The Money Launderer’s Playbook

Mark Halstead Compliance

Money laundering is getting a lot of publicity lately. Just last week, ten suspected members of an organised crime group were arrested on suspicion of flying over £15m out of the UK, while last year,

Zamira Hajiyeva became the subject of the UK’s first ever Unexplained Wealth Order (UWO), after spending an eye-watering £16m in Harrods. 

This all part of a bigger picture, as authorities’ investigative powers increase and the crackdown on financial crimes gathers pace. In particular, the focus is growing on professional firms which are seen to be complicit in - or complacent over - money laundering.

I’m always surprised when talking to professionals in the UK how often they are ill-informed and unprepared to fulfil their growing obligations.

A great way to understand money laundering, and therefore put the necessary steps in place to tackle it, is to see how money launderers work in practice.

Money Laundering 101

Let’s start with the basics, looking at how drug dealers launder their money.

First, piles of cash go to drug bosses from drug sales made on the street. Obviously, the bosses can’t deposit this cash into their nearest bank account, so they enlist the help of a money launderer with international connections. The process will ‘clean’ the dirty cash so that the authorities can’t trace it back to its criminal roots.

The launderer will arrange to transport the money with someone called a money mule. To cover their tracks and obscure the movement of the cash, the criminals will often use multiple mules before getting to a final destination. The money will then be used to purchase something easier to move across borders, such as gold or jewels.

These goods will be sold on to turn them back into cash. This cash has now been earned ‘cleanly’, through the supposedly legitimate sale of goods. The drug dealers are almost home free.

Finally, this ‘clean’ money can be deposited into hundreds of different bank accounts, all over the world. It’s now nearly impossible to trace back to the street drug deals from where it came.

This video from the BBC gives an excellent overview of the process and also highlights how it’s often the middlemen who get caught, while the top dogs evade detection.

Placement, Layering, Integration – In the Real World and Online

As we’ve seen with our drug dealing example, the process of money laundering typically has three key steps: placing the money into the system (turning it into gold or jewels above), layering it through a series of transactions (selling the gold) and finally integrating it back into the legitimate financial system through bank accounts.

Laundering money can be simple; a common example is using a shop ‘front’ that deals with a lot of cash transactions, such as a fast-food restaurant or a nail salon. The legitimate takings of the business can then be inflated with illegally acquired cash and funnelled through the front’s accounts.

For larger-scale operations, a similar approach can be taken using deliberately obscure ‘shell’ companies. These exist only on paper, with no real operations and are key to the layering part of the process.

However, the internet age and rise of internet banking and cryptocurrencies has opened up whole new ways of laundering money, and some of these can be very complex. Criminals can exploit the fact that transactions made using cryptocurrencies are pseudonymous and that many exchanges (where cryptocurrencies can be purchased with cash) have weak AML compliance.

One way money is laundered through cryptocurrencies is by a service known as a ‘tumbler’. This is a mixing service that can effectively split up the dirty cryptocurrency, send it through various addresses (using the ‘dark web’) and then bring it back together. Once it’s back together, it’s clean enough to go back to mainstream, legitimate exchanges and be traded back into cash.

Other approaches are more straightforward, such as loading up prepaid debit cards with cryptocurrency and trading these for other currencies, or using gaming and gambling sites that accept cryptocurrencies to buy virtual chips before quickly cashing out into ‘clean’ cash.

Looking at all the different methods employed by money launderers can be bewildering if you’re trying to do your compliance duties and stay on the right side of the law. But it’s important to make sure you know what’s expected of you, and how you can meet those expectations.

Your AML Obligations

If you’re a bank or building society, or your firm undertakes certain financial activities (such as investment managers or firms, e-money institutions, payment institutions, consumer credit firms and more), then the Money Laundering, Terrorist Financing and Transfer of Fund (Information on the Payer) Regulations (2017) applies to you.

This means that the FCA requires you to apply risk-based customer due diligence measures and take other steps to prevent your services from being used for money laundering. Your internal controls must also effectively monitor and manage your firm’s compliance with AML policies and procedures.

As well as having preventative measures in place, a key element of a risk-based approach to AML is flagging any suspicious activity, as claiming ignorance is not an excuse and the sanctions for failing to comply can be severe.

Red Flag Alert Can Help 

Luckily, Red Flag Alert’s AML service can help. It offers a full range of risk level checking with unbeatable match rates, Know Your Client (KYC) and AML solutions, enhanced due diligence and much more. It’s an instant, secure and cost-effective way to make sure you’re taking a risk-based approach to AML and meeting your obligations.

For more information on how Red Flag Alert can help you navigate AML regulations and provide peace of mind that your business will remain compliant, get in touch with Richard West on richard.west@redflagalert.com or 0344 412 6699.

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Mark Halstead Mark Halstead Partner

Mark's experience is big data analytics, financial services and building businesses provides Red Flag Alert with strategic direction.

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