Modern day money laundering methods improved with the arrival of fintech technology but remained, in essence, the same. Money launderers improve their methods to avoid detection and avoid being caught every day.
A money launderer seeks a method to circumvent the system or find a loophole wherever there is a new technology, cryptocurrency, or process. We’ll go over five of the most common ways people use today to hide money from the law and get away with it without being caught.
Money launderers and financial institutions are engaged in an ongoing intelligence fight.
What Exactly Is Money Laundering?
Money laundering is the process of illegally obtaining significant sums of money and concealing them in order to make them appear to have come from legitimate sources. The money is typically obtained through illegal operations such as drug and sex trafficking, terrorist activities, and other illegal ways. It is regarded as filthy and is laundered to make it appear to have come from a lawful source (s). Money laundering is a serious felony with severe penalties, including prison time.
To conceal the source of unlawfully gained money and make it usable, three steps are taken:
- Placement: The money is put into the financial system, usually by breaking it up into a lot of different deposits and investments.
- Layering: The money is moved around in order to put distance between it and the offenders.
- Integration: The money is subsequently returned to the culprits as legitimate income, or “clean money.”
Banking regulators throughout the globe are tightening AML/CFT standards for their citizens, forcing banks to modernize their scanners for fear of massive fines.
They have been able to minimize money laundering activities to some extent after spending billions of dollars on new systems and employees.
Criminals, on the other hand, have become more sophisticated. They use expert money-laundering cells that do not work under static, present, or overly broad transactional acts. With the sophistication of current financial technology, they can sidestep several regulatory criteria that were assumed to be ideal. At the same time, new technologies like cryptocurrencies allow people to avoid traditional financial systems while still paying for and getting goods and services.
Common money laundering methods
Banks, which aren’t very knowledgeable about modern technology, are becoming less and less able to help governments fight money laundering and terrorist financing.
Placement, layering, and integration are all money laundering stages, making illegal money legal.
Among the traditional methods of money laundering are:
- At banks, the division of huge sums of money into several little transactions (often called smurfing)
- The utilization of foreign exchange
- Move money across borders, cash smugglers, and wire transfers.
- Investing in high-value, transportable commodities like diamonds and gold
- Buying and selling precious assets such as real estate discreetly
- Accounts in foreign banks
- Counterfeit Gambling and Shell Corporation
All of these actively employed money laundering methods and strategies.
In addition to these, criminals are increasingly using technology and the hugeness of the internet to hide their identities and spend their money without fear of being caught.
Online banking is one of the most recent ways money launderers try to get away from being caught.
Banks carefully monitor investments in these areas because they are aware of the time and resources required to prevent laundering operations in traditional banking. However, many countries banking systems frequently exploit online banking flaws. This flaw provides a fertile field for criminals who employ these lax rules for money laundering and terror financing.
Online banking is currently a haven for many fraudsters who use social engineering methods to gain access to other people’s bank accounts. A criminal may transfer money straight to such a victim’s account and deceive the person into revealing important information such as passwords or gaining remote access to the victim’s computer for money laundering reasons. Criminals can then use the victim’s account to make unauthorized payments.
Coming up with a business email compromise.
It is a well-planned scam targeted by firms that perform regular wire transfers with international suppliers. In this case, a criminal uses social engineering or computer penetration tactics to hack legitimate corporate email accounts in order to make unauthorized financial transfers. While the scam is usually used to get people to give up money, it can also be used to layer and hide money, even if the victims don’t know about it.
Mistaken identity
Nowadays, creating a false identity on the internet is a simple task. Criminals are opening accounts for credit cards, online deposits, and loans using a combination of actual and fake information. Providers of these digital accounts, including banks, typically do not conduct rigorous consumer checks, and criminals easily circumvent the minimum security checks that they do have.
This crime costs banks a lot of time and money and their reputation. They’re wasting countless hours looking for people who don’t exist. They only become aware of a problem when they discover strange activity on their accounts. When they try to do something about these accounts, they often disappear without a trace, leaving no evidence of who owns them.
