How do people get caught laundering money?

Some of the steps financial institutions, their employees, and others can take to detect digital laundering include: Assembling details of possible and known networks of mules. Monitoring high-volume and suspicious transactions. Ensuring that the know your client (KYC) protocols are adhered to on a regular basis.

investopedia.com - What Methods are Used to Launder Money? - Investopedia

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What Is Money Laundering?

Money laundering is the process of illegally making a large amount of money and hiding it to make it look like it was generated from legitimate sources. The money normally comes from activities like drug and sex trafficking, terrorist activities, and other illicit means. It is considered dirty and is laundered to make it look like it came from a legal source(s). Money laundering is a serious crime that carries heavy penalties, including jail time. There are three steps used to disguise the source of illegally earned money and make it usable: Placement: The money is introduced into the financial system, usually by breaking it into many different deposits and investments. The money is introduced into the financial system, usually by breaking it into many different deposits and investments. Layering: The money is shuffled around to create distance between it and the perpetrators. The money is shuffled around to create distance between it and the perpetrators. Integration: The money is then brought back to the perpetrators as legitimate income or clean money. Now that we've helped you understand the basics of money laundering, we're going to go through how to recognize whether money is legitimately made or if it was generated from illegal sources. We've highlighted laundering methods and how the digital age plays into these schemes. Key Takeaways Money laundering involves hiding large amounts of money made illegally to make it look like it was generated legitimately. Money laundering is a serious crime that carries heavy penalties, including jail time. Fraudsters often use smurfs, mules, and shells to play, layer, and integrate their money into the financial system. The digital age helps money launderers stay under the radar and one step ahead of financial authorities. Financial institutions, corporations, their employees, and other individuals can help fight money laundering by adhering to anti-money laundering policies and other policies, such as strict identification protocols.

Smurfs, Mules, and Shells

Money launderers typically use methods to avoid detection and hide the real sources from where their money actually comes. Some of the most common methods are outlined below.

Smurfs

Contrary to what you may believe, this doesn't have anything to do with the classic children's cartoon. Smurf is the term used to describe a money launderer who wants to avoid government scrutiny. They do this by using the placement, layering, and integration steps to hide the money. Large sums of money are deposited in different banks using smaller transactions. Financial institutions are required to report large deposits that exceed $10,000 or those they deem suspicious to financial regulators and authorities. By depositing smaller amounts of money or smurfing, money launderers are able to go under the radar and make it look like the money they deposit is legitimately sourced.

Mules

Mules are individuals who are hired by money launderers to help carry out their laundering schemes. Money mules are just like drug mules, who may be in on the scheme or may be recruited unknowingly. But rather than smuggling drugs, these individuals carry money. People who are recruited are usually approached by money launderers and often don't have any knowledge of the scheme. They may be enticed by being promised jobs that pay large sums of money in return. Criminals often target people who usually fall under the radar, including those who don't have a criminal record or the financially vulnerable. One of the mule's responsibilities is to open up bank accounts and deposit the money into them. Money launderers then begin making wire transfers and using currency exchanges to move the money around the financial system to avoid further detection.

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Shells

Shells or shell corporations are companies that don't have any business activity or operations, physical operations, assets, or employees. Many shells are legitimate business entities that are used to raise money and fund the operations of a startup company or to manage a merger or acquisition. But other cases involve the creation of shells by fraudsters who want to hide illegal activities and/or avoid paying taxes. Many individuals do this by setting up shell companies in jurisdictions that guarantee anonymity, allowing them to make deposits and transfer money into different accounts. Shells also allow people to avoid reporting income and paying taxes to authorities like the Internal Revenue Service (IRS).

Other Methods

Other than trying to hide the money through deposits and corporations, money launderers also choose to avoid detection by: Investing in mobile commodities such as gems and gold that can be easily moved to other jurisdictions

Discretely investing in and selling valuable assets such as real estate

Gambling

Counterfeiting

The maximum penalty for money laundering is $500,000 or twice the property value involved in the transaction (whichever is greater), or a maximum 20-year prison sentence—or both.

