Methods of Money Laundering

Money laundering is a dynamic and evolving activity, and continuous monitoring is necessary to implement timely and effective measures against it. Illicit money often moves through various commercial channels, such as checking, savings, and brokerage accounts, offshore entities and trusts, wire transfers, hawalas, securities dealers, banks, money services businesses, and car dealers. As governments around the world have enforced anti-money laundering (AML) regulations on the banking sector, laundering activities have shifted from traditional banking to non-bank financial sectors and non-financial businesses and professions.

The Financial Action Task Force (FATF) uses its annual typologies exercise to monitor changes and better understand the mechanisms of money laundering and terrorist financing. This exercise aims to report on key methods and trends in these areas, ensuring that the FATF's 40 Recommendations and 9 Special Recommendations on Terrorist Financing remain effective and relevant.

Banks and Other Depository Institutions

Banks have historically played a significant role in the disposal of criminal proceeds and continue to be a key mechanism for money laundering. Some specific areas of concern for laundering through banks include:

1. Electronic Transfers of Funds

• Description: Electronic transfers of funds are initiated by electronic means, such as ACH (Automated Clearing House), ATMs, computers, mobile phones, and more. They are a fast way to move money from one account to another, within a country or across borders. Systems like Fedwire, SWIFT, and CHIPS handle millions of transactions daily.
• Risks: Money launderers exploit electronic funds transfer systems to move illicit money rapidly and hide it among legitimate transfers. They may initiate unauthorized transfers, use stolen credit cards to purchase merchandise, or employ layering techniques to obscure the origin of funds.
• Indicators: Suspicious activities include funds transfers to or from financial secrecy havens without a clear business reason, large incoming funds with little explanation, small repetitive transfers that are quickly wired elsewhere, unexplained or repetitive fund activities, and transfers without apparent links to legitimate goods or services.

2. Correspondent Banking

• Description: Correspondent banking involves one bank (the correspondent bank) providing banking services to another bank (the respondent bank). This allows banks to conduct international transactions in jurisdictions where they have no physical presence.
• Risks: Correspondent banking is vulnerable to money laundering due to the indirect relationship between the banks, where the correspondent bank may not know the identities or activities of the customers using its services. This creates a significant threat due to the large volumes of transactions processed and the lack of information on the actual parties involved.
• Regulatory Response: The USA Patriot Act of 2001 introduced several provisions to enhance due diligence for correspondent banking, including:
• Example: In 2004, a lawsuit was filed against ABN Amro’s New York branch, alleging that it ignored multiple warnings about the risks of maintaining correspondent accounts for First Merchant Bank of Northern Cyprus, which was involved in laundering $50 million.

Payable-Through Accounts (PTAs)

Payable-through accounts (PTAs) are a specific type of arrangement in correspondent banking where the respondent bank’s customers can directly control transactions within the correspondent bank’s account. Unlike traditional correspondent relationships, where the respondent bank acts as an intermediary for its customers, PTAs allow the customers of the respondent bank to execute transactions such as wire transfers, deposits, and withdrawals without needing the transactions to be cleared through the respondent bank.

Key Characteristics of PTAs:

• Direct Control: Customers of the respondent bank can directly control funds at the correspondent bank, bypassing the traditional intermediary role of the respondent bank.
• Sub-Accounts: PTAs can have multiple sub-account holders, which may include individuals, businesses, or even other banks. The terms of these sub-accounts are defined in the agreement between the correspondent and respondent banks.
• Risk Factors: PTAs pose significant money laundering risks, especially when they involve institutions in offshore financial sectors with weak regulations or when the correspondent bank fails to apply adequate Customer Due Diligence (CDD) to the sub-account holders.

Example:

Lombard Bank, licensed in Vanuatu (a known tax haven), opened a PTA at American Express Bank International (AEBI) in Miami. The Vanuatu bank’s customers had almost full banking services through this PTA, using checkbooks to manage funds directly within AEBI’s account. Over two years, the bank’s Miami affiliate handled around $200,000 in cash deposits from sub-account holders.

Concentration Accounts

Concentration accounts are internal accounts within a bank used to settle multiple customer transactions, often on the same day. They are known by various names, such as omnibus, suspense, or collection accounts. These accounts are typically used in private banking, fund transfers, and international banking transactions.

Risks and Controls:

• Separation of Information: When customer-identifying information is separated from financial transactions, the audit trail can be lost, making these accounts vulnerable to misuse.
• Anti-Money Laundering Practices: To mitigate risks, banks should prohibit direct customer access, ensure dual signatures on transactions, retain transaction records, and frequently reconcile accounts by independent personnel.

