For the layperson, the act of anti-money laundering monitoring may seem like it should solely be the purview of governmental authorities. But the fact of the matter is that money laundering is a process far more common than one might think: according to the Treasury department, financial crime in the United States (not including tax evasion) “generates approximately $300 billion of proceeds for potential laundering”, most of which stays in the United States. The methods that are used to make this money legitimate might seem innocuous, which is why companies of all sizes and types need to implement stronger protocols to identify and combat money laundering.
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How does it work?
Money laundering typically takes place in three stages: placement, layering, and integration. Placement refers to the movement of funds generated from criminal activity into the financial system. This can be done in several ways, such as by padding legitimate profits with illegitimate proceeds, creating false invoices, utilizing offshore trusts or moving money between multiple bank accounts.
Once the money has made its way into the system, the next step is to layer it – essentially, to keep moving the funds around as much as possible in order to obscure where the money is coming from (as well as where it ends up). The final stage, integration, is the process money launderers use to make their money legitimate, thus allowing them to use the funds however they wish.
One major difficulty hindering anti-money laundering monitoring is the fact that technology has become sophisticated enough to enable criminals to easily forge or alter official documents, to the point where even seasoned experts can struggle to identify them. This can especially pose problems in situations where people who are not trained to identify fraudulent documents are the ones who make decisions about which transactions should be approved and which are potentially suspicious.
For instance, while the luxury property market has long been a favorite for money launderers looking to wash large quantities of cash, lower-value transactions – especially ones that don’t require any input from a financial institution – are an equally effective, and perhaps stealthier, way for criminals to legitimize their ill-gotten gains.
Moreover, as the Treasury Department notes, the internet has both made it simpler for criminals to engage in cybercrime and facilitated the creation of global money laundering syndicates that are able to employ a whole host of people, from financial services experts to lawyers to merchants willing to participate in their schemes, to launder money on other people’s behalf. The use of virtual currencies such as Bitcoin also enables money launderers to further shield their identities and makes it more difficult for investigators to follow their trail.
Watch out for red flags
In light of this, what realistically can be done to combat money laundering? There are several red flags to look out for. One thing to note is the distance between a client and the geographic area they wish to do business in – so, for example, a transaction involving someone who operates mainly out of South America but is looking to buy property in New York could merit further investigation.
The demeanor of the client is also important – are they anxious or in a rush? Are they encouraging that shortcuts be taken or preventing companies from performing due diligence in any way? Have any attempts been made to hide the origin of their funds or the nature of their work, and is the true identity of the client being disguised in some way? When it comes to their finances, does the amount of money involved fit in with what else is known about that/those person(s)? Are there any unexplained third parties involved?
If there is any doubt at all that something is off, the next step is to make sure they are who they say they are by verifying their documents and checking to see if they are on a list of sanctioned individuals or organizations.
As mentioned earlier, it can be difficult for the untrained eye to spot discrepancies – which is why anyone faced with the responsibility of verifying them should look for tools that will enable them to quickly and accurately carry out background and sanctions checks. These tools should ideally be able to scan documents and identify forgeries, perform checks on individuals and businesses, and continually monitor any changes in PEP (politically exposed person) or sanctions status. Compared to traditional methods, these new automated tools can provide answers in seconds, thus saving firms time, effort and money.
A new era for AML
Money laundering is, unfortunately, not an isolated practice. While new regulations are helping to make the process more difficult by eliminating the most obvious loopholes, they also force criminals to get creative and find other avenues to exploit. Steeper consequences will also deter this from happening and should awaken us all that we need to be stricter about curbing money laundering.
There has never been a greater need to understand the underlying systems that can enable money laundering to occur, as well as the tells that indicate nefarious activity. Only then will we be able to keep one step ahead of the fraudsters.
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