What is Money Laundering?
According to the Financial Action Task Force (FATF), money laundering is the processing of criminal proceeds to disguise their illegal origin. In other words, it is a technique used by criminals to “clean” the illegally obtained money and conceal the source of funds through financial transactions, and finally release laundered money into the legal financial system.
United Nations Office on Drugs and Crime (UNODC) estimates that the annual amount of money laundered is ranged between US$800 billion and US$2 trillion, 2 – 5% of global GDP per year.
3 Stages of Money Laundering
Typically, money laundering involves three stages as following.
In the initial stage, the money launderer introduces the illegal profits into the financial system, usually by breaking up large amounts of cash into smaller deposits and investments. The objective during placement stage is to set up the structure to allow movement of funds across countries and entities.
Creating complex layers of financial transactions, such as transfer of money to various accounts across the globe, to distance illegal funds from the source. Through layering, the money launderers aim to confuse and delay law enforcement agencies’ investigations so that they cannot trace the money back to the criminals or terrorists.
- Integration / Extraction
The funds re-enter the general financial system and appear to be the result of legitimate business activities. The money launderer might choose to invest the funds into real estate, luxury assets or business ventures.
Common Money Laundering Schemes
Professional firms provide services such as company incorporations, nominee director services or audit. Some of these services are at higher risk for money laundering as criminals can abuse these services as part of money laundering schemes during the placement, layering or integration stages. Some of the common schemes that could be exploited by criminals are:
- Setting up cash-intensive businesses
A business that legitimately transacts large amounts of cash, for example, restaurant, grocery, car washes or taxi companies. Money launderers can use the account to deposit both business proceeds and illegally obtained money. It is difficult to verify the source of funds due to poor record keeping.
- Smurfing/ Structuring to hide under the radar
It is a classic money laundering scheme where a larger cash sum is broken into smaller, less suspicious amounts and moved across countries to avoid detection, usually in the form of business transactions.
- Use of shell companies and trusts to conceal ownership
Shell companies are corporation without active business operations or significant assets. Trusts are also frequently misused by illicit actors to conceal ownership information. The lack of ownership transparency gives fraudsters opportunities to hide ill-gained funds and bypass Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) regulations.
- Laundering of illegal proceeds using high value assets
This scheme occurs when an individual or companies purchases high value assets with illegally obtained money, then sells it off to make the profits as legitimate income. Criminals particularly like assets that are high in value, easily transacted, and can preserve the value over a long period of time. Hence, assets like real estates, precious stones and precious metals are hot favorites for criminals.
How do professional firms prevent money laundering activities?
1. Deny criminals the secrecy through identity checks and risk assessment
Verification of customers’ identity and risk assessment is the key to controls and mitigate money laundering risks. Professional firms should verify customers’ identity, including the name, date of birth, address and additional information, with ID documents at onboarding. This is to ensure that the customer and beneficial owners are indeed who they say they are.
After creating the customer profile, AML/CFT screening and Customer Due Diligence (CDD) are required to check if a customer is Special Interest Person (SIP) / Special Interest Entity (SIE), Politically Exposed Person (PEP) or Relatives and Close Associates (RCA).
The four factors of country, customer, product/ service and delivery/ distribution channel should be considered for the risk assessment. For higher-risk business and transactions, particularly those listed above, firms should be aware of the account transaction consistency, beneficial ownership and location, for a more comprehensive and appropriate consideration to money laundering/terrorism financing and sanction risks. If there are suspicious cases, Enhanced Due Diligence (EDD) is necessary for further investigation.
2. AML Control Measures and Record-keeping
Firms should formulate methodology and AML red flag indicators for assessing, monitoring and mitigating money laundering/terrorism financing risks. Scrutinizing accounts and transactions is necessary for specific types of business and transactions, by making enquiries, requesting documents proofs or declaration, and checking if they are commensurate with clients’ financial profiles.
Proper documentation and record-keeping of both the initial CDD assessment and any updated information and explanations are required for audit trail purposes. The risk assessment and decisions relating to transactions, workflow procedures and red flags should be appropriately documented and kept up-to-date.
3. Ongoing Monitoring (OM) and Reporting
It is important to manage and monitor the risks associated with customers on an ongoing basis throughout the relationship. Ongoing monitoring could keep professional firms alert to activities which appear to be unusual or suspicious for further examination and investigation. Whenever there are known or suspicious illicit activities, Suspicious Transaction Reports (STRs) should be filed with the local enforcement authority in a timely manner.
Effective and efficient way to carry out AML procedures and controls
Performing screening, CDD and ongoing monitoring manually are time-consuming and tedious. To be more productive and save time for business development, professional firms are encouraged to leverage innovative technology, such as commercial AML/CFT screening tools, for complying the regulatory requirements.
One such AML screening tool would be SentroWeb-DJ. With its reputable and comprehensive Dow Jones’s AML databases, you can conduct a search for your client within seconds. All the searched names will be automatically monitored on a daily basis and alerts will be sent to you when there are any changes on their status.
- Sanctions screening (SIPs, SIEs, PEPs, RCAs)
- Customer Due Diligence (CDD)
- Automated ongoing monitoring
- Dashboards management
- Staff Training
- Click to see the FATF’s page about Money Laundering
- Click to see the United Nations Office on Drugs and Crime (UNODC) estimation on annual amount of money laundered
- Click for details of SentroWeb-DJ AML/CFT screening solution
- First ever North Korean national extradited to U.S. for money laundering charges – Implications for professional firms with clients in cross-border business
- [Public Webinar] Hong Kong Anti-Money Laundering/ Countering-Terrorist Financing (AML/CTF)
- The Most Common Money Laundering Schemes — How Professional Firms Stay ahead of criminal activity?