Money Laundering Using Financial Businesses: Insightful Guide About Money Laundering In Financial Business

Financial businesses are usually the ones who are most frequently misused for money laundering purposes. Money laundering using financial business especially the larger money laundering cases almost always involve a financial business, usually a bank.  But there are other types of financial businesses that might be misused for money laundering purposes.  This includes nonbank financial institutions such as money services businesses and the credit card industry.  

We will talk about five exemplary methods of money laundering through these financial businesses.  However, you should be aware that these are exemplary methods and that the money laundering process is extremely complex. 

Money Laundering Using Financial Businesses

It is important to note that, in reality, there is often an overlap in the three stages of money laundering.  As in some financial crimes, there is no requirement for the illegal funds to be “placed”.

Money Laundering Using Financial Business

Method 1: Complex Wire Transfers

The first method is using wire transfers.  This is quite a simple and everyday banking product.  Still, a simple wire transfer remains among the methods used by criminals to move a large volume of money.  By making cash advances on a stolen credit card, criminals can initiate unauthorized domestic or international wire transfers.  Then, funds can be placed into an account established to receive the transfers.

Money launderers also use wire transfers in the second stage of the laundering process, the layering stage.  The goal is to move the funds from one account to another, from one bank to another, or from one jurisdiction to another.  Each layer of transactions makes it more difficult for law enforcement and investigative agencies to trace the origin of the funds.

To avoid detection in either stage, the money launderer may take basic precautions.  Examples include varying the transaction amounts, keeping the amounts relatively small and under applicable reporting thresholds, and, where possible, using reputable organizations.

It seems too simple to be true and rather trivial.  Still, wire transfers remain the number one method for money laundering.  But professional money launderers can make these simple electronic transfers incredibly complicated by remitting a large number of funds, splitting them, comingling them, using different banks in different countries.  It can get complicated.

Let’s consider one example.  The Italian mafia organization Ndrangheta, which is considered one of the world’s largest criminal organizations, executes an average of 90 transactions per money laundering operation.

Method 2: Private Banking Accounts

The second method involves using private banking accounts.  Private banking provides highly personalized and confidential products and services to wealthy clients at fees based on assets under management. 

The more assets you have from your clients, the more money you make in fees.  Private banking often operates semi-autonomously from other parts of a bank.  Banks often engage in private banking activities because it is highly profitable for them, but this also leads to fierce competition in the market.  Because a typical private banking client is also fairly wealthy and economically, socially, or politically powerful, private banking is exposed to a higher risk of money laundering.

Imagine this; as a private banking client, you must be somewhat wealthy, which successful criminals are, so they fit the typical client type.  Because banks make good money with private banking clients, they might not look too much into the details of the funds’ origin.  Potentially, they are somewhat concerned on the one hand, but on the other hand, they want to manage the assets. 

Once the criminal has become a bank client, he finds himself in a department that operates more or less on its own.  The bankers usually don’t want to be inconvenient for private banking clients and cater to their every financial need.  If the criminal then introduces the element of pressure on the bankers, they have great leverage.  The bankers don’t want to lose the assets, as this would harm their bonuses.

In the past, private bankers have helped money launderers in many cases to launder the proceeds of illegal activities.  For example, Two private bankers formerly employed by American Express Bank International were convicted of money laundering for the Mexican drug cartel of Juan Garcia Abrego.

Method 3: Credit Cards

The third method involves the use of credit cards.  Let me say this first: Credit card accounts are not likely to be used in the initial placement stage of money laundering because the industry generally restricts cash payments.  They are more likely to be used in the layering or integration stages.  For example, money launderers prepay credit cards with funds they have already placed in the financial system.  Prepaying credit cards creates a balance on them.

It’s a simple as that.  The money launders, then ask for a refund of the prepayment and create a layer.  The money launderer can then use the funds of the prepayment to purchase a good.  If someone asks where the funds are coming from, the money launderer can refer to the credit card refund.

Method 4: Money Services Businesses

The next methods involved the so-called money services businesses.  These businesses are businesses that include the transmission or conversion of currencies.  They typically provide forex exchange services, money transmission, or check-cashing.  The latter is more common in some countries and less common in others.  For example, money launderers use money remitters and currency exchanges to make the funds available to the criminal organization at the destination country in the local currency.  The launderer/broker then sells the criminal dollars to foreign business people wishing to make legitimate purchases of goods for export.  And on the other end, the money comes out clean.  It can be claimed as proceeds from a forex transaction in conjunction with an import-export-deal.

Method 5: Smurfing Scheme

Last but not least, let’s look at the Smurfing Scheme.  Smurfing refers to the practice of distributing small amounts of a larger cash horde to a series of partners who then deposit the money in incremental amounts.  Smurfing is used to get around the currency reporting requirements that banks must observe in many countries.  Small amounts that come from many partners are less likely to trigger an automatic report

The placement stage starts with the cash being distributed through a network of people who can be trusted to deposit the money back again on schedule.  Larger criminal organizations are more likely to use this strategy because they already possess a network of compliant members.

This scheme’s layering stage happens as the money is deposited back into one or several accounts.  More advanced smurfing schemes will attempt to ensure that the money is deposited in ways that avoid automatic detection.  The cash must not only be deposited in small amounts but varying amounts and at different intervals.  

The money can be extracted as it is moved back into the account.  While this scheme avoids automatic detection and reporting, it is not as safe as some schemes.  If the deposits do come under scrutiny, it may be difficult for the launderer to explain why the deposits were made.  

How Does Money Laundering Impact a Business

Money laundering is a multibillion-dollar industry that makes it much more difficult for honest businesses to compete in the market because money launderers frequently provide products or services at less than market value. Money laundering or a failure to implement reasonable anti-laundering policies can result in the revocation of a business charter or government licenses where a financial institution or business is also regulated by the government.

Businesses that associate with people, countries, or entities that launder money may also face fines. ING, the Royal Bank of Scotland, Barclays, and Lloyds Banking Group are among the institutions that have been fined for their involvement in money-laundering transactions in countries such as Iran, Libya, and Sudan.

Final Thoughts

Money laundering is defined as the process of creating the illusion that large sums of money obtained from serious crimes came from a legitimate source. Laundering is frequently accomplished through criminal activities such as drug trafficking or terrorist activities. It is estimated that over $800 billion is laundered each year.

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