Money laundering refers to the camouflaging of funds criminals have so far earned from illegal sources and activities. Fraudsters target banks, businesses, and other firms to flow their funds and make them look legit. The source of money can be selling drugs, illegal trade of valuable artifacts, human trafficking, weapon smuggling, and stolen assets such as gold. These criminal activities not only compromise integrity of banks but also expose them to regulatory restrictions.
In order to ensure secure transactions, funds transfers, account opening, and other operations, banks need to incorporate better anti money laundering measures. While criminals exploit these institutions, AI-powered digital onboarding services place restrictions in their way. The blog covers types of money laundering and how AML solutions help banks combat them.
AML Security Solutions – Shedding Light on Types of Money Laundering
Criminals integrate their illicit funds into banks to convert them into clean money. With advanced techniques at their disposal, it becomes easier for them to dodge AML security checks. Furthermore, fraudsters use banks to conceal the source of their funds to steer clear of regulatory checks. The availability of digital banking solutions and lax AML compliance checks is further helping criminals launder big sums of money.
Keeping in view the increase in criminal activities where a total of 2%-5% of the world’s total GDP is lost to money laundering schemes, regulatory bodies are making effort to overcome this menace. Therefore, the EU put forth Sixth Anti-Money Laundering Directive (6AMLD) and FATF documented 40 Recommendations regarding AML verification to combat this dramatic rise.
Moving on, banks serve as the largest financial institutions as they facilitate millions of transactions every day. Simultaneously it increases their chances of vulnerability to organized financial crimes. Therefore, it has become crucial for banks to verify identities, perform customer due diligence, and take other necessary precautions. However, despite the AML compliance checks, criminals somehow manage to launder money. The next section provides details regarding the stages of this malicious activity.
Placements involve bypassing the AML screening processes and flowing illicit funds across banks by using transactions, wire transfers, and deposits. Industries like gaming, cryptocurrency, and others also facilitate this stage of money laundering as they are directly affiliated with the banks. Furthermore, keeping this in view, regulatory bides have set some thresholds or limits for making transactions.
Money transfers exceeding this limit are actually the red flag of suspicious activity. By detecting this, banks can report the transaction to regulatory bodies so that they can take legal action. Moving on, cross-border payments through banks also adds as a way of money laundering. While using synthetic identities and fake sources of funds, criminals steer clear of the AML compliance checks.
Furthermore, to escape the transaction threshold, criminals purchase high-value products such as gold, vehicles, antique items, and much more. However, with robust AML solutions in place, banks can validate the source of funds in the first place while tracking activities to prevent unforeseen chances of money laundering.
Layering refers to a breakdown of transactions and use of multiple banks to escape the threshold restriction. Criminals often use this technique to make money transfers while staying within the set limits. This helps them confuse AML monitoring process and flow their funds easily through banks. Layering is the most complex and hard-to-detect technique in all stages of money laundering.
Furthermore, due to availability of advanced tools such as Photoshop, criminals easily forge documents to escape identity validation and anti-money laundering checks. Further pathways fraudsters use to commit layering include;
- Multiple inter-bank transactions
- Smurfing – structured withdrawals and deposits
- Use of different currencies
- Establishing shell companies
- Use of money “mules”
- Making huge investments in businesses with lax regulatory checks such as car washes, art galleries, and currency exchanges
Integration is the process where criminals use legit transactions to dodge AML systems and move their illicit funds across different banks. They are then reused as money coming from legit sources. This makes differentiating between illicit and legitimate funds challenging. Furthermore, criminals escape the anti-money laundering regulatory checks and re-enter their funds into banks. Methods fraudsters most commonly use for integration involves;
- Using upfront of legit companies
- Fraud loan schemes
- Real estate investment
- Goods trading
- Foreign bank complicity
- Property sale/purchase
- Insurance scams
- False export/important invoices
The digital shifts in financial infrastructure and advent of online banking are increasing the need for banks to employ more efficient AML solutions. While criminals deploy several stages of money laundering to escape suspicious detection, institutions need to place restrictions on their way.
Otherwise, banks can face hefty non-compliance fines as well as huge losses to integrity. Digital payments, e-transactions, and cross-border funds transfers are increasing the need for better digital onboarding solutions that accurately validate customers’ identities. Hence, AI-powered AML compliance solutions are banks’ combatting measures against money launderers.