Why does it occur?
Financial crime is a prevalent issue across the globe, with criminals facilitating their illegal activities with dirty money. One of the drawbacks of earning or spending money illicitly is that it becomes increasingly difficult to use this money for legitimate purposes, except in small amounts. If an individual were to make a small amount of cash from selling illicit substances, they could spend it fairly freely. They could even probably deposit small amounts of it into their bank account without raising any red flags. However, if the person makes tens of thousands of dollars in cash selling illicit substances, they cannot just put it straight into their bank account nor can they use it to buy a luxury good like a new car at a dealership.
Large cash transactions raise all sorts of red flags among legitimate businesses and banks. Once law enforcement or the IRD becomes interested in the source of a person’s windfall of cash, they will ultimately want to see a paper trail explaining where the money originated from.
The same goes for digital transactions – large unexplained wire transfers from international accounts will have mandatory reporting requirements and more than a few questions.
Spending large amounts of money is just as difficult – withdrawing huge sums of cash and spending it without a paper trail is risky business, and it had better be accounted for properly if the regulatory authorities take an interest. If you want to give someone a large bribe, you’ll need to report the expense as something, otherwise the books won’t be balanced. Thus, those individuals with large amounts of money from illicit activities – whether the activity is drug dealing, tax fraud or bribery – will inevitably find themselves with the age-old problem of how to launder the money, turning “dirty” money into “clean” money.
So how does money laundering work?
There are three key steps.
The first step is called placement: A criminal puts illegal gains into circulation by using shops and small businesses. Startups can become a target for criminals interested in “cleaning” their dollars.
The next step is layering. This refers to how illegal money is separated from its source (such as fraud or bribery). Basically, this involves shuffling money around to throw off anyone nosing around for it. If there are enough layers of spending and overseas bank accounts or shell companies, it can be nigh impossible to trace the origins of the wealth.
The third step is integration, giving the funds legitimacy through its re-entry into the economy through normal business transactions. By the time the funds enter the integration stage, it is difficult to distinguish between legal profits and illegal wealth. Now the money is ‘clean’ and can be used by the criminals at their own discretion.
How do you protect against such tactics?
Understanding how money laundering actually works can be really useful in detecting suspicious activity and the risks associated with new customers. Technological advances are making it harder for criminals to lurk in the grey areas of financial law. By requiring the verification of new customers, vulnerable industries can protect themselves from the tactics of these criminals. First AML can help you mitigate these risks whilst staying compliant with the legislation – helping you and your company get back to business and stay protected.
About First AML
First AML is an AML technology provider, and the maker of Source, an all-in-one AML platform. Source powers thousands of compliance experts around the globe to reduce the time and cost burden of complex and international entity KYC. Its enterprise-wide, long term approach to the KYC / CDD data lifecycle addresses time and cost challenges while minimising compliance, reputational and security risks.