Money Laundering: How Bureaus Help Keep the Dirt Out

Money.  Everybody wants it. Everybody wants a lot of it.

But having money in large amounts of cash raises flags at financial and governmental institutions. The need to appear legal and legit gives rise to a criminal activity known as money laundering, and companies use anti-money laundering (AML) software to combat it.

“Dirty money” from criminal activities is made “clean” through money laundering.

This is Marty Byrde’s cheat-sheet explanation of money laundering from the popular Netflix TV series, Ozark:

Individuals and both blue and white-collar crime syndicates are involved in money laundering activities. Law enforcement agencies and companies around the world have AML measures to discover and prevent money laundering.

Why is money laundering illegal?

Money laundering is considered to be a crime in many jurisdictions. It is illegal because it allows criminals to profit substantially from activities like drug dealing and extortion. Also, as you read above, it involves more than one crime in order to be successful.

While the origin of the money used for laundering is illegal, its act is illegal as well. If the proceeds from illegal activity were not laundered, criminals would be unable to explain their source.

If financial intelligence agencies notice that tax has not been paid or that the criminal is unemployed, it will raise red flags to the authorities who would then launch investigations.

Importance of combating money laundering

Money laundering is illegal, and measures to eliminate it are crucial. AML laws and practices aim to prevent criminals from profiting from money laundering. 

Money laundering  “cleans” the dirty money these criminals make. Putting a stop to these activities benefits society, since illegal activities like drug and human trafficking, smuggling, and extortion pose severe threats to human lives and economies. Making use of AML software can help combat this issue. 

Money laundering vs. tax evasion

Tax evasion occurs when a person deliberately fails to pay taxes and liabilities. It is an illegal activity, and those caught for tax evasion are subject to criminal offenses. It is a federal offense under the Internal Revenue Service tax code.

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Money laundering is used as a way to hide the origin and quantity of income. Through organized crime, money laundering masks illegal income and portrays it as legitimate, erasing the evidence of illegal income completely. 

History of money laundering

Money laundering can be traced back to early Chinese merchants who circled money through various sources and financial transactions to mask their money from government agencies. The term “money laundering” became popular in 1920, during the prohibition era and the early stages of organized crime.

Edward O’Hare, the accountant to American gangster Al Capone, purchased many laundromats and used them as a front for washing money gained from various sources such as liquor distribution. Capone’s connection to these laundromats can be explained as the source of the term “money laundering.”

As drug trafficking increased in the 1980s, so did money laundering, and only during the “war on drugs” era in the United States did money laundering become a more serious offense.

The war on drugs was at a peak in the US during the 1980s. President Ronald Reagan and his administration took strict measures to prevent money laundering, which drug dealers relied on to get access to their drug money. Many laws such as the Money Laundering Control Act of 1986, were established, and money laundering was considered to be a federal crime.

Right after the Vienna Convention, the Financial Action Task Force (FATF) was established in 1989 during the G7 summit. The FATF analyzes money laundering activities and trends. It evaluates preventative steps that government agencies have taken. Thirty countries are a part of the FATF, including the US and the UK.

In the early 2000s, after the attack on September 11th 2001, money laundering faced stricter regulations. The United States passed the Patriot Act. One part of the Patriot Act allowed institutions to increase their AML programs and monitor offshore bank accounts on a higher level. This strengthened the 1986 law by increasing the collaboration between law enforcement and financial institutions.

Since 2010, it has become harder to launder money, but the practice still exists. Many banks around the world are being investigated for being involved with money laundering.

Examples of money laundering

After Al Capone was convicted for tax evasion (since money laundering laws didn’t exist yet), others launched more complex operations to hide proceeds from criminal activities and avoid prosecution.

Meyer Lansky famously deposited heaps of money into offshore accounts in Switzerland and then borrowed them from the same banks. These appeared to be genuine loans that were supported by the illegal cash, and could even be declared for tax deductions.

Another example of money laundering occurred during President Richard Nixon’s re-election campaign. To avoid disclosing financial contributions from anonymous donors, or illegal contributors, the donations were collected and deposited into a bank that didn’t allow the US government to subpoena those records. These funds could later be withdrawn as cashier checks and moved around easily.

How does money laundering work?

Money laundering applies to large amounts of cash. For example, small-time criminals like pickpockets or drug runners do not need to necessarily launder money. When they pay for goods, rent, or utilities in cash, it does not always raise any eyebrows.

Who needs it then? Criminals who need to use large amounts of cash without provoking attention from law enforcement or financial institutions require a money-laundering scheme.  Establishments that get paid mostly in cash, like laundromats or bars are used as fronts.

How does it work?

There are three money laundering stages: placement, layering, and integration.

1. Placement

Significant amounts of cash from crimes like drug and human trafficking require placement. The aim here is to “place” or deposit cash into an account of an intermediary or transfer it using a third person. 

