What are the types of money laundering? From basic strategies like smuggling to more complex acts like mules and smurf, there are several techniques criminals use to launder money to avoid regulatory authorities. In the global economy today, it's a huge industry, worth up to billions in dollars.
According to research, money laundering schemes cost 2% - 5% of the world’s total GDP. This is possible through the three basic types of money laundering - smuggling funds across borders, through the financial system or through misinvoicing goods and services during international trade (also called trade-based money laundering or TBML).
Understanding the different types/techniques of money laundering and how they work is the first step to creating a robust system that identifies and mitigates risks early as a business. In this article, we simplified everything you should know.
What is Money Laundering?
Money laundering is essentially the process of cleaning criminal funds to make them appear legitimate. These funds are often obtained from illegal sources like terrorist activities, sex and drug trafficking, and other illegal means. Due to its source, it is considered dirty and needs laundering to be made “clean” hence the name, money laundering.
Money laundering is a global crime today and carries severe penalties including financial fines and jail terms. A good example of such is the series of fines imposed on global banks in 2021 due to anti-money laundering non-compliance.
What are the Stages of Money Laundering?
There are 3 stages employed in money laundering for disguising illegal funds and their sources. These includes:
Placement stage is basically introducing illegal money into the financial system and it usually involves breaking it into smaller deposits and investments.
at the layering stage, the money is run through several legal transactions to distance it from the illegal source and perpetrators.
Finally, the money is then reintroduced back into the legal economy, posing as clean money. This is called integration.
Now that you've fully grasped the basics of money laundering, now let's answer the question “what are the types of money laundering”. This highlights the laundering methods mostly employed today and how digital infrastructures are leveraged to achieve this act.
What are the Types of Money Laundering?
There are 3 basic types of money laundering used today and all other methods fall under them. The major types of money laundering used by criminals include:
Smurf is the term commonly used to describe a money launderer whos trying to avoid government agencies and scrutiny. Essentially, they achieve this by employing the three stages of money laundering - placement, layering and integration to mask the money from regulatory authorities. Most times, large sums of illicit money are deposited in different banks through smaller transactions.
Depending on the jurisdiction, anti-money laundering laws dictate that sums above certain amounts are to be reported to financial regulators and authorities. For example, this could be $10,000 and in such a case, money launderers break down and deposit bits of the illegal sum without going above the $10,000 threshold, therefore, their transactions are not flagged suspicious or reported to regulators.
Unlike smurfs, mules refer to the individuals and not the activity itself. Essentially, mules are individuals who are hired by criminals to help carry out money laundering schemes. A good example is money mules who are recruited knowingly or unknowingly to smuggle money.
Money launderers usually recruit those who can easily fall under the radar, especially people who are financially vulnerable and without criminal records. Most times, these individuals are ignorant of the larger scheme and are enticed by job offerings with large sums of money in return.
Mules mostly have specific responsibilities - to open up bank accounts and deposit the money they’re given in them. After that, the launderers continue making wire transfers to move the money around the financial system to avoid detection.
Shell corporation is one of the most used terms in money laundering today. A very popular type of money laundering, it refers to companies that don't have any physical operations, business activities, employees or assets. Basically, they are legitimate business entities that are used to raise money and finance a merger, acquisition or operations of a startup company.
Their mode of existence and operation gives room for launderers to use them as an avenue to hide illegal activities or avoid paying taxes. For example, people do this by setting up shell companies in countries that guarantee anonymity, therefore, they can easily make deposits and transfer money under the radar to different accounts. With shell companies, individuals can also avoid paying taxes and reporting income to relevant authorities. Shells and shell corporations are of vital discussion when answering the question - what the types of money laundering.
Asides from these three basic methods, other methods of money laundering include:
- Investing in mobile valuable commodities that can be easily moved to other jurisdictions
- Discreetly purchasing and selling off valuable real estate assets
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Money Laundering and How it Affects Businesses Today
Today, criminals are leveraging the advancement in technology to redefine money laundering operations. Essentially, this involves putting new spins on old crimes and leveraging digital transactions and the internet to avoid detection.
These activities are possible due to the prominence of online banking, peer-to-peer transfer, online payment services, and virtual cryptocurrencies like Bitcoin. The availability of multiple channels makes detecting illegal transfer of money more difficult than ever.
As a business, here are a couple of things you should know about money laundering activities today:
- Establish a robust financial crime risk assessment structure, taking into account the vulnerability of your client base and the originality of your product.
- AML transaction monitoring software remains your best bet in the world of ever-evolving money laundering techniques. Consider the potential and invest in automation-focused platforms to stay ahead of criminals.
- Institutions exposed to the property market should thoroughly assess the risk and establish respective controls.
Detecting Money Laundering in this Digital Age
Anti-money laundering policies are established by financial regulators to ensure affected institutions comply. This creates a safe system, where criminal activities are identified and reported promptly.
The exact regulations vary from one jurisdiction to another, although they are required to comply with the global FATF standards. This generally includes:
- Ensuring that adequate KYC protocols are in place and adhered to strictly
- Establishing tight identity verification procedures and authentication before allowing certain transactions through
- Monitoring high volume and suspicious transactions
- Regularly verifying funds, their sources and beneficiaries
Some countries have gone ahead to ban digital currencies like cryptos to further mitigate money laundering activities. This is because most of them currently provide anonymity to users due to the way they are traded.