What are the warning signs of money laundering and who should it be reported to? Read on for more insights from our Professional Refresher module
by Bethan Rees
Be sure to look out for the financial crime-themed issue of The Review later this year
Money laundering, according to our recently launched Anti-Money Laundering Essentials Professional Refresher module, is "a process where criminals seek to conceal the true origins and/or ownership of the proceeds of criminal activity". It can have far-reaching consequences for both the economy and society. The United Nations Office on Drugs and Crime (UNODC) estimates that between US$800bn and US$2tn is laundered annually, the module says.
It's a global issue and is high on the political and regulatory agenda. In January 2021, Brussels think tank the Centre for European Policy Studies, together with the European Credit Research Institute, published a report titled Anti-money laundering in the EU: time to get serious, which makes recommendations and observations under three pillars: governance, risk management and capability.
Also, the CISI has announced a new Professional Assessment, Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) it has developed with the Qatar Financial Markets Authority, the Qatari capital markets regulator. The assessment is available to both professionals and the wider public.
Here are five things worth knowing about money laundering, taken from our Professional Refresher.
1. It's a global challenge
There are several organisations around the world that are attempting to address money laundering. The Financial Action Task Force (FATF) is an intergovernmental organisation that has defined a framework for combating money laundering. Its FATF 40 recommendations are considered the sector standard, and although not mandatory, countries that fail to implement these standards can face additional scrutiny from financial institutions.
The Basel Institute on Governance has an annual ranking assessing the risk of money laundering and terrorist financing globally, published in the Basel AML Index. In the 2020 index, the top five high-risk countries are Afghanistan, Haiti, Myanmar, Laos and Mozambique.
The International Money Laundering Information Network is an internet-based resource assisting governments, organisations and individuals in the fight against money laundering and the financing of terrorism. It has been developed in cooperation with other AML organisations such as the FATF and the UNODC.
2. The stages of money laundering
"Money laundering is traditionally described as having three main stages where ‘dirty’ money is converted to what appears to be ‘clean’ or legitimate money."
It starts with placement. This is where a criminal introduces illegal money into the financial system. This could be done through a deposit in an ATM, for example. Money launderers may try to cover up the source of this income through a 'front' company, such as a nail salon or a tourism agency, so it appears the money is coming from a legitimate source.
The second stage is called layering. This is when multiple financial transactions are used to move money around to make it difficult to trace back to the original crime. "For example, the same criminal then purchases and sells investments, such as shares or bonds, with the deposited funds."
The third stage is called integration, where the funds have been distanced from the origin and can appear legitimate. "The money is then integrated into the normal economy" and the criminal can use it to purchase things.
It's sometimes suggested that there is a fourth crime, which is predicated offences, otherwise known as the initial crime, which can lead to money laundering. Some typical examples of this are fraud, human trafficking, drug trafficking and insider trading. "Predicate offences now include cyber crime and environmental crimes, such as the illegal trade in wildlife, the smuggling of ozone-depleting substances, the illicit trade in hazardous waste, illegal, unregulated, and unreported fishing, and illegal logging."
3. Identifying 'red flags'
Employees in the financial services sector should be aware of money laundering and need to know how to identify any suspicious or warning signs. The module provides a list of some potential red flags, which will be different "depending on whether you are dealing with retail, private or wholesale clients, however, most of them will typically be in relation to either a client’s profile, identity, source of wealth and their transaction activity".
Potential warning signs that something isn't right in terms of identity and source of wealth can include:
- contradictory identification documents or documents that look unusual/cannot be verified
- unwillingness to provide information about identity or source of funds
- in complicated cases, providing all required documents instantly could be a warning sign
- for corporate clients, if there is a lack of presence or an office, this could indicate that it's a shell company
- for both corporate clients and individuals, complex ownership structures, for example, trusts, could hide the source of funds
- fast growth levels for a corporate client could indicate fraudulent activity.
Potential warning signs in terms of transactions can include:
- exchanging smaller bills for larger ones
- breaking up large transactions into smaller ones to avoid transaction reporting requirements
- using bearer instruments with no record of ownership
- transactions of large amounts of cash
- transactions with counterparties in tax havens or jurisdictions recognised as higher risk for money laundering
- taking out a mortgage not suited to their profile
- unusual and irregular account activity, such as a retail client with multiple inflows/outflows to other accounts or countries where the client doesn't have an immediate connection
- buying and selling securities or policies regularly, without regard to fees.
4. Reporting money laundering
If someone suspects money laundering, it is their duty to report it – even if there is no tangible evidence. At a very minimum, an employee should raise suspicions with their line manager. If the firm has a money laundering reporting officer (MLRO), then it should be reported to them – most regulated financial institutions need to have a MLRO. The MLRO will then assess the situation and determine the next steps. If they want to file a suspicious activity report, in the UK this would be done by contacting the National Crime Agency.
There can be several consequences if money laundering suspicions are not adequately reported. For the individual, this could include fines, loss of job and imprisonment if the person is seen to be aiding and abetting, including if a client is tipped off about suspicions. The consequences for companies not reporting suspected money laundering include fines, loss of licence and reputational damage. It also has implications for wider society. A failure to report or prevent money laundering encourages crime and corruption, and this diverts resources from productive activities.
5. Cyber laundering
Criminals can exploit legitimate payment systems online, too. "It takes place when a criminal sets up a website to sell illegal goods and routes the payments that result through a legitimate online merchant’s payment service provider."
Combating cyber laundering is difficult due to the lack of law enforcement expertise in these crimes, poor coordination between agencies, lack of legislation and the transactional nature of cyber crimes. Criminals can exploit technology for their own purposes, and it is reported that they are using cryptocurrencies for laundering as well.
"As long as there is a financial system, there will be criminals abusing it to try to make money," the module concludes. "No matter how small the amounts may be, financial institutions have an obligation to stop criminals from using their services and benefiting from illicit activities."