Money Laundering in the Digital Age

While the methods listed above are still common, money launderers often find modern ways to operate, putting a new spin on the old crime by making use of the internet to avoid detection. A key element of money laundering is flying under the radar. The use of the internet allows money launderers to easily avoid detection. The rise of online banking institutions, anonymous online payment services, peer-to-peer transfers using mobile phones, and the use of virtual currencies such as Bitcoin makes detecting the illegal transfer of money ever more difficult. Here are a few ways that technology is helping further money laundering activities: The use of proxy servers and anonymizing software. These tools make integration almost impossible to detect because money can be transferred or withdrawn with little or no trace of an IP address. Money can be laundered through online auctions and sales, gambling websites, and even virtual gaming sites. Ill-gotten money is converted into the currency that is used on these sites, then transferred back into real, usable, and untraceable clean money. A spin on phishing scams for a victim's bank account. Fraudsters scam victims under the pretense of depositing a fictitious lottery winning or international inheritance. Instead, they make multiple deposits into the account with the stipulation that a portion of the money must then be transferred to another account. Some of the world's largest banks have been implicated in money laundering schemes, including HSBC, Wachovia, and Standard Chartered.

Detecting Digital Money Laundering

Financial regulators have anti-money laundering (AML) policies in place. Banks and other financial institutions are required to comply with these procedures to ensure a safe system, where criminal activities are detected and reported to authorities. For instance, banks must report large deposits over $10,000 and any suspicious activity that takes place within an individual or corporation's account, whether that's multiple deposits, frequent wire transfers, and currency exchanges, among others. Some of these laws are proving to be slower to catch up to these digital crimes. Cybercrime has become one of the top priorities for the Treasury's Financial Crimes Enforcement Network (FinCEN). In a June 2021 memo, the agency outlined the growing threat of money laundering vis cryptocurrencies and cyberattacks such as ransomware that can illegally funnel digital funds overseas.

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Some of the steps financial institutions, their employees, and others can take to detect digital laundering include:

Assembling details of possible and known networks of mules

Monitoring high-volume and suspicious transactions

Ensuring that the know your client (KYC) protocols are adhered to on a regular basis

Verifying funds, including their sources and beneficiaries

Putting tight identification procedures in place before allowing (certain) transactions to go through online Some countries have gone even further by banning certain practices, such as the use of cryptocurrencies. Although investors and advisors firmly insist that using digital currencies is very complex, some financial regulators say that they can dismantle the global financial system. But changes have been made to increase the level of transparency related to cryptocurrencies, many of which provide(d) anonymity to users because of the way they are treated and traded. What Are the Stages of Money Laundering? There are three common stages to money laundering. The first is called placement, where fraudsters first introduce money obtained from illegal activities into the financial system. They do this by breaking up large amounts into smaller deposits in multiple bank accounts. The second stage is layering, which involves moving the money around to distance it from the fraudsters. The final stage is called integration, where the money is brought back to the perpetrators as clean money. What Are Common Ways to Launder Money? The traditional forms of laundering money, including smurfing, using mules, and opening shell corporations. Other methods include buying and selling commodities, investing in various assets like real estate, gambling, and counterfeiting. The rise of digital technology also makes it easier to launder money electronically. What Is the Wash Wash Scam? The wash wash scam is a scheme commonly used by scammers who fleece victims by promising them large sums of money in exchange for literally cleaning dirty money. Victims are given fake banknotes that are passed off as being real by dyed. The fraudster promises their victims a big cut if they pay a certain fee and purchase a special cleanser. Scammers commonly seek out financially vulnerable individuals and the scheme is also called the black money or black dollar scam.

The Bottom Line

The act of hiding money is thousands of years old, and it is the nature of money launderers to attempt to remain undetected by changing their approach, keeping one step ahead of law enforcement, just as international governmental organizations work together to find new ways to detect them.

investopedia.com - What Methods are Used to Launder Money? - Investopedia

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