Types of Money Laundering Schemes
Money laundering involves making money from illegal activities and using loopholes to legitimize the money. Money laundering takes different forms. Some of the ways that lead to money laundering include drug trafficking, fraud, corruption, terrorism, and other unlawful activities. Failure to comply with money laundering regulations can have serious negative impacts on the economy.
We are going to focus on what money laundering is and the types of money laundering schemes.
What is Money Laundering?
Money laundering is an illegal way of making large amounts of money through criminal activities like drug trafficking, embezzlement, or terrorist activities. Money launderers try to legitimize money from illegal sources while in essence, it is dirty money. Money laundering is a criminal offense that is punishable by law.
Common Types of Money Laundering Schemes
How many types of money laundering? There are 7 main types of money laundering. They include:
1. Trade Based Money Laundering
Trade based money laundering takes advantage of complex international laws and regulations. Money from criminal activities is moved from one account to the other in disguise of trade transactions to try and make it look legitimate. This is done through under or over-invoicing goods and services, invoicing multiple times, or falsely describing goods and services.
Money launderers prefer trade-based money laundering scheme because dirty money usually has a solid paper backing and banks are not likely to notice it. However, banks can flag businesses when they realize a sudden increase in profits. They then go ahead to investigate them.
2. Casino or Online Gambling Laundering
Casinos or online gambling have a reputation for laundering illegal money. Money launderers come to casinos with dirty money and pay for the casino chips using dirty money. They then gamble a bit using dirty money and come out with "clean money" in the name of winning.
Many money launderers use casinos to clean dirty money since it is challenging for financial institutions to really determine the source of that money. However, financial institutions monitor gamblers to ensure the money they deposit into their bank accounts is not from money laundering in disguise by casinos.
3. Bank Laundering
The other type of money laundering is bank laundering. People who own financial institutions can use them to clean illegal money. For instance, if a money launderer owns a stock trading company, he or she can use it to clean dirty money by moving it through the company to another organization. Most of the time, this takes the form of currency exchanges that are hard for banks to detect.
To counter bank laundering, Bank Secrecy Act was created so that financial institutions have to follow reporting requirements to help unravel money launderers. However, even with Bank Secrecy Act, bank laundering still finds its way.
4. Real Estate Laundering
Real estate laundering involves reselling of assets. Real estate assets are used because they involve large amounts of money. Money launders buy real estate properties using money from criminal activities and then quickly sell these assets. They usually have a third party buy the asset. They then deposit the proceeds of the sale in a legitimate bank account. It then becomes hard to trace the origin of the purchasing money.
5. Structuring or Smurfing
Structuring or smurfing is another type of money laundering used by launderers to clean illegal money. This involves splitting large amounts of money into smaller amounts and depositing it into different accounts. This makes it difficult for banks to detect illegal funds.
However, financial institutions can easily detect structuring or smurfing when these small deposits are made frequently within a short time frame. This can trigger them to investigate the source of the money.
Layering is another way used by money launderers. They put the money in different money transactions and transfer the money to different countries to make it difficult for banks to detect money laundering. For instance, dirty money can be put into real estate, then into gambling, and then into gold to make it look legitimate.
When dirty money is sent overseas, it becomes even more challenging to enforce AML transactions. Layering type of money laundering is common with people evading tax, or those wanting to commit cryptocurrency fraud like bitcoin scams.
7. Money Laundering through Cash Businesses
The other type of money laundering scheme is through businesses. Businesses can be used to clean up illegal money. Some companies are started for use to clean illegal money.
For instance, a grocery store can operate by partly doing clean business and partly by being used to clean illegal money. This makes it challenging for law enforcers and banks to detect such business dealings. IRS normally checks business records to detect suspicious activities. They sometimes compare businesses to detect any anomalies.
How to Prevent Money Laundering
There are several ways that can be used to prevent money laundering. They include:
- Know Your Customers. Banks and financial institutions should use KYC. This involves monitoring their activities and clients and flagging any suspicious transactions.
- Criminalization. Governments and law enforcers should criminalize money laundering. There needs to be put in place painful punishments like longer jail terms for money launderers.
- Step up searches using technology. Since many money laundering schemes can go undetected, technology should be developed to help detect money laundering.
- Put in place Anti Money Laundering programs. Businesses and financial institutions need to put in place AML programs to detect and report suspicious financial activities.
- Do risk-based due diligence. Businesses need to do risk-based due diligence on their customers, associates, and consultants. Where the risk is higher, then due diligence is supposed to be even higher. Firms need to provide more details about their dealings.
Summary of Types of Money Laundering Schemes
The above are some of the common money laundering schemes used to clean illegal money. Money laundering is a criminal offense and is punishable by a jail term. Businesses and financial institutions should work in harmony to prevent money laundering. Some of the ways to prevent money laundering are through policies and procedures and the establishment of technologies to detect money laundering.