encouraged to look out for any patterns on an account, or transactions that drop repeatedly just below the threshold, are potential red flags for laundering activity. Just being vigilant of this possibility and reporting any concerns accordingly is a good way of managing this risk.
Money laundering via social media channels is also increasing. Launderers can establish fake money-making programmes through a social media channel and encourage people to get involved. When selecting which accounts to use, criminals will usually target young people who do not have a criminal record, which reduces the likelihood of any suspicions being aroused and of them then getting caught.
Launderers will get the account holder to receive money into their account, which they are then asked to transfer to another account, often one that is overseas. The victim, known as a ‘money mule’, is usually unaware that the money involved is stolen, and as an incentive gets to keep some of the money for themselves as payment for their trouble. The money transferred can also be converted into a virtual currency, which as mentioned earlier is extremely difficult to detect.
The Covid-19 crisis has actually been responsible for an increase in the use of money mules to launder cash. With many more people out of work and under some financial stress, the opportunity to earn quick cash for little effort can be very appealing. Detecting this activity can be challenging though, as those targeted are usually viewed as low risk. Reviewing customer accounts regularly and looking for discrepancies between expected behaviour and actual behaviour is a good way of identifying where this activity might be taking place.
Criminals have been using stolen identities to avoid detection for some time. They will conduct their money laundering activity under the stolen identity with the view that, if suspicions are raised, law enforcement will go after the innocent victim and not the criminal themselves.
Recently, more robust identity verification technology has made this crime more difficult to carry out successfully, so money launderers have developed a new approach on the same theme. Rather than stealing the identity of an actual person, they are now manufacturing a new, artificial identity.
This ‘synthetic’ identity is created by combining real, stolen and fabricated data. The identity is often established over a long period of time, allowing the launderer to build an online credit history to further validate the fabricated information. This can result in banks spending a lot of time and resource going after people who don’t actually exist. When any suspicious activity is reported against this ‘identity’, the criminal will empty the accounts and lines of credit that they’ve built up and disappear without a trace.
Why is this important?
These are all examples of the modern methods being adopted by criminals to carry out their money laundering activities. For HR directors to have a practical insight into how these crimes are perpetuated will help them and their staff understand the way 21st century technologies are being used by money launderers.
Through this understanding, staff can begin to ‘think like a launderer’. This will help HR directors contribute to maintain a level of vigilance over your business and your customers to identify any potential laundering threats.
Across the financial services sector, AML is about knowing your customers. The more a customer’s passions, motives and objectives are understood, the easier it is to recognise when things are out of place. This is a vital part of the AML process.
But as the above examples have revealed, AML is also about knowing the criminals too. Understanding how the criminal thinks, including their motivations and ultimate objectives, is just as important in the fight against money laundering.