Money Laundering: Airing out dirty cash

Criminals will always have to clean dirty money but fraud examiners need to be aware of the common ways many launderers infiltrate financial institutions worldwide.  

Sammy, a drug dealer, has a large load of cash coming in from a sale but he first has to wash the soiled money. One of his agents, Mike, transports, redenominates, and stores the money at a bank at the country's border. Mike later transfers the money to another agent, Hans, across the border through another bank. Yet another agent, Sarah, transfers the cash back across the border to the launderer's account in a third bank.1 

This scheme, the cross-border cash movement, is just one of the several that money launderers use to bleach the stains out of dirty cash. Fraud examiners should know as many as possible.

No one is sure when the concept of laundering dirty money first started, but according to the International Monetary Fund, "the aggregate size of money laundering in the world could be somewhere between 2 and 5 percent of the world's gross domestic product. Using 1996 statistics, these percentages would indicate that money laundering ranged between US Dollar (USD) 590 billion and USD 1.5 trillion. The lower figure (USD 590 billion) is roughly equivalent to the value of the total output of an economy the size of Spain."

The possible social and political costs caused by the infiltration of dirty money or proceeds from illicit sources are almost endless: illegal arms sales, smuggling, drug trafficking, prostitution rings, embezzlement, insider trading, bribery, tax-related economic crimes, cyber crimes, and other fraudulent businesses. Money launderers, who infiltrate financial institutions with dirty money, acquire control of large sectors of the economy through investments and can destroy the functioning of a financial system and undermine its integrity. Following is a review of the most common methods of money laundering techniques that all fraud examiners should study.

Money transfers
Money launderers use the several transfer methods - electronic, telegraphic, telephone, or cyber - to exploit lapses in the documentation trail.

The specifics
In most cases, agent A makes a deposit at bank A, agent B collects the funds from bank A, and then remits the funds via two or more banks accounts controlled by the launderer within or across the border.

Often, the launderer takes advantage of the periodic banker lapses in the documentation trail. Because the launderer engages in such a complex web of transactions to lose the documentation trail, the bank is considered a victim in this circumstance. But there are instances when bankers deliberately alter, misrepresent, or manipulate the documentation procedures to help the launderer conceal the illegal origins of such funds.

Proxy bank account creation
This involves the launderer recruiting established professionals from various trades, fields, and businesses to use their accounts to deposit money and then transfer it again into other accounts controlled by the launderer based on an agreed-upon commission.

The specifics
Agent A, who offers professional services or goods in trade, allows agent B who works for the launderer, to deposit funds into his account at bank A, which will be transferred into an account at bank B controlled by the launderer. Agent A charges commission for the use of his accounts for laundering the money.

Alternative remittance system
Agents deposit money into various bank accounts and then subsequently transfer it into trading or service company accounts through overseas alternative remittance services and then to other bank accounts via telegraphic transfers purchased with cash or checks. (A trading or service firm can be used as a front company. Alternative remittance services transfer money outside normal or formal financial institution procedures in countries where these institutions are inadequate or don't exist.)

The specifics
Agent A of the money launderer deposits money in bank A and later transfers it to trading or service company A, which will transfer the money to an account controlled by the launderer in bank B.

In most cases, bankers' fears and suspicion are reduced if money transfer transactions involve trading or service companies. Therefore, launderers often prefer this type of transfer to conceal the funds' origin. The bank is presumed a victim if it didn't knowingly facilitate the concealment of the transaction.

Temporary bank accounts
The launderer transfers the proceeds to a financial institution and requests that they be placed into a temporary account because he says he hasn't yet decided into which account he wants to place them. A few days later, he instructs the bank to pay out the money in cash or with a bank check. The transaction isn't registered on the launderer's books.

The specifics
The launderer sometimes may use the temporary bank account for more than one transaction. Afterwards, he will ask the bank to transfer the funds to accounts (at the same bank or another), which had been opened on behalf of companies controlled by the launderer. He'll use false invoices for fictitious deliveries to these accounts to justify the transfers.

Investigators have discovered, in most cases, that banks fall as easy prey to launderers using this technique because temporary accounts are intended to be suspense items in bank books. But there are instances in which such transactions are arranged with bank officials as insider agents. The bank collects money from the launderer via an outside agent and deposits it through the client account officer's bank account. The money is later transferred into a "concentration account" of the bank and paid to the launderer with a check drawn on the bank's name and not the client's name, which conceals the launderer's identity and origin of the funds.

Bureau de change and bank accounts
The launderer's agent opens accounts with fictitious names at a bureau de change (currency exchange outlet) or bank. In this case, the accounts are opened solely and wholly to facilitate money laundering.

The specifics
The launderer opens the accounts at the bureau de change to change large volumes of lower denomination currency into higher denominations for onward deposit into a designated bank account and subsequent transfer to another account controlled by the launderer.

In most cases, the bank and the bureau de change are potential victims because transactions of this nature always involve large amounts of cash and multiple bank accounts and agents. Insider agents often are used.

Cross-border cash movement
The money launderer's agent transports large amounts of cash to borders, changes it into higher denominations, and deposits it into a bank account. The agent then transfers the funds to another agent across the border and remits them back to the launderer's bank account across the border.

