We need to talk about money laundering
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To many of us, money laundering might as well be the practice of throwing the contents of your wallet into the washing machine and letting dollar bills spin in a lavender-scented foam before being hung out to dry carefully in the garden. People in general just aren’t aware of the extent and gravity of the problem.
Money laundering is the practice of turning the profits of illegal activities into legitimate, ‘clean’ money. It’s a crime in virtually every part of the world. Criminals employ all sorts of clever schemes to make their profits untraceable. Drug trafficking, terrorism, embezzlement, and a multitude of other violent and/or corrupt practices are enabled by money laundering, and so causing all sorts of damage not just economically but to the very fabric of global society.
Money launderers have never had so many technological tools at their disposal. There are now so many ways transactions can be obfuscated and rendered impossible to track. Converting and transferring money can be done in a couple of clicks. Thankfully, more and more people both inside and outside the finance industry are waking up to this threat. Because it’s happening everywhere, all the time. Around $1.6 trillion is laundered globally per year, representing 2.7% of the world’s GDP. Right now, as you are reading this article, someone is in the process of eliminating all traces of illegality from a huge sum of money made by nefarious means.
No business is truly safe
If your business is not ‘financial’, don’t think that you’re not in danger. Yes, banks and other financial organizations face the greatest risk as most laundered money ends up being deposited in an account at some point, but with the rise of new payment platforms and virtual currency exchanges, both clean and dirty money can get everywhere, more quickly than ever, and is increasingly likely to make its way into the hands of businesses of all sizes, in all locales.
One day, you may be sure your business partner is a secure, legitimate party; the next, you may come under the scrutiny of a national financial regulator as they investigate a huge money laundering case.
Restaurants, hotels, and even bars can look the part on Trip Advisor, but great ratings for delicious drinks and food may be cleverly masking a front for someone’s primary illegal economic activity. It’s almost impossible to distinguish between illegal gains and funds received from grateful, happy clients. This is because experienced money launderers know exactly how to hide their unlawful incomes.
You don’t want to end up having to fight the fires engulfing your business caused by an unwitting connection to money laundering. Let us give you a heads-up about the process and a few tips to help you beat the money launderers at their own game.
The three stages of money laundering
There’s no one way to check for evidence of money laundering; however, there are certain patterns that you can look out for. It’s useful to know the three main stages: placement, layering, and integration.
The very first step of the money laundering process is to consciously place the money into the financial system. Depositing cash into a bank account is a simple way to allow it to be transferred and manipulated: possession of large amounts of physical cash makes money launderers more vulnerable and suspicious and easier to link to a criminal act. Cash, especially in small denominations, can be carefully counted and put into the financial system where it can go under the radar of authorities. It can also be spent in the retail economy or even smuggled out of the country to an offshore location.
The amounts may still be traceable to the original depositor, so the next stage is to destroy any links to the original owner and mix the illegal funds with legitimate money. A variety of ‘fund-layering’ techniques continue the placement of small amounts into various accounts around the world. Using multiple banks and accounts, working with professional intermediaries, making transactions via big corporations, converting dirty cash into stocks, making wire transfers, or even purchasing and reselling expensive jewelry or pieces of art are all ways that advanced launderers deflect the attention of the authorities.
Finally, the squeaky-clean gains have to be conveyed back to the original owner, again avoiding any kind of closer inspection. The money is now appearing as legally earned and is assimilated into other assets, perhaps as ‘legitimate’ income, property, luxury items, or vehicles.
These three stages may happen separately or simultaneously. Sometimes the money goes through several of these ‘wash cycles’ before the original owner is finally confident enough to receive it. The process depends on the regulations — or lack thereof — in the region(s) in question and the particular techniques employed by the individual money launderer.
Tackling money laundering
There is a standard framework of anti-money laundering (AML) regulations that is applied all around the world. It consists of laws, approaches, and regulations aimed at avoiding a variety of financial crimes and market manipulation.
Ways to tackle money laundering
👉 Know the UBOs of the business
A private person that owns at least 10–25% of a company is known as an Ultimate Beneficial Owner (UBO). It is necessary to know the ownership structure of the company down to the very last individual involved, in order to understand who is benefiting from a given transaction and where the money is going.
Often you may start by looking into a company in the EU but the chain of shareholders will end up leading you to an island in the Caribbean. While businesses often do take advantage of certain jurisdictions’ local tax laws to their advantage, it’s a problem if they’re not completely transparent about it.
👉 Don’t just rely on Google
A quick search is unlikely to offer real proof as to whether a professional-looking website and positive reviews from happy customers are genuine or fake. You often won’t find information that is trustworthy enough to be accepted by regulators. What’s more, different sources may provide contradicting information that will leave you confused.
👉 History is important
No matter how promising a new company may look, its lack of history may point to a shell company that is an intermediary in the process of money laundering between big, trustworthy corporations. Recently established companies are considered higher risk. Make sure you check the history of the owners and look for their ties to other companies and business activities.
Similarly, if a company was founded a while ago but has had no activity for years until its involvement with you, beware.
👉 Check business activity
If you’re working with a business customer or partner, look into the full breadth of their business activities. If you find weapons, drugs, or mining — to name but three examples — you may be entering into the high-risk territory. For instance, if your partner is selling firearms, any legislative changes related to the restriction of arms possession may lead an unscrupulous business owner to panic and unload the goods illegally. And whenever a company is investigated for potential money laundering, it’s likely that connected companies, including yours, may come under suspicion too.
👉 Check the sanctions list
Sanctions are penalties applied by countries against certain groups, businesses, individuals, and even entire countries. Your business partner may be on the list due to its business activities, geography, customers, or partners. Fines and penalties, embargos, punishments, and lawsuits from financial regulators are likely to be heading your way if your partnership breaks any sanctions. Even if your partner is not on a sanctions list themselves, but is connected with a suspicious entity, they can be considered a Special Interest Entity, which can be just as bad as being sanctioned.
These are just a few ways you can start to think about tackling money laundering. There are so many more nuances to consider when setting up your compliance process. At Vespia, formerly KYB Platform, we believe that compliance should be simple, fast, and fully automatic — for any sized team with or without a dedicated compliance department.