AML KYC FREE SHORT NOTES | MODULE – A: ANTI-MONEY LAUNDERING

AML KYC FREE SHORT NOTES | MODULE – A: ANTI-MONEY LAUNDERING

MONEY LAUNDERING

Money laundering is a declared criminal activity that is basically the act of disguising an illegal source of money and putting it into a legitimate financial system.

Money laundering involves three steps: 

• Placement:  Money from a legitimate source is broken down in small deposits and Investments.

• Layering: It is smaller portions of money are then transferred to different locations and accounts far from the illegal source.
• Integration: This money is integrated into the financial system making it seem like clean money. 

In each of the mentioned stages of money laundering, criminals come up with new money laundering techniques which are difficult to detect. Some of these activities have been categorized & recognized. Some of these types of methods for money laundering are: 

• Structuring or smurfing 
• Currency exchanges 
• Double invoicing 

All these techniques involve the above-mentioned 3 stages.

An increase in digitalization, financial transactions made through online modes & the options of entertainment, have altogether increased the new opportunities or avenues for money launderers. 

These criminal entities run their businesses successfully and make profits using various money laundering techniques. 

Therefore, it becomes important for Financial Institutions to understand and recognize the common methods through which money is laundered so that they can please effective policies and procedures to curb this problem of money laundering. 

COMMON MONEY LAUNDERING TECHNIQUES

Below are some of the examples of methods through which money is laundered. These include traditional as well as modern techniques.

STRUCTURING

It is also known as smurfing where money is broken into small deposit amounts. This way of breaking the large amount into smaller amounts of money is done with the intention to remove the suspicion of money laundering.

One way to structure is using the small amount of money to purchase instruments such as money Orders and then depositing these financial instruments into bank accounts again in small amounts.

BULK CASH SMUGGLING

The Classic way to launder the money is physically smuggling the bank routes to another jurisdiction and depositing them with a bank or financial institution where greater secrecy is provided by the bank or financial institution or where there is less severe enforcement of money laundering.

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CASH-INTENSIVE BUSINESSES

Criminals sometimes set up cash-intensive businesses from which the greater portion of the revenue is received in cash. Then these business accounts are used to deposit the money that has been received through criminal activities. 

Under this method, businesses operate in the open and generate cash from genuine business additionally to the illegitimate sources. 

Some of the examples of these businesses are Car washes, bars, restaurants, casinos and parking structures, etc.

INVESTMENTS IN COMMODITIES

Sometimes the laundered money is used to purchase luxury and mobile goods such as diamonds, gold, and gems which can be moved easily. One another avenue where black money is obtained is real estate.

TRADE-BASED LAUNDERING

This is one of the newest and most complex forms of money laundering. This method involves under- or over-valuing invoices to disguise the movement of money. The art market is often criticized for being an easy money laundering channel. The subjective value of art and the secrecy norms of auction houses about buyers and sellers make it easier for money launderers to clean their money easily.

SHELL COMPANIES AND TRUSTS

Because trusts and corporations are not under obligation to disclose The Identity of the two owners or beneficial owners in many of the jurisdictions, it is easy to store black money in these companies’ accounts.

ROUND-TRIPPING

When criminal money is deposited in the accounts of a foreign Corporation situated offshore, mostly in tax heaven countries where anti-money laundering checks are less or minimal. Then money is transported back in the form of foreign direct investment which is often exempt from taxation. 

One different way to use round-tripping is transferring this money to a allot organization as a fee and then canceling it and the remitted money is represented as under a will.

BANK CAPTURE

Sometimes money launderers purchase a controlling interest in a bank in an extremely weak money-laundering controlling jurisdiction where they can freely move money through the banking system without the fear of any scrutiny.

CASINOS

An individual can walk into a casino and can buy chips with any money whether white or black. Criminals use this method by playing in a casino for a short time and when the chips are cashed, they get receipts for the money and claim the proceeds as winnings from gambling.

ANOTHER FORM OF GAMBLING

Sometimes the black money is spent on high odd games or betting where the bet is made on every possible outcome and when the bettor wins in one or more bets, the proceeds are shown as winnings while the loss is not shown at all.

BLACK SALARIES

A company can have unregistered employees who I hired without any written contracts and their salaries are paid in cash. Their salaries are paid through black money.

TAX AMNESTIES

Sometimes the government gives a limited-time option to taxpayers to pay an amount, usually a big portion of the money, in exchange for forgiveness of a tax liability relating to previous years without undergoing Criminal prosecution. So, even though taxpayers lose a significant amount of your money, they get clean money back.

BUSINESS EMAIL COMPROMISE

A business email compromise is a systematic scam where businesses work with foreign suppliers and do some regular wire transfers. The criminals compromise legitimate business emails intentionally to conduct some unauthorized fund transfers to defraud others out of money. It has provided them an effective tool to layer and launder the money without or with the knowledge of the victim.

TRANSACTION LAUNDERING

Under this method, merchants process illicit credit cards for another business (with or without knowledge of the credit cards being illicit). This way the ecosystem of payment is used to hide even the occurrence of the transaction.

CYBER-LAUNDERING

In today’s digital age, cyberspace is being used to launder money through online transactions. ECommerce, online games, Crowdfunding, and digital currencies are being used to launder money easily and with speed.

So, these are the ways through which criminals convert their black money into white. Bankers must know these methods so that they can identify any suspicious transaction and report it.

If you know of any other method of money laundering, tell us in the comment box.