Unexplored Areas Of Money Laundering

Immediately after September 11, 2001 banking regulations and money laundering legislations were either enacted or amended to impose on financial institutions comprehensive anti-money laundering and anti-terrorist financing compliance and reporting requirements. With the passage of the years, these regulations have become even more stringent the world over as it has increasingly been recognised that an essential part of the fight against crime is to prevent criminals, wherever possible, from legitimising the proceeds of their activities by converting dirty money into clean money.

New money laundering methods are being devised constantly, some simple, some sophisticated. In a number of cases the amounts are relatively small, while others involve millions of dollars. In most instances the money begins as cash, which, from a criminal perspective has the advantage of being anonymous. Unless marked or recorded in some way, it carries no indication of ownership or source and there is no question of its value.

An effective money laundering operation normally follows three stages: Placement introduces the illegitimate cash into the financial system; Layering, involves undertaking multiple transactions to confuse the audit trail and separate the money from its origin and finally, Integration which introduces the laundered money into the legitimate economy, so that it appears to be normal business funds.

If all three processes are successfully completed, the money will appear to have been legitimately obtained. The main opportunity for identifying money laundering operations occurs at the placement and layering stages.

With the worldwide banking community moving into the forefront of war against the financing of terrorism, the banking system has become less accessible to terrorists. As a result they have reverted to trade based financing mechanisms. Two hot areas where laundering of money is possible are the Casino and the Real Estate transactions. In a casino, the transactions could be something like this:

Casino transactions

Many of the following situations would be quite normal in some instances, where in others they may be unusual.

The following scenarios may give reasonable grounds for suspicion:

1)Patrons wanting to exchange large quantities of low denomination notes for higher denominations. This type of activity is particularly suspicious if they do not seem to participate in any of the gaming activities or if they are known to staff to be involved in a business that would normally generate cheques or other instruments, rather than cash.

2)Unusually large amounts of cash exchanged for chips made by a patron whose business is known by casino staff to normally generate cheques or other instruments, rather than cash.

3)Frequent exchange of cash from other currencies to dollars where there appears to be no logical reason for such activity.

4)Patrons whose transactions contain counterfeit notes or forged instruments or whose cash has an unusual appearance or smell.

5)A group of patrons who appear to be acting together and simultaneously, or within a short period of time, use separate cashiers to conduct large cash or foreign exchange transactions.

6)Patrons purchasing large amounts of casino chips, do not gamble or do very little gambling and then attempt to cash the chips for a casino-issued cheque.

7)Patrons buying-in with large amounts of cash at the tables or gaming machines, do not gamble and then cash out at the cashier’s cage.

8)Patrons making verbal statements as to their involvement in criminal activity.

9)Patrons depositing cash, or making wire transfers, with no intention to wager.

10)Patrons establishing and using cheque cashing facilities with no intention to wager.

Real estate transactions

Similar kinds of dealings are common in real estate transactions. The following scenarios may give reasonable grounds for suspicion:

1)Initial deposit is paid by purchaser with a large amount of cash.

2)Initial deposit is paid with a cheque from a third party, for example, an associate or relative (other than a spouse).

3)A purchaser uses a significant amount of cash to close a real estate deal.

4)Property is purchased in the name of a nominee, for example, an associate or relative (other than a spouse).

5)Purchaser refuses to put his/her name on any document associated with the property or uses a different name on contracts, agreements or deposit receipts etc.

6)Client unsatisfactorily explains the last minute substitution of the purchasing party’s name.

7)Client purchases property without inspecting location.

Conclusion: The international community has made the fight against money laundering and financing of terrorism a priority. To combat this menace, over 20 international authorities including FATF (Financing Action Task Force) have formulated recommendations, methodologies and typologies meant for financial service providers. These bodies warn that if banks and financial institutions fail to adhere to recommended compliance guidelines, they would tend to open themselves to operational, legal and reputation risks and consequent costs.

To tackle these risks, the common trend for both large and small financial institutions is to transition from task-oriented compliance programs to process-oriented compliance programs. Process-oriented programs require compliance to be practiced, tested, validated and evolved through out the organization on an ongoing basis. This is necessary since the risk associated with money laundering and terrorism financing is a moving target and is beyond the realm of single point solutions such as AML software applications.

To tackle these risks comprehensively, other solutions needed would include Strong Name Filtering Tools, Watch-List Subscriptions, Customer Due Diligence Automation, KYC Automation, CFT Mechanisms, Market Manipulation Detection, Identity & Other Fraud Detection, Regulatory Reporting etc. The recommended approach is to incrementally tackle each of these dimensions through a quick-turn around software solution deployment and back it up with commencing the compliance culture across the organizational eco-system.

Abdul Aziz - Divas Offshore Software Technologies
abdul@divassoftware.com