Money laundering: A pressing global issue
Developments in financial data, cryptocurrencies, tech and communication has allowed money to move anywhere in the world with speed and ease. This makes money laundering an increasing, pressing global issue. The deeper "dirty money" gets into the financial system, the more difficult it is to identify and trace its origin.
The nature of money-laundering makes it difficult to estimate the total amount of money that goes through the "laundry cycle" on a global scale. However, according to the U.N., the amount of money laundered globally in one year is estimated to a 2 - 5% of global GDP, or $800 billion - $2 trillion in current US dollars. Though the margin between those figures is huge, even the lower estimate underlines the seriousness of the problem.
How does it work?
Money laundering is conducted in multiple ways, with skills and innovation of criminals increasing rapidly. However, at a basic level the process of laundering is described in the following steps by the FATF (Financial Action Task Force);
- In the initial - or placement - stage of money laundering, the launderer introduces his illegal profits into the financial system. This might be done by breaking up large amounts of cash into less conspicuous smaller sums that are then deposited directly into a bank account
- After the funds have entered the financial system, the second – or layering – stage takes place. In this phase, the launderer engages in a series of conversions or movements of the funds to distance them from their source.
- Having successfully processed his criminal profits through the first two phases the launderer then moves them to the third stage – integration – in which the funds re-enter the legitimate economy. The launderer might choose to invest the funds into real estate, luxury assets, or business ventures.
Virtual assets money laundering
The FATF argues that while virtual assets and related services can spur financial innovation and efficiency, their distinct features also create new opportunities for money launderers, terrorist financiers, and other criminals to launder their proceeds or finance their illicit activities.
The ability to transact across borders rapidly not only allows criminals to acquire, move, and store assets digitally often outside the regulated financial system, but also to eclipse or hide the origin or destination of the funds and make it harder for reporting entities to identify suspicious activity in a timely manner. These factors add hurdles to the detection and investigation of criminal activity by national authorities.
What is a virtual asset?
The term "virtual asset" refers to any digital representation of value that can be digitally traded, transferred or used for payment. Examples are cryptocurrencies, such as bitcoin.
"Example of misuse of virtual assets in cyber attack"
New, innovative ways of swiftly transferring value around the world has the potential to radically change the financial landscape. However, its speed, global reach and above all - anonymity - also attract those who want to avoid financial audits and inspections by authorities' . Virtual assets have become widely available in the last decade or so, now also being used as payment products. However, without established regulation and oversight, the sector is often still referred to as the "wild west" of the finance industry.
In 2017 the "Wannacry" ransomware attack held thousands of computer systems hostage until the victims paid hackers a ransom in bitcoin. This is just one of the ways virtual assets are being used in money laundering activities, illustrated in the image to the left.
Red flag indicators
The FATF recently released a report with a list of red flag indicators, in relation to virtual assets and money laundering. We've listed a few examples of red flags from the report here;
- Structuring transactions (e.g. exchange or transfer) in small amounts, or in amounts under record-keeping or reporting thresholds, similar to structuring cash transactions.
- Making multiple high-value transactions:
- in short succession, such as within a 24-hour period;
- in a staggered and regular pattern, with no further transactions recorded during a long period afterwards, which is particularly common in ransomware-related cases; or
- to a newly created or to a previously inactive account.
- Conducting a large initial deposit to open a new relationship with a virtual asset service provider and funding the entire deposit the first day it is opened, and that the customer starts to trade the total amount or a large portion of the amount on that same day or the day after, or if the customer withdraws the whole amount the day after.
- Transactions involving the use of multiple virtual assets, or multiple accounts, with no logical business explanation.
- Making frequent transfers in a certain period of time (e.g. a day, a week, a month, etc.) to the same virtual asset account:
- by more than one person;
- from the same IP address by one or more persons; or
- concerning large amounts.
- Incomplete or insufficient KYC information, or a customer declines requests for KYC documents or inquiries regarding source of funds.
Any suspected activity in regards to money laundering or financing of terrorism should be reported to authorities. The examples above are just a few taken from the report. Read the full report from the FATF here!