Money Laundering
From FraudWiki
The IMF (International Monetary Fund) estimates the amount of money involved in money laundering is 2%–5% of global GDP, which equates to US$590 billion to US$1.5 trillion annually. The Asia Pacific Group on money laundering estimates that money laundering in the Asia-Pacific region is around US$200-250 billion annually. In China alone, criminal monies are laundered to the tune of US$24 billion annually. The value of money laundering in the USA is around US$300 billion annually.
There are generally agreed to be three phases to money laundering:
- Placement occurs when the cash generated from crime is placed into the financial system or used to purchase goods. This is the point at which the proceeds of crime are most apparent and therefore most at risk of detection. In this phase dirty money is very often (though not always) in the form of cash but may also, for example, be in the form of negotiable instruments such as travellers cheques. Those seeking to place dirty money might therefore, target deposit-takers such as banks or building societies or cash businesses such as money service businesses or dealers in high value goods.
- Layering is where the dirty money passes through a series of transactions in order to obscure the origin of the proceeds. These transactions may involve different entities, such as companies and trusts, different financial assets such as shares or insurance products and/or multiple jurisdictions.
- Integration. Once the original source of the funds has been obscured the final stage of the process is for the dirty money to reappear as legitimate funds or assets, for example, through income from legitimate business. This is known as integration. The criminal is subsequently free to enjoy the proceeds of crime with much less fear that they will be identified as criminal funds.
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Regulation
AML is orchestrated worldwide, by the Financial Action Task Force (FATF) [ref 1], the United Nations Office on Drugs and Crime (UNODC) [ref 2] and the Wolfsberg Group [ref 3].
There are five main strands to the AML regulatory environment:
- Criminalisation of money laundering as a discrete offence category
- Putting into effect provisions for the confiscation or forfeiture of criminal proceeds
- Putting into effect Know Your Customer (KYC) and Enhanced Due Diligence (EDD) regulations for service providers.
- Creating a reporting network and obliging private sector service providers to report on unusual or suspicious transactions through this network to Financial Intelligence Units (FIU)
- Enhancing international cooperation and mutual assistance by way of treaties and Financial Intelligence Units.
Types of Money Laundering (aka Typologies)
The types of money laundering scheme are myriad. An excellent review has been produced by the British Bankers’ Association Joint Money Laundering Steering Group [ref 5].
At a very high-level it is possible to group the methods as below:
- Turnover manipulation
- Loan Back
- Invoice manipulation
- Underground Banking / Alternative Remittance
- Legal Entities in Tax Havens and Offshore Financial Centres
The FATF issues regular updates on new typologies as they are identified.
Prevention and Detection of Money Laundering
The most important aspect of AML, at the level of a service provider, is Know Your Customer (KYC). This applies to all money laundering typologies and to each of the three phases.
After KYC comes monitoring of transactions. Spotting a money laundering scheme then involves comparing account activity against transaction history (identify sudden changes), and against peer accounts (how others “behave”). Transaction trend monitoring software is essential for this. Simple rules-based system go some way with this but technologies like link analysis are also increasingly becoming essential to detect situations like for instance: Party A receives funds from B who is linked to terrorist C so transactions in A's account are suspicious.
In determining whether an individual or a transaction is suspicious requires a systematic framework to measure risk.
The risk based approach suggested by Rohan Bedi [ref 6] identifies three risk models:
- Geography and Country Risk
- Business and Entity Risk
- Product and Transaction Risk
Geography and Country Risk
Here we simply ascribe a risk based on country of origin of individuals or organisations involved in the transaction. There are a variety of sources of such information:
- The FATF black-list of high-risk for money laundering countries (and also those recently removed)
- FATF mutual evaluation reports, World Bank & IMF reviews.
- The USA PATRIOT Act Section 311 designated countries as ‘primary money laundering concern’
- OECD black-list of countries for adverse tax practices;
- US list of drug producing and drug conduit countries;
- US list of state sponsors of terrorism;
- US Department of State annual reports on country money laundering risk and global terrorism
- Reports by Council of Europe/ similar bodies
- Transparency International’s Corruption Perceptions Index (CPI)
Business and Entity Risk
Within this model we ascribe a risk based on information about the organisations and individuals. To do this the so called entity can be checked against a variety of lists and databases of known and suspected criminals, terrorists, PEPs, IPR theft perpetrators and other high-risk categories. One such list which is regularly updated by US Treasury is the Special Designated Nationals List [ref 8]
Commercial KYC databases are also available: [refs 9 and 10]
In looking up these lists some form of name recognition software is important as names can take on many different cultural forms. For instance “Richard Smith” may be the same as “Dick Smith”. Nicknames, aliases and unusual forms like “Cindy” and “Cyndi” further complicate matters. Arabic names may include some combination of honorifics, given name, family name, or identify patronymic data (son of x, father of y), tribe, tribal group, city of birth, etc.
Product and Transaction Risk
As noted by Rohan Bedi in ref 6, the BBA – Joint Money Laundering Steering Group [ref 5] states that: products or services with the highest risk are those where unlimited third party funds can be freely received, or where funds can regularly be paid to third parties, without evidence of identity of the third parties being taken.
There are many resources available to help assess the product risk relevant to the services offered by a provider, refs [3,5,6]. Also, the typologies of money laundering particular to service type need to be considered.
Each product has its own risks but there remains the need to look for indicators that the product is being abused. As previously mentioned, this is where the monitoring of transactions is crucial. Through the use of transaction monitoring it is possible to detect abnormal behaviour that can be then brought to the attention of the responsible compliance officer.
Automated detection methods
Enhanced Due Diligence (EDD) puts a burden on service providers to undertake checks on their clients and the transactions they undertake. To do this many techiques have been developed:
Systems to monitor lists:
- US Treasury Special Designated Nationals List
- Transparency International’s Corruption Perceptions Index (CPI)
- Commercial KYC databases as required
These can be used to monitor client registration, transaction sources and beneficiaries.
Rules based checking
Rules allow particular signatures of types of money laundering to be automatically flagged.
Peer Group Analysis
Peer Grouping analysis is a technique for building profiles of behaviour of individuals and their peer groups based on historic data and can then alert when abnormal transactions take place.
Link Analysis
Link Analysis is a method that is able to look at historic data and find links between individuals and organisations. Where one party is involved in a high risk transaction it is then possible to see who else may be involved.
See Also
External Links
- Financial Action Task Force
- United Nations Office on Drugs and Crime
- Wolfsberg Group
- Asia Pacific Group on Money Laundering (APG)
- BBA - Joint Money Laundering Steering Group
- Anti-Money Laundering Risk Models - Rohan Bedi
- Transparency International
- US Treasury Special Designated Nationals List
- World Check
- Factiva
- w:Money Laundering
- Indiaforensic
- Job portal for Anti-Money Laundering experts