The illegal money is split into multiple parts. This is known as “structuring” or “smurfing”. The criminal deposits small amounts of cash several times at different bank branches to make it appear as if these transactions are not connected. They give it to their immediate relatives or trusted associates or hire a “money mule” who opens a new account and deposits the cash whenever required.

2. Layering

This stage is executed to hide the origin of the cash. While banks are wary of these acts, criminals use more complex methods to achieve their goals. In this stage, the criminal could employ a professional money launderer. Based on the amount of money, the criminal can hire either an individual who is a professional accountant or a team of experts. 

Money mules are important at this stage. All they have to do is to deposit or withdraw the money from their bank.

3. Integration

In this final step, criminals try using the funds incurred from layering to perform legal transactions. The money is used to purchase real estate, investments, or vehicles. They also use this illegal money purchase establishments such as bars, tourism ventures, and other cash-based businesses like catering or entertainment. 

They are likely to employ themselves in fictitious positions to reduce suspicion.

Types of money laundering

While money laundering has different steps, there are different practices it applies to. Here are some of its different types:

Structuring money laundering

This kind of money laundering is known as “smurfing”. It happens when a criminal takes dirty money and breaks it into smaller, less suspicious amounts. They do this by purchasing money orders or cashier’s checks.

Trade-based money laundering

Trade-based laundering is the practice of modifying invoices or business documents to mask the proceeds of crime as “profits from doing business”.

Money generally leaves a paper trail, and banks don’t suspect these profits to be dirty.

However, the Financial Crimes Enforcement Network (FinCEN), and other law enforcement agencies will investigate if banks file a suspicious activity report (SAR) after noticing a substantial increase in profits.

Cash-based money laundering

This type of laundering works by depositing a considerable amount of dirty money, obtained from illegal activities, to a business such as a laundromat, a car wash, a club, or any predominantly cash-based business. The bank will not know whether the cash is dirty, but in certain cases, the criminal owning a cash-based business can incriminate them.

Capture-based money laundering 

When money launderers own a financial institution, it is known as capture-based money laundering. In this instance, the illegal money moves throughout the bank, and shifted to other banks. It’s difficult for the criminal to apply financial sanctions to this money since it moves without much noise.

Casino money laundering 

Winnings from any game in a casino are completely legal and paid in cash. Criminals purchase chips with the illegal money, gamble a small amount, and turn the chips back in for cash. This means that the money turns clean. However, banks are wary of this illegal method and this method can easily raise suspicion.

Real-estate money laundering

Money laundering can occur through real estate businesses as well. A criminal could purchase a property with cash, sell it immediately, and all the profits will be considered legal. This is known as “property-flipping”. It is illegal, and is flagged as suspicious.

Shell company money laundering 

A shell company is an establishment that exists only on paper. Money laundering through trusts and shell companies hides the real owners of the money. These establishments are not required by law to disclose the true owner. Shell companies or trusts are often referred to as “ratholes”.

Transaction-based money laundering

Merchants knowingly or unknowingly processing illegal credit card transactions, or even cryptocurrencies (such as bitcoin) for businesses is known as transaction-based money laundering. This is not a traditional type of money laundering since it uses a payment ecosystem to hide the fact that the transaction ever took place. Examples of this type include using fake websites as a front to launder money.

Electronic money laundering

The rise of the internet and internet-based services since 2000 has provided innovations such as digital banking, payment services, and mobile payments. It has become more difficult to track illegal money transfers. Criminals also use server-masking techniques to hide their IP addresses to stay completely anonymous. Cryptocurrencies such as Bitcoin have also made inroads into money laundering over the last decade. While these illegal methods don't allow the criminal to be completely anonymous, they are untraceable compared to regular transactions.

Combating money laundering

Preventing and combating money laundering is essential. There are AML and counter-terrorist financing (CFT) measures to fight money laundering in the United States. The Group of Seven (G-7) formed the FATF in 1989 to battle money laundering worldwide. It was even expanded to cover the financing of terrorism in the early 2000s. 

The Association of Certified Anti-Money Laundering Specialists (ACAMS) offers a certification course. This helps interested individuals to pursue the course and earn a designation known as "Certified Anti-Money Laundering Specialist" (CAMS).

Preventive measures

To put a stop to dirty money entering the US financial system, Congress passed laws starting in 1970. This is known as the Bank Secrecy Act or BSA. This law requires financial institutions including banks, credit card issuers, and money services to report suspicious transactions.

For example, cash transactions that exceed $10,000 must be reported on a currency transaction report (CTR) to the Department of the Treasury. This information is used by FinCEN.

Criminal measures

Money laundering is a criminal offense in the US. The Money Laundering Control Act of 1986 will be enforced if an individual purposefully intends to conceal transactions, hide large amounts of money, and cover up their sources.

Best anti-money laundering software

Companies use anti-money laundering software to detect and stop suspicious activities by individuals or organizations whose primary motive is to generate income through illegal actions. This software needs to comply with regulations such as the BSA and with the company’s own corporate policies on financial crimes.