Anonymous online payment services
Payment methods such as prepaid gift cards, prepaid debit cards, and prepaid credit cards can be purchased fully anonymously or with false information. They can also be purchased with cash. The value on these cards can be used from anywhere in the world without revealing the person’s name.
Cryptocurrencies
Due to their inherent anonymity, cryptocurrencies like Bitcoin are one of the most convenient ways to wash money. These currencies are unrelated to a person’s identification and rely solely on the private key associated with an account. Furthermore, individuals who utilize digital currencies do not need to rely on intermediaries to transfer value. Checks are the source of money for politically exposed people (PEPs), and penalties are often not done by digital currency platforms.
Experts believe that a significant but unjustified increase in the prices of numerous cryptocurrencies may be due to their use by criminals to launder their illegal gains. Banks and financial institutions are concerned about cryptocurrency’s apparent link to cybercrime and money laundering. As more people try their luck with cryptocurrency investments, the likelihood of using these currencies for criminal purposes increases.
Many banking regulators have prohibited financial institutions from interacting with cryptocurrency exchanges, and banks have limited consumers’ ability to transact in virtual currencies. However, both of these transactions are taking place in a variety of nations, and the risk of financial crime is increasing. Despite the fact that most central banks don’t like cryptocurrencies, some of the world’s biggest banks have started working with cryptocurrencies in a very active way.
These contemporary money laundering methods and the increasing transaction quantities associated with them are causing huge headaches for regulators all over the globe. Because of the complexity of cryptocurrency technology and how hard it is to keep it safe, many governments have banned it. Regulators have now been forced to step up their control in order to stop money laundering through these new, high-tech methods.
They must impose stronger norms and reporting standards on the institutions involved, particularly banks.
Some Surprising Statistics About Money Laundering
- Every year, an estimated amount of $800 billion to $2 trillion (2-5 percent of the world’s GDP) is laundered internationally.
- Suspicious Activity Reports (SARs) lead to the blocking of about 31% of the money that is laundered each year.
- According to Kroll’s most recent Global Enforcement Review, fines for financial crimes such as money laundering, bribery, and sanctions would total $4.67 billion in 2020, up from $3.75 billion in 2019.
- In the first half of 2021, 23 regulatory actions led to $1.13 billion in fines for financial crimes around the world.
- The number of financial non-banking entities that were not AML-compliant by 2018 was over 9,500 out of the 11,500 registered.
Money laundering endangers both national security and the global economy. Financial institutions’ profitability is jeopardized as a result of the costs involved with combating the vice through increasing anti-money laundering expenditures, such as the purchase of anti-money laundering software. Furthermore, countries incur enormous costs in establishing anti-money laundering legislation. SARs issued by financial institutions assist authorities in catching money launderers.
Banks have begun to recognize that their old rule-based systems cannot effectively prevent money laundering threats. They must now embrace advanced technology to tackle their concerns successfully. Financial institutions can use machine learning-based solutions like Tookitaki’s AML Suite to fight money laundering.
Money Laundering in the Digital Age
Money launderers often come up with new ways to hide their crimes, such as using the internet to hide their money.
Flying under the radar is a critical component in money laundering. Money launderers can easily avoid discovery thanks to the internet. The rise of online banking institutions, anonymous online payment systems, mobile phone peer-to-peer transfers, and the use of virtual currencies like Bitcoin makes it more difficult to find money transfers that are not legal.
Here are a few examples of how technology is assisting in money laundering:
Proxy servers and anonymizing software are used. Because money can be sent or withdrawn with little or no evidence of an IP address, these techniques make it almost impossible to find out that they have been used.
Online auctions, sales, gambling websites, and even virtual gaming sites can be used to launder money. Illegal money is first changed into the currency used on these sites, then changed back into real, usable, and untraceable money.
A variation in phishing scams involving a victim’s bank account fraudsters deceives victims into depositing a bogus lottery windfall or international inheritance. Instead, they make multiple contributions to the account on the condition that a portion of the money is moved to another account.
Money Laundering Methods: Conclusion
Money laundering has been going on for a long time. Money launderers try to stay one step ahead of law enforcement by changing their methods, so international governments work together to develop new ways to find them.