People who engage in money laundering attempt to conceal the origins of funds they obtain illegally by siphoning them through legally operating companies, foreign banks, or legitimate investments.
Criminals must launder the proceeds of criminal enterprises like drug trafficking, embezzlement, and corruption, otherwise, they can’t spend the money on legal purchases.
Through money laundering, criminals conceal the origins of their ill-gotten profits to hinder or make asset recovery impossible. Cryptocurrency Forensic specialists must work with the authorities to untangle the money laundering web and obtain the asset forfeiture documents they need to recover the funds.
By tackling money laundering, Cryptocurrency Forensic Specialists contribute to the integrity of the financial system. They help authorities track down criminals, punish them, and prevent them from using illegally obtained proceeds.
This article discusses the subtleties of money laundering, the role financial institutions may have in it, and the impact of this criminal practice on asset recovery.
What is Money Laundering?
Money laundering is the practice of disguising illegally obtained funds as legitimate, legal money. Criminals engage in money laundering to ensure that they can use funds obtained from drug trafficking, fraud, or theft, to purchase goods and services legally.
To launder money, criminals can resort to real estate or business investments, networks of bank accounts, virtual currencies, or shell businesses. Money laundering is a way for criminals to prevent asset recovery. As such, it represents a considerable headache for private and governmental asset recovery agencies.
Types of Money Laundering
Criminals can resort to a variety of money laundering methods. Only their creativity and available means limit their options in this respect.
Some common types of money laundering are:
- Structuring bank transactions to avoid detection.
- Investing in legitimate businesses and organizations.
- Using intermediaries for money transfers to disguise the true origins of the funds.
How Does Money Laundering Work?
Money laundering does not operate by a strict structure or agreed rules. Most money laundering involves the following three stages, however.
- Placement. Criminals identify a money laundering opportunity in the financial system and move their illegally acquired funds to take advantage of it. They might make investments, deposit their money in a bank somewhere, or buy real estate and other types of assets.
- Layering. Layering is the money laundering stage specifically designed to confuse Cryptocurrency Forensic Specialists, obfuscating the origin and trail of funds. When layering, money launderers move the money between bank accounts, make investments in foreign countries, or take advantage of the relative anonymity of cryptocurrencies.
- Re-integration. Following the previous two stages, money-laundering crooks reintroduce their “clean” and seemingly legitimate funds to the financial system. They may cash out investments, sell assets, pay off debts, or make additional investments.
Some of the techniques that allow criminals to go through these stages and launder their money are:
- Using trading to obfuscate the trail and origins of funds. Setting up a series of international trades, complete with invoices and receipts depicting fictitious trades, is one way to launder money. Untangling the web of trades that make up trade-based layering is difficult and time-consuming.
- Taking advantage of reporting rules. Criminals often break up large sums of money into smaller chunks as they transfer them from one bank account to another. Many banks do not report smaller transfers to the authorities, and such transfers are less likely to raise red flags money laundering-wise.
- Involving other individuals in the scheme. Breaking up large sums and trusting bits of it to different individuals to launder can make money laundering schemes more effective and difficult to break up.
- Setting up shell companies. Crooks set up business entities, the sole purpose of which is to move money back and forth to launder it. Such business entities may conduct other transactions to mask their true purpose.
The Impact of Money Laundering on Asset Recovery
Money laundering is the archenemy of asset recovery. At the very least, it can make it difficult for Cryptocurrency Forensic Specialists to return stolen funds to their rightful owners. In some cases, it may be impossible to complete the recovery.
Money launderers can set up intricate networks of offshore bank accounts, shell companies, and other opaque financial elements. Cryptocurrencies also represent an option for money launderers looking to make funds disappear here and appear legitimately somewhere else.
Interestingly, sometimes large and well-established financial institutions engage in money laundering.
- During the 80s, the Bank of Credit and Commerce International (BCCI) engaged in illegal activities and money laundering. When they shut down the bank in 1991, regulators found it impossible to recover its assets due to the complex web of financial artifices it had used.
- In Malaysia, the prime minister was involved in a corruption scandal concerning a state-owned investment fund created in 2009. The official and the other parties involved stole billions of dollars from the fund until 2015 when their activities came to light. Due to the advanced money laundering techniques the perpetrators used, the authorities failed to recover all of the embezzled money to this day.
The Role of Financial Institutions
As all-important linchpins of the financial system, financial institutions play an essential role in discouraging, preventing, and busting money laundering. Here’s how this role plays out:
- Compliance programs. The law requires financial institutions to have procedures and programs that allow them to identify and thwart money laundering attempts.
- Monitoring transactions. Financial institutions have systems in place, including AI algorithms, that allow them to detect suspicious patterns in transactions.
- Reporting. If they notice suspicious transactions, financial institutions must notify the appropriate authorities. The Financial Crimes Enforcement Network is one such authority in the US.
- Customer identity verification. Financial institutions must know the identities of their customers. To this end, they must implement strict verification procedures.
Deutsche Bank noticed suspicious transactions at the Russian embassy in Moldova in 2016. Having flagged and reported the suspicious transactions, the bank facilitated the later arrest of several individuals involved in the money laundering scheme.
In 2015, HSBC reported a series of suspicious transactions to the authorities. It turned out that the accounts involved in the money laundering belonged to Mexican cartel members. The authorities arrested several individuals tied to the scheme and recovered millions of dollars from their accounts.
The Importance of Collaboration in Tackling Money Laundering
The only way to effectively fight money laundering is for financial institutions, investigation agencies, and the authorities to cooperate. Here’s what that cooperation looks like in concrete terms:
- The involved entities share information. Banks report suspicious activities. Investigation agencies share the results of their investigations with the authorities.
- Freezing assets to facilitate recovery. Only authorities can issue the orders required to freeze and seize stolen assets. To work effectively, investigation agencies must obtain the necessary subpoenas and seizure orders.
- Investigation. Investigation and law enforcement agencies need a starting point for their investigations. Banks can provide such starting points by reporting suspicious activities.
- Assistance in legal proceedings. If authorities decide to bring criminal or civil charges against the perpetrators, banks will have to provide evidence to support the case.
In the 2015 Malaysia corruption and embezzlement scandal, many banks, the authorities of several countries, and asset recovery agents cooperated to extradite individuals, track down the stolen funds, and recover them.
Strategies for Tackling Money Laundering in Asset Recovery
The strategies asset recovery agencies use to bust money laundering schemes and recover funds are straightforward.
- They trace the funds using transaction records or blockchain and exchange data in cases involving cryptocurrencies.
- Once they find the assets, they cooperate with law enforcement to freeze, seize, and restore them to their rightful owners.
- They cooperate with law enforcement, sharing data about their investigations and getting the necessary subpoenas when they need them.
- International cooperation is also part of asset recovery. Agents can trace funds to any country and cooperate with the local authorities to recover them.
Here’s how technology can help asset recovery agents complete their objectives:
- Data analysis
- Using AI to enhance pattern recognition and data analysis capabilities
- Predictive analytics
- Know-your-customer compliance
- Blockchain analysis tools
The above-detailed 2015 Malaysia money laundering scandal is a textbook example of how international asset recovery works against money laundering.
Asset recovery agencies and technology play critical roles in combating money laundering and other forms of financial crime worldwide.
By cooperating with financial institutions and the authorities, asset recovery agents can effectively trace, freeze, seize, and recover funds criminals have stolen. The obvious goal in this sense is to minimize opportunities for those looking to disguise the proceeds of their crimes as legally-obtained money.
We offer complimentary consultations to determine if our Asset Tracing, Recovery Assistance, and Intelligence Services are suitable for your case.