Example:

Vladimiro Montesinos, former intelligence chief of Peru, used a concentration account at the Bank of New York to funnel illicit funds. The account was used to manage and disburse corrupt payments, highlighting the potential misuse of such accounts.

Private Banking

Private banking is a lucrative sector catering to high-net-worth individuals (HNWIs) offering personalized and confidential banking services. However, it has been associated with significant money laundering risks due to the high level of confidentiality and the intense competition among private bankers to attract wealthy clients.

Vulnerabilities in Private Banking:

• Secrecy and Confidentiality: The high level of secrecy and discretion in private banking, combined with the close relationship between bankers and clients, can create opportunities for laundering illicit funds.
• Politically Exposed Persons (PEPs): Private banking is often targeted by corrupt PEPs who use their influence to move illicit funds through these channels.

Examples:

• Raul Salinas: The brother of a former Mexican president used Citibank’s private banking services to manage hundreds of millions of dollars in ill-gotten gains.
• Riggs Bank: Facilitated money laundering for dictators like Augusto Pinochet of Chile by helping them move large sums through real estate transactions and other banking services.

Structuring: A Key Method in Money Laundering

Overview: Structuring, often known as smurfing, involves breaking down large transactions into smaller ones to evade reporting or recordkeeping requirements. This technique is commonly employed in various industries, including banking, money services, and casinos. It is illegal in many jurisdictions and must be reported through suspicious transaction reports.

How Structuring Works: Individuals engaged in structuring, known as "runners," visit multiple banks to deposit cash or purchase monetary instruments in amounts below the reporting threshold. This tactic is designed to avoid triggering regulatory scrutiny.

Examples of Structuring:

1. Large Transaction Splitting:

• Scenario: Henri wishes to deposit €18,000 in cash but avoids the reporting threshold by breaking the deposit into three separate transactions of €6,000 each at different banks.

2. Multiple Individuals:

Scenario: Jennifer needs to send €5,000 but, to avoid reporting, she splits the transfer into two payments of €2,500 each, sent through her and a friend.

3. Real-Life Case:

• Isaac Kattan: Allegedly laundered $500 million annually through massive cash deposits. Bribed bank officials to avoid currency transaction reports.
• Hernan Botero: Laundered $100 million yearly, using offshore corporations to invest in real estate and bribing bank employees to process his deposits.

Cuckoo Smurfing: Introduced by FATF in 2005, this technique involves transferring criminal funds through unwitting third parties’ accounts. It requires insider knowledge within financial institutions and follows a four-step process:

1. Customer Funds Transfer: A customer gives funds to an alternative remitter for transfer.
2. Insider Role: The insider provides transaction details to an associate in the beneficiary's country.
3. Cash Deposit: The associate deposits cash into the beneficiary’s account.
4. Funds Replacement: The associate obtains legitimate funds from the remitter to replace the criminal funds.

Sample Cuckoo Smurfing Transaction:

• Scenario: A Turkish electronic firm orders phones from a UK supplier. The payment is processed through a series of transactions involving smurfed cash deposits and legitimate funds.

Microstructuring: A variation of structuring, involving breaking large sums into numerous small deposits to evade detection. For instance, $18,000 might be divided into 20 deposits of $900 each.

Detection Measures:

1. Counter Deposit Slips: Use counter deposit slips instead of preprinted ones.
2. Account Activity: Monitor frequent, small deposits, especially in new accounts.
3. ATM Withdrawals: Look for ATM withdrawals following cash deposits.
4. Third-Party Deposits: Watch for cash deposits by unrelated third parties.

Bank Complicity: An insider within a bank can facilitate money laundering by bypassing controls and processing illicit transactions. For example, Lucy Edwards from the Bank of New York facilitated money laundering through corporate accounts.

Credit Unions and Building Societies: While generally lower-risk, credit unions are still vulnerable to money laundering due to high levels of cash transactions and potential for unusual activities. Increased vigilance is recommended for transactions involving third parties, cash payments, and accounts opened by children.

Conclusion

Money laundering methods are continuously evolving, necessitating ongoing vigilance and adaptation of anti-money laundering measures. Banks and other financial institutions remain prime targets for laundering activities, particularly through electronic funds transfers and correspondent banking relationships. To combat these risks, robust due diligence, effective monitoring, and adherence to regulations like the USA Patriot Act are essential.