To qualify for inclusion in the anti-money laundering category, a software must do the following:

• Use algorithms for fraud detection and risk management
• Provide watch lists of suspicious or potentially suspicious individuals in the industry
• Allow users to assign scores based on risk
• Provide AML documents and reports for compliance
• Provide behavioral models to detect suspicious individuals or organizations
• Offer dashboards with real-time data to allow users to take swift action

* This data was pulled from G2 on April 25, 2022. Some reviews may have been edited for clarity.

1. Refinitive World-Check Risk Intelligence

Refinitive World-Check Risk Intelligence delivers accurate and reliable information to help you make informed decisions. It has hundreds of specialist researchers and analysts across the globe who adhere to the most stringent research guidelines as they collate information from reliable and reputable sources, such as watchlists, government records, and media searches.

What users like:

“The interface of the application is user-friendly. There is no time lag as we get the results in a blink of an eye.”

 - Refinitive World-Check Risk Intelligence review, Amit S.

What users dislike:

“Overall this tool is quite helpful but not an ultimate one, as this required continuous upgrade ensuring new regulatory requirements and new threatening risks are factored in RI application.” 

- Refinitive World-Check Risk Intelligence review, Mohammed Salim A.

2. Trulioo

Trulioo builds trust online to protect your business and customers. Their marketplace of global identity networks, GlobalGateway, helps organizations comply with AML and Customer Due Diligence (CDD) requirements by automating Know Your Customer (KYC) and Know Your Business (KYB) workflows.

What users like:

“We are in the financial services space and use Trulioo to verify clients' identities to meet anti-money laundering requirements. Trulioo works well to verify identity details quickly without going back to our clients to get them to complete more steps. We collect their verification details and put it into Trulioo. It checks those against their credit record quickly, and it's done!” 

- Trulioo review, Adam P.

What users dislike:

“Trulioo attempts to provide services for many countries and it feels like they overextend to provide quantity, not quality. Thus many regions they attempt to service for identity verification result in consistently poor match rates. Also, it does not have the functionality to conduct ongoing list screening, which would be an amazing tool to see them have.” 

- Trulioo review, Paulo D.

3. Sanction Scanner

Sanction Scanner is an anti-money laundering solutions provider. They provide cost-efficient AML solutions that businesses of any size can use. They serve in more than 35 countries with global AML solutions. Companies know their clients, monitor transactions, and check adverse media data with their solutions.

What users like:

“Sanction Scanner helped me reduce my workload, which was something I needed for a long time. Not having to write a report paper feels amazing. Sanction Scanner's reliable data is another plus too.”

- Sanction Scanner review, Henry D.

What users dislike:

“We had trouble with the passwords.  They didn’t send me one. Then I sent them an email and they resolved my issue.”

- Sanction Scanner review, Giorgia T.

4. PassFort

PassFort transforms how compliance professionals work, breaking the compromise between compliance efficiency and excellent customer experiences in the fight against financial crime. Born in the cloud, PassFort’s SaaS solutions define a new wave of RegTech by enabling regulated financial services companies to manage risk, trust, and compliance standards across customer relationships.

What users like:

“I like the efficiency. It has been easy to learn when I joined my company. Also the team is very quick to respond and we can easily make adjustments to our products if we require.” 

- PassFort review, Samuel L.

What users dislike:

“As a very demanding customer of PassFort's, at times we ask for very tight timelines for multiple competing projects. Understandably, the team cannot commit to all requests, but we've found PassFort's willingness to work with us to find agreeable compromises and solutions to be great and has further built on our foundation as partners.”

- PassFort review, Dave C.

5. Encompass

Encompass automates KYC information for major financial, and professional service firms globally. It provides simultaneous, real-time access to multiple sources of a global company, registry, and people information. By using robotic search to discover everything your KYC policy demands, Encompass delivers more efficient processes and faster, safer regulatory compliance.

What users like:

“I love encompass, I am a loan officer and this is our origination software. It is extremely easy to use and integrated throughout all departments of my company. The personas are easy to build to meet my companies specific needs. I also love the fact that out pricing engine is built in so it make shopping for interest rates awesome for the client to understand”

-Encompass review, Roxie V.

What users dislike:

“The UI is a little antiquated but it gets the job done, and it could use some updating.” 

- Encompass review, Katherine E.

Money launderers - FinCEN's after them! 

While money laundering was prominent in the 20th century, it has been difficult to carry out this practice in recent years due to AML laws and the FinCEN.

However, that’s not to say that it does not exist at all. Illegal cash flow still exists, and so do money launderers worldwide. AML measures and software are continuously updated to attempt to get rid of laundering activities once and for all.

Interested in learning more about AML? Learn how artificial intelligence (AI) continuously innovates and influences the banking sector to come up with AML detection techniques.