Money laundering is a serious financial crime that allows criminals to make their illegally obtained money appear legitimate. To do this, they employ various strategies known as money laundering typologies. These are specific methods and patterns designed to exploit weaknesses in the financial system and avoid raising suspicion.

It's critical for businesses, especially those in finance, to understand these typologies in order to develop effective AML procedures and controls. Failure to do so could lead to unknowingly facilitating criminal activity, resulting in reputational damage as well as legal and financial consequences. Let's take a detailed look at some of the most common ways that money is laundered:

Typologies and Methods of Money Laundering

Layering

This involves moving money through various accounts and often multiple banks or countries. The complexity makes it hard to trace the funds back to their criminal source. For example, a criminal might deposit dirty money into one account, transfer it to an offshore account, then move it again to a shell company's account, before finally withdrawing it as seemingly clean funds.

Smurfing/Structuring

Large sums are broken down into smaller amounts and deposited separately to avoid triggering reporting requirements. This makes detection much more difficult. A money launderer might have several individuals (known as "smurfs") deposit $9,000 each into different accounts, staying just under the $10,000 reporting threshold.

Mingling

Dirty money is blended with funds from legitimate businesses, obscuring the illegal portion. A criminal might use a cash-intensive business they own, like a restaurant or car wash, and mix their illegal profits with the business's legitimate earnings. To the outside world, all the money appears to come from the legal enterprise.

Trade-Based Schemes

Fraudulent invoicing, misrepresenting goods, and phantom shipping are used to disguise illicit funds in trade transactions. For instance, a criminal might import goods worth $1 million but use falsified invoices that state the value as $3 million. The extra $2 million is the laundered money.

Shell Companies

These are businesses without real operations, used to hide true ownership and facilitate covert money movement. A criminal could set up a shell company and use it to send and receive funds, making it appear as though the company is engaging in legitimate business transactions.

Offshore Accounts & Tax Havens

Countries with strong secrecy laws or lax regulations are used to hide funds from authorities. A money launderer might transfer their dirty money to a bank account in a country with strict bank secrecy laws, making it very difficult for law enforcement to trace the funds.

Buying & Selling Valuables

Art, antiques, cars and more are purchased with dirty money then resold, making the proceeds seem legitimate. A criminal could buy a rare painting with illicit cash, then sell it through an auction house, receiving a check for the sale that appears to be from a legitimate source.

Real Estate

Properties are bought and sold to launder money, with sale proceeds appearing as legitimate earnings. A money launderer might purchase a property with dirty funds, then quickly sell it. The profits from the sale would appear to be clean income from a real estate transaction.

Abusing Insurance

Over-insuring assets, false claims, and policy manipulation exploits the complex insurance sector to clean funds. For example, a criminal could use dirty money to buy an expensive car, over-insure it, then stage an accident and file a claim, receiving a payout from the insurance company that appears legitimate.

Informal Value Transfers

Systems like hawala move money without formal banking, often leaving no paper trail. A criminal could give cash to a hawala broker in one country, who then contacts a broker in another country. That second broker gives the equivalent amount to the criminal's associate, minus a small commission. No money physically crosses borders and there's often no record of the transaction.

Casinos

Chips are bought with dirty cash, played with briefly, then cashed out as "winnings." A money launderer could take their ill-gotten cash to a casino, buy chips, gamble a small amount, then cash out the remainder. The money would then appear to be gambling winnings.

Other methods

Other methods include:

• Anonymous bearer instruments: These are financial products like bearer bonds that belong to whoever holds them, rather than having a registered owner, making them easy to transfer anonymously.
• Prepaid cards: Criminals can load these with dirty money and spend it like regular debit/credit cards. Since prepaid cards aren't tied directly to a bank account, they're harder to trace.
• Correspondent banking: Money launderers can exploit the relationships between local and foreign banks to move money internationally, obscuring its origins.
• Cash-heavy businesses: Enterprises dealing mainly in cash, like laundromats or nail salons, can easily blend dirty money into their daily takings.
• Precious metals & gems: Criminals can buy gold, diamonds etc. with dirty funds as a way to store value, then resell them to get clean money.
• Diverting NGO funds: Charitable organizations can be deceived into diverting donated funds to criminals, who claim to be legitimate causes.
• Cryptocurrencies: The anonymity of digital currencies like Bitcoin makes them appealing for hiding illicit transactions.

The fight against money laundering requires vigilance from regulators and the private sector. By understanding these typologies, we can better detect and prevent these crimes. Anti-money laundering training is essential for all financial professionals to stay one step ahead of criminals seeking to exploit the system.

How can AML checked help?

Understanding the various typologies that your business is exposed to is crucial when conducting your Money Laundering and Financing of Terrorism (ML/FT) Risk Assessment and designing your overall AML Program. AML Checked has mapped hundreds of typologies against potential vulnerabilities that could be present in a financial services business to ensure that there are no gaps when you are designing your AML Program. Contact us for a free consultation, and we will provide guidance on the best approach to defend your business from financial crimes, including money laundering and the financing of terrorism.