Money Laundering Through Financial Companies: Awareness 101

Financial institutions are typically the most commonly abused for money laundering purposes. Money laundering using financial institutions, especially the larger money laundering cases, almost always involves a financial institution, usually a bank. However, other types of financial institutions can be abused for money laundering purposes. This includes non-bank financial institutions such as money services companies and the credit card industry.

We will discuss five exemplary methods of money laundering through these financial companies. However, you should know that these are exemplary methods and that money laundering is extremely complex.

Money laundering through financial companies

It is important to note that in reality there is often an overlap in the three phases of money laundering. As with some financial crimes, there is no requirement that the illicit funds be “placed.”

Method 1: Complex transfers

The first method uses wire transfers, a simple, everyday banking product. However, a simple wire transfer remains one of the methods criminals use to move large amounts of money. By making cash advances on a stolen credit card, criminals can initiate unauthorized domestic or international wire transfers. Funds can then be deposited into an account that has been set up to receive the wire transfers.

Money launderers also use wire transfers in the second phase of the money laundering process, the layering phase. The goal is to move the funds from one account to another, from one bank to another, or from one jurisdiction to another. Each layer of transactions makes it harder for law enforcement and investigative agencies to trace the origin of the funds.

The launderer can take basic precautions to avoid detection at both stages. Examples include varying transaction amounts, keeping the amounts relatively small and below applicable reporting thresholds, and, where possible, using reputable organisations.

It seems too simple to be true and rather trivial. Yet wire transfers remain the number one method of money laundering. But professional money launderers can make these simple wire transfers incredibly complicated by moving, splitting, commingling money and using different banks in different countries. It can get complicated.

Let’s look at an example. The Italian mafia organization Ndrangheta, considered one of the largest criminal organizations in the world, carries out an average of 90 transactions per money laundering operation.

Method 2: Private Banking Accounts

The second method involves the use of private banking accounts. Private banking offers highly personalized and confidential products and services to wealthy clients for fees based on the assets under management.

The more assets you have from your clients, the more money you make in fees. Private banking often operates semi-autonomously from other parts of a bank. Banks often engage in private banking activities because it is very profitable for them, which leads to fierce competition in the market. Because a typical private banking client is also fairly wealthy and economically, socially or politically powerful, private banking carries a higher risk of money laundering.

Imagine; as a private banking client you have to be somewhat wealthy, which successful criminals are, so they fit the typical client type. Because banks make a lot of money from private banking clients, they may not look so much into the details of the origin of the funds. Potentially, on the one hand they are somewhat concerned, but on the other hand they want to manage the assets.

Once the criminal becomes a bank customer, he enters a department that operates more or less independently. The bankers usually do not want to be a nuisance to private banking customers and want to provide for all their financial needs. If the criminal then introduces the element of pressure on the bankers, they have a lot of leverage. The bankers do not want to lose their assets, which would damage their bonuses.

In the past, private bankers have in many cases helped money launderers launder the proceeds of illegal activities. For example, two private bankers formerly employed by American Express Bank International were convicted of laundering money for Juan Garcia Abrego’s Mexican drug cartel.

Method 3: Credit Cards

The third method involves the use of credit cards. Credit card accounts are unlikely to be used in the initial placement phase of money laundering, as the industry generally restricts cash payments. They are more likely to be used in the layering or integration phases. For example, launderers prepay credit cards with funds they have already placed in the financial system. Prepaying credit cards creates a balance on the cards.

It’s that simple. The launderer then asks for a refund of the advance payment and creates a layer. The launderer can then use the advance payment funds to purchase an asset. If someone asks where the funds came from, the launderer can point to the credit card chargeback.

Method 4: Money Service Companies

The next method involved the so-called money service companies. These companies are businesses that involve the transfer or conversion of currencies. They usually offer forex exchange services, money transfers or check cashing. The latter is more common in some countries and less common in others. For example, money launderers use money transfer offices and currency exchanges to make the funds available to the criminal organization in the destination country in the local currency. The launderer or broker then sells the criminal dollars to foreign businessmen who want to make legitimate purchases of goods for export. And on the other side, the money comes out clean. It can be claimed as proceeds of a forex transaction in combination with an import-export deal.

Method 5: Smurf Scheme

Last but not least, let’s take a look at the Smurfing Scheme. Smurfing refers to distributing small amounts of a larger money supply to a series of partners who then deposit the money in incremental amounts. Smurfing is used to circumvent the currency reporting requirements that banks in many countries must comply with. Small amounts coming from many partners are less likely to trigger an automatic report.

The placement phase begins with distributing the money through a network of people who can be trusted to return the money in a timely manner. Larger criminal organizations are more likely to use this strategy because they already have a network of cooperating members.

The layering phase of this scheme occurs when the money is deposited into one or more accounts. More advanced smurfing schemes attempt to ensure that the money is deposited in ways that avoid automatic detection. The money must not only be deposited in small amounts, but in varying amounts at different intervals.

The money can be withdrawn while it is being deposited back into the account. While this scheme avoids automatic detection and reporting, it is not as secure as some schemes. If the deposits are scrutinized, it may be difficult for the launderer to explain why the deposits were made.

How does money laundering affect a company?

Money laundering is a multi-billion dollar industry that makes it much harder for honest businesses to compete in the marketplace, as launderers often provide products or services at a price lower than market value. Money laundering or failure to implement reasonable anti-money laundering policies can result in the revocation of a business license or government license when the government regulates a financial institution or business.

Companies that work with people, countries or entities that launder money can also face fines. ING, the Royal Bank of Scotland, Barclays and Lloyds Banking Group are among the institutions that have been fined for their involvement in money laundering transactions in countries such as Iran, Libya and Sudan.

Final thoughts

Money laundering is the process of creating the illusion that large sums of money obtained from serious crimes originate from a legitimate source. Money laundering is often accomplished through criminal activities such as drug trafficking or terrorist activities. It is estimated that over $800 billion is laundered each year.