The Financial Conduct Authority (FCA) fined Santander UK £107.7 million after finding they had repeatedly failed to monitor and maintain their AML processes between 2012 and 2017. Having ineffective systems and poor process management ultimately led to serious money laundering risks.

Financial institutions and businesses can prevent and avoid financial crime by understanding money laundering schemes and structures. Knowing their processes and habits can help you stay more vigilant if illegal and suspicious activity occurs.

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What is structuring in money laundering?

Structuring in money laundering is a strategy used to avoid detection by authorities when sending funds into the financial system. This technique involves splitting large amounts of cash into smaller, less conspicuous amounts.

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Structuring vs Smurfing

Breaking down a large financial transaction into multiple transactions can be purposely done to conceal illicit funds or avoid paying tax obligations. These can be defined as structuring and smurfing, and while others might use these terms interchangeably, there is a difference.

Smurfing is a form of structuring, however, not all structuring necessarily involves smurfing. At the end of the day, both practices are illegal and are methods that evade anti-money laundering (AML) regulations.

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What structuring does

The goal: Structuring can be done for different reasons, but it is ultimately a strategy to hide the main source of illicit funds or to avoid tax obligations.

How it's done: This activity breaks down large funds into smaller transactions to avoid reporting requirements from financial institutions or government bodies.

For instance, many countries have financial institutions that require reports to authorities on cash transactions when they hit a threshold. In the US, this amount is $10,000. If money launderers want to conceal this, they will divide the sum into smaller amounts less than the threshold so as not to trigger any reporting and avoid detection.

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What smurfing does

The goal: Smurfing can be considered a form of structuring. It is done to intentionally avoid regulatory requirements and prevent the trigger of suspicious activity reports (SAR).

How it's done: This type of structuring involves using multiple accounts or individuals referred to as "smurfs" to perform smaller transactions across many locations. They can deposit from various local branches or even use offshore bank deposits to make distinguishing the true source of funds harder.

For example, an individual acquires $200,000 in illegally obtained funds and wants to go unnoticed by authorities. The money launderer can recruit 20 individuals or smurfs to make multiple deposits by giving them $10,000 each. They can then put the money into various accounts without exceeding the reporting threshold. After this is done, they will filter the money back into the money launderer's accounts, which can be used for personal gain.

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Three Stages of Money Laundering

The money laundering scheme may vary depending on the complexity of an individual or organization's approach to filtering large transactions. Generally, however, there are three common stages of concealing suspicious activities. Namely, these are placement, layering, and integration.

Each stage serves a specific purpose and is used to disguise the origins of illegally obtained money, making it appear as if it came from a legitimate source.

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1. Placement

This is the initial stage of the money laundering process. It can also be called "dirty" money, often obtained from criminal activities and introduced into the financial system. Because it is so close to its criminal or illegal origin, it is at the highest risk of detection. This is where splitting and scaling the funds through multiple transactions comes in.

The execution

The first step of the process that avoids triggering a suspicious activity report, is making multiple cash deposits into bank accounts. This can also include purchasing money orders or prepaid cards, and smuggling cash in foreign currencies to deposit in financial markets with more lax regulations.

Another often-used method is utilizing cash-intensive businesses such as casinos, bars, and even convenience stores. The smaller transactions can be done regularly as these types of businesses have a high volume of cash transactions occurring on a daily basis.

The purpose

The goal of this stage is to spread the illegal proceeds out of the money launderer or the main criminal beneficiary's hands. Turning the funds into a more legitimate-looking form with transactions even further from their true origin contributes to making the tracing process difficult.

This can be the most challenging for organized crime, especially if they are new to operations, as there is much room to make mistakes. Syndicates, however, may move through more inconspicuously.

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2. Layering

Once the money is in a financial institution, the layering process begins. This involves moving the money through various financial transactions to obscure and further separate it from its origins. In other words, it is intentionally meant to confuse the paper trail law enforcers often use for tracing.

The execution

At this stage, illegally obtained funds are blended with legitimate money. The money can also be rotated within several bank accounts. They can be hidden under the guise of paying for goods and services. Often, structuring transactions for this intent involves international bank accounts.

The most common choices for placing money are investing in financial products, purchasing assets through intermediaries, or converting money into cryptocurrencies.

The purpose

Embedding illegitimate funds within legitimate financial institutions can effectively make it harder for the Financial Crimes Enforcement Network to trace. This is also the easier stage for criminals to conduct because there is a smaller window of opportunity for error.

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3. Integration

The final stage involves reintegrating the laundered money back into the economy to make it appear legitimate. This could involve using the money to fund other legal activities without any suspicion.

The execution

Once the money is difficult to trace or has been transferred to legal businesses, the funds can be used on luxury expenses. This includes real estate, business ventures, or long-term investment vehicles. They can also be used for future illegal activities.

The purpose

Integration completes the laundering process by allowing the criminal to use the funds freely without the risk of legal repercussions tied to the original illegal activity.

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Detecting Suspicious Activities

When a financial institution suspects individuals or customers of participating in smurfing and structuring money laundering activities, they must file a suspicious activity report and submit it to the Financial Crimes Enforcement Network (FinCEN). This does, of course, require vigilance and a comprehensive approach to detect and prevent illegal activities from occurring.

Here are some effective ways to detect them.

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Transaction monitoring

The best way to go about transaction monitoring is to employ the right transaction monitoring software. Ensuring it has automated detection to check transactions real-time can help you spot patterns that could indicate illegal or suspicious activity.

This can also identify anomalies in customer behavior. The right tool can help you discern whether a customer's transactions are typical or unusual.

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KYB

Know Your Business (KYB) is an extension of the Know Your Customer (KYC) principle, specifically for dealing with business clients. KYB processes are crucial for AML compliance, particularly when financial institutions or other regulated entities engage with corporate customers.

With the right KYB process in place, financial institutions can accurately verify the legal status of a business. This is done by thoroughly checking corporate documentations, background checks, and transaction patterns.

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AI and Machine Learning

With advanced analytics from artificial intelligence and machine learning algorithms weaved into an AML compliance software, businesses can analyze vast amounts of transaction data to identify patterns and correlations that human analysts may miss. These technologies are increasingly used to enhance the detection of complex money laundering schemes, including structuring and smurfing.

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The Indicators of Money Laundering

Today, money laundering can be quite sophisticated and hidden within seemingly normal financial activities done online. Fortunately, there are indicators, also known as "red flags," that don't necessarily prove that money laundering is occurring, but they warrant further investigation.

Here are some common indicators:

• Unusual transaction patterns that link to the same account
• Lack of transparency on the source of large funds
• Complex or unusual business structures
• Use of intermediaries to conduct transactions
• Over-reliance with using cash transactions

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Using an AML Compliance Platform for Early Detection

In a time when most people can enjoy frequent online and in-person transactions, it can be challenging to detect structuring and smurfing methods to launder money. However, Safeguarding financial institutions' integrity can be much easier with AML compliance software embedded into the business.

Choosing an AML software powered by AI can be even more beneficial in preventing money laundering. With it, you can automate the transaction monitoring process, advanced data analysis, risk assessment management, and even KYB with KYC processes. Vespia is an AML compliance software that enforces all of these early detection and prevention practices. Ready to work with an efficient AML tool to protect your business and clients? Sign up for a Demo today.

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