The specifics
Agent A transports, redenominates, and stores cash at bank A at the border and later transfers the money to agent B across the border through bank B. Agent C transfers the money back across the border via bank C to another account controlled by the launderer.

The banks and other financial institutions engaged in international fund transfer are commonly used. Therefore, such institutions located on border towns are more vulnerable to launders.

Market derivatives
In this method, a stock broker must be willing to allocate genuinely losing trades to an account in which criminal proceeds are deposited. Instead of relying on misleading or false documentation, the broker uses the genuine loss-marking documentation to be allocated to the dirty money account holder.

The specifics
The crooked stock broker opens two or more accounts for the launderer. Criminal proceeds are deposited in account A, which is used only for buying shares on the trading floor and resold to account B at whatever price. Irrespective of the closing prices for the deals transacted, account A will be losing trades to account B. With this, the broker has laundered the criminal proceeds.

The stock exchange is a potential victim because of the broker's gross compromise of professional responsibility.

Insurance policies and real estate
Launderers often invest their criminal proceeds into real estate though it can be difficult to do so. To do it safely and conceal the criminal origin of their proceeds, launderers purchase an insurance policy and then use it as a mortgage or collateral to acquire loan facility from a bank before buying a property.

The specifics
A launderer or his agent purchases an insurance policy from insurance company A, uses that policy to acquire a mortgage loan with bank A. He then invests the loan facility acquired from bank A to purchase a choice property.

The bank and the insurance company are both potential victims because the launderer has designed a complex web to conceal the illegal origin of his criminal funds.

Front company or false loans scheme
Launderers use front companies as agents to transfer criminal proceeds into offshore accounts. Or the launderer arranges a false loan scheme granted to his front company to legitimize the criminal proceeds as loans received from a false loan scheme.

The specifics
Front company A applies for a loan facility, controlled by the launderer or his agent, from bank A. The loan is granted and paid by the bank to the front company. The front company then deposits its illegal proceeds as loan repayments. Or the front company acquires a false loan scheme arranged through a subsidiary or false technical partnership scheme and has such criminal proceeds paid or transferred into its accounts under the guise of the false scheme.

The potential victims are perhaps the banks where such transactions were undertaken. Investigators of these financial transactions will have to be sure that they have no reason to doubt the occurrence of any insider collaboration to assist the launderer.

Shell corporations
Launderers use criminal proceeds to purchase property, land, or machinery of which part could be paid in cash and the remainder could be obtained through a mortgage. Then the launderer immediately sells the property for a nominal sum to a shell corporation, which is controlled by the launderer. The shell corporation would then resell the property to an innocent third party for the original purchase price. So the launderer conceals his proceeds of crime in the shell corporation and disguises the origin of the original purchase funds.

The specifics
The launderer purchases property A and sells it to shell corporation B which he controls for any value lower than the purchase price. Then the launderer resells it to a third party for the original purchase price or higher.

The potential victim is the bank that granted the mortgage because possible criminal proceeds were used to acquire the mortgage facility to complete the transaction.

Shell corporations and secretarial companies
The launderer purchases a shell company within a different jurisdiction from the launderer's home base, which will be operated by a secretarial company through his instruction. (A secretarial company offers services such as registrations, tax returns, clearance services, and other functions to mostly foreign-based companies that don't have branch offices.) The shell company opens a bank account, which will be used to receive cashier orders and bank drafts that were purchased by cash in the country of origin. The launderer, via his agent, controls several companies through the same secretarial company, which will be operated for legitimate and criminal purposes. Operating under different jurisdictions, the launderer conceals his criminal proceeds by avoiding face-to-face banking or keeping a detailed customer profile, which is supposed to originate from his country of jurisdiction. (The launderer deliberately has escaped the "now your customer" procedures in the local bank within the jurisdiction where the transaction occurred.)

The potential victims are the jurisdictions where such shell corporations are operated by the criminal cartel. The banking institutions involved in financial transactions of multinational corporations and subsidiaries need greater compliance.

Handy list
Criminals always will have to clean dirty money. Fraud examiners have to be aware of the common ways money launderers infiltrate financial institutions. When examining cases, keep this list of common laundering schemes handy.

References
R. Mark Bortner. Cyber laundering: Anonymous Digital Cash & Money Laundering. Presented as first final paper requirement for "Law and the Internet (Law 745)," a seminar at the University of Miami School of Law, 1996.

Financial Action Task Force (FATF). Money Laundering Typology Exercise: Typology Reports 1999-2000. 

International Monetary Fund. Financial System Abuse, Financial Crimes and Money Laundering - 1996. 

The Economist. "Less Secretive." July 27, 2000. Cited from the printed edition by the International Law Institute, Washington, D.C.

The Economist. "That Infernal Washing Machine." July 24, 1997. Cited from the printed edition by the International Law Institute, Washington, D.C.

I. B. Gashinbaki. Bank Failure: The Worst Corporate Crisis of the Millennium in Nigeria. (2000) Frankad Publisher. Lagos, Nigeria.

I. B. Gashinbaki, CFE, is senior officer with the Economic and Financial Crime Commission in Abuja, Nigeria. He is the author of "Bank Failure: The Worst Corporate Crisis of the Millennium in Nigeria."

1 This fictitious case is used for illustrative purposes.