What is Money Laundering and How is it Done? Part 1

This is the first part of a two-part series on the what money laundering is and some of the ways it is done.

            Money Laundering is a step every criminal must take to use money which comes from illegal activity. It includes minor drug dealers from the street and rich white-collar types who launder large amounts of cash. There are a variety of ways in which lawbreakers go about this, each tailored to different needs and amounts of cash. Without laundering money, there is no use of the criminally generated funds. The funds need to be integrated into the financial system to appear legitimate so they can be used to buy goods and services. It is very important for AML professionals to understand how criminals launder money. The two-part article describes some of the most common mechanisms used to achieve this goal. Knowing how the procedure works makes it easier to detect and prevent it.  

Smurfing - when our little blue cartoon friend becomes an ally of a criminal

Smurfing is one of most common tactics used by criminals. Its purpose is to divide dirty money into small amounts to avoid suspicion and then inject it into a financial system. The name is taken from a well-known Belgian cartoon franchise “The Smurfs” created by Pierre Culliford (known as Peyo). In context of money laundering, Smurfs are people, used as intermediaries in the money laundering process. Sometimes they take part in it knowingly, but often they are unaware that their account is being used for illicit purposes or become victims of social engineering. Common tactics used by criminals to exploit so called Smurfs include:

• Making small payments by multiple individuals; small payments often do not require verification of identity; the payments are directed to one account; this way the payments are intended to avoid suspicion; Smurfs often use fake identities.
• Buying money instruments such as money orders or travelers checks and travelling abroad with them
• Using accounts of work immigrants to transfer dirty money, which is later directed to another country where it is supposed to circulate legally in financial system.

It is worth noting that people who engage in such operations as intermediaries are also referred to as “straw men”. It is not uncommon to exploit vulnerable people such as the homeless or the elderly.

Online banking - laundering through social engineering

Online banking is one of the biggest conveniences enabled by the Internet. Gone are the days when we had to visit a local bank or post to make a payment. These days we have the whole banking system literally at our fingertips. From opening an account to transferring large sums of money - we can do it all without even meeting a bank clerk.

Convenient as it surely is, this approach has also a big downside. It creates a huge opportunity to for criminals of all sorts to prey on the money of gullible people. Money launderers are no exception. Using the technique known as social engineering, which involves tricking the user of online banking into believing that the criminal who contacted them is a worker of the bank, a police officer, a close relative, etc. This is intended to build trust and is a strong suggestion that we should believe and cooperate with a person of authority. Another tactic is creating a sense of urgency or a threat, which tricks the victim into believing a criminal and taking the action they are requesting. The goal is gain access to the victim’s bank account. It can be done either by sharing a password or installing software which gives the criminal remote access to victim’s computer.

The end goal for criminals is transferring money from victim’s account to their own. Money launderers tend to be more subtle in this regard. Victims’ accounts are used to make unauthorized payments, which is a way of covering identity of a criminal and laundering money.

Among all categories of users of online banking, older people tend to be the easiest target because they are often less knowledgeable about technology. However, everyone is highly susceptible, because of effectiveness of social engineering or just out of pure greediness. For example, in this era of cryptocurrencies, it is not uncommon for criminals to trick us into believing that we have a certain amount of Bitcoin waiting for us. To unlock it, we just need to share some account details with our helpful “friend” or let him unlock it for us via granting remote access to our computer…

Conclusions? We must always be on guard when interacting with unknown people through internet, especially in context of online banking. We need to spread awareness of methods used by criminals and access our banking services only through approved channels.

Fake identity & anonymized payment services

Faking an identity is a great way for any potential wrongdoer to avoid responsibility for their crimes. In a world of financial crime, it often translates to opening different kinds of bank accounts: for a credit card, deposits, loans, etc., using a mix of real and made-up personal information. This way a new, non-existent identity is created.

This situation is enabled by those financial institutions which have insufficient countermeasures. They don’t check their customers rigorously enough either because of a lack of staff, technology, or because of chasing profits (making it harder for potential customers to open an account can diminish a profit for a bank). This is shortsighted thinking; a bank can suffer significant reputational damage. When suspicious activity gets detected, it may already be too late to properly react. An account connected to a fake identity can be closed very quickly, leaving behind almost no trail to the criminal. Therefore, it is so important for banks to strengthen preventive measures in the early phase of opening a digital account.

Another common technique used by money launderers is using different types of pre-paid cards: credit, debit, or gift. The Internet enables them to buy these cards using fake identities; pre-paid cards can also be purchased with cash. This is a very convenient way to anonymously transfer value and use it in different locations around the world.

Conclusion

This two-part series describes some of the most popular money laundering methods, both traditional and modern; it is in no way exhaustive.

In everyday work of an AML specialist, it is easy to overlook exactly how money laundering is orchestrated. Awareness of methods used by criminals is crucial for professionals in the field and for every participant of today’s digital economy.

Individual people are the weakest link in AML prevention chain. Susceptibility to social engineering as an individual, being prone to corruption as a politician, being unable to establish good legal countermeasures as a society or being reluctant to properly check the background of a transactional partner. This can also empower us. The more knowledgeable about money laundering dangers we have, the more we can counteract. Our awareness can in turn prevent a great deal of human suffering and societal wrongdoing, which results from criminal activity and money laundering.