Learn what money laundering is, why it’s harmful for businesses and the economy, and how companies can protect against it.
Money laundering (ML) damages businesses, the investment climate and overall economic growth. It promotes crime and corruption, dramatically decreases efficiency of the real sector of the economy, and leads to a host of other consequences.
The global scale of ML is vast. According to the United Nations Office on Drugs and Crime (UNODC) between 2 and 5% of global GDP is laundered each year, which amounts to between $754 billion and $2 trillion.
In most jurisdictions, ML is a serious crime punishable by imprisonment and/or significant fines. For example, in the USA, the penalty for involvement in ML can reach $250,000 and up to five years’ imprisonment.
Some businesses may not even be aware that they’re being used for ML. Although not all businesses may be held responsible for ML conducted through them, AML-obligated entities, such as banks, are. And if the crime is detected during the audit process, huge consequences can result. Recently, Danske Bank was slapped with a €470 million ($495 million) fine in an international money laundering scandal.
To protect your business from criminals and regulatory fines, let’s explore what ML is, common schemes and how it can be prevented.
Money laundering (ML) is the process of concealing the origin of money obtained from illicit activities, like drug trafficking, bribery or fraud. The purpose is to introduce illicit funds into the financial system under the guise of ‘clean’ money, so that criminals can use it without attracting undesirable attention from authorities.
The fight against money laundering (ML) is often linked to efforts against terrorism financing (TF), because both ML and TF involve redistribution of the funds.
According to the Eurojust report, cases of money laundering have dramatically increased since 2016 and are expected to grow further, causing harm for business.
Read on to learn about the three stages of money laundering, the impact of money laundering on businesses, common money laundering schemes, as well as how to detect and prevent it.
According to the FATF, $1.6 trillion are laundered each year from lower-income countries—most often the proceeds of political corruption. Corruption deepens poverty in such regions, also leading to environmental degradation and economic stagnation. Given the close link between ML and corruption, any efforts to limit the spread of illicit money also plays an important role in lowering corruption worldwide.
There are three stages of money laundering introducing laundered funds into the financial system:
Placement of illegal funds into the financial system may happen directly or indirectly.
The most popular method used in the placement stage is to divide large amounts of cash into less suspicious smaller sums, which can then be deposited into a single bank account or several bank accounts (which could involve the ‘smurfing’ technique).
Smurfing often occurs through money service businesses.
Other placement methods include:
“Layering” is the process of separating illicit money from its source and creating “layers” of transactions to confuse an audit. The purpose is to hide the origins of illegally obtained assets. This stage is considered to be the most complex, as it involves multiple transactions, often including international money transfers.
For the purposes of layering, money can be moved through the purchase and sales of investments, or through a series of accounts at banks in different countries. Most often, such funds are directed to jurisdictions which have loose AML regulations or do not cooperate with AML investigations.
The most “popular” examples of the layering:
and a number of others.
Differences between placement and layering
While placement injects illicit funds into the financial system, layering hides the source of these funds through a series of transactions and financial tricks.
After placement and layering, criminals then integrate—or, in other words, “return”—illicit money to themselves in a way that appears “clean.” If this stage is successful, the funds are now part of the legitimate financial system, and can be used freely.
The main objective here is to integrate the money without drawing the attention of the law enforcement. This can be done, for instance, by purchasing property, art, jewelry, or luxury automobiles.
Here are only a few of the negative consequences that ML brings to business:
Moreover, money laundering has damaging socio-economic effects worldwide, including:
Criminals use all available financial instruments—from NFTs to real estate—to make their illicit funds look legitimate.
Gambling, gaming and betting
Gambling and betting (both online and offline) are often used to launder illicit cash.
Money laundering here takes up the following forms:
A money mule is a person “hired” by criminals to launder illicit proceeds. Mules usually have a good banking history and reputation, which allows them to move dirty money without being noticed.
Money mules are recruited through online job offers or dating sites. Criminals can lure individuals by promising easy money or creating job adverts that appear like legitimate offers.
Suggested read: What’s Money Muling and How Does It Affect Businesses?
There are many ways to make—and therefore launder—money on sports: from sports betting to sponsorships to action figures. The higher the profit from these activities, the higher the risk of money laundering.
The most vulnerable sports include football, cricket, rugby, horse racing, motor racing, ice hockey, volleyball and basketball.
Here is how criminals use football to clean dirty money:
Suggested read: How Money Is Laundered Through Football
To keep businesses safe, a thorough AML compliance program must be in place. It should define how the company detects, assesses, and reports financial crime, including the following measures:
If businesses don’t monitor transactions, they risk money laundering, fraud, and other crimes occurring on their platforms. That’s why governments have been tightening their anti-money laundering (AML) regulations, and businesses that fail to comply can face hefty penalties and reputational harm.
As an example, between 2012 and 2017, Santander neglected to effectively monitor and maintain its AML processes, severely impacting account monitoring for more than 560,000 corporate clients. After an investigation, the FCA fined Santander UK Plc £107,793,300.
In 2022, Danske Bank was fined €1.82 million by the Central Bank of Ireland. Danske Bank’s failures were linked to out-of-date data filters within its automated transaction monitoring systems, resulting in 348,321 transactions being processed without adequate AML and counter-terrorist financing (CTF) monitoring between 2015 and 2019.
Let’s look at how to monitor and stop a common money laundering technique known as smurfing, using Sumsub’s Transaction Monitoring tool.
Smurfing is structuring large amounts of money into smaller and multiple transactions. The people moving these smaller amounts—known as smurfs—will often spread the transactions over various accounts to keep them under the regulatory reporting thresholds and avoid detection.
This AML rule compares ingoing and outgoing transactions and checks if a withdrawal amount is 10% less than the original deposit amount. This is a tell-tale sign of money laundering because the participant is usually paid a percentage for their efforts.
This rule can trigger one or both of the following automated actions:
Sumsub makes it easy to detect money laundering with an expansive variety of customizable rules. In the rule below, you can see how the conditions can be altered if customers attempt to initiate multiple outgoing transactions within a certain time period after registration:
Download our eBook to learn further details on how transaction monitoring prevents money laundering and fraud, and how to combat them with the most up-to-date solutions, helping you fill your organization’s transaction monitoring knowledge gaps.Download this eBook
Placement is injecting illegal money into the financial system, layering is the process of moving illegal funds through multiple transactions in order to conceal their source, and integration is the process of returning the money to the criminal in a way that appears to be legitimate.
They can. The placement, layering and integration stages can occur simultaneously, separately or in an overlapping manner.
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