Money Laundering is an illegal activity where an individual or organization disguises the true source of their income to make it seem legit. The anonymity feature of cryptocurrencies made them a good target for money laundering as criminals can use these assets to hide the illegal origin of their dirty funds.
In this article, we will explain money laundering with a simple example, cover the steps and its usual patterns, and see which regulatory bodies around the globe are responsible for detecting and preventing money laundering activities.
Heisenberg is a rich businessman with many cars and luxury real estate properties but no one really knows what he does for a living. One day, authorities audited his firm and found inconsistencies in cash deposits and an unusual transaction pattern.
They noted that he transferred amounts to his family members under false claims and bought them houses and cars and other properties. This is a classic situation of money laundering where Heisenberg has structured his money into smaller transactions to avoid detection.
let’s look at a second scenario, Pearsons is a logistics company founded in 2020 with clients in high-risk jurisdictions. The company turnover has increased heavily in the last few months. Jimmy, an accountant at the company, noticed some amounts have been transferred from a company in LaLa Land with no physical presence, in other words, a shell company.
His boss has been depositing cash to the accounts and had asked him to make false invoices for those transactions. Jimmy immediately noticed that this was money laundering and he complained to the authorities.
The investigations revealed that the owner of Petersons was getting money from the shell company in LaLa Land was dirty money that was being wired to the Pearsons’ account. What we learned from this scenario is that Jimmy rightfully spotted money laundering and complained to the relevant authorities.
Money laundering is usually done in 3 steps: Placement, Layering, and Integration.
Placement refers to structuring deposits into smaller amounts, currency smuggling, currency exchange, blending funds, and false invoicing. When “Dirty”, AKA illegal money, enters the financial system, it is called placement.
Following Placement, the money goes through a layering process which implies the transfer of funds across various offshore/onshore banks.
Finally, laundering is completed when integration is done in the form of purchasing luxury goods or services.
To combat laundering, several international financial organizations have come up with a standard of rules and regulations for financial platforms to abide by. These are known as Anti-Money Laundering policies or AML Policies.
The main bodies governing AML policies are the following:
As it is a criminal activity, identifying the pattern of activity is important to recognize Money Laundering. Some key patterns to look out for to spot Money laundering are
When there is an unexplainable, unusual, or repetitive transfer of funds
When a customer deposits high values of cash at regular intervals
If the individual or business is trying to hide the true beneficial ownership of the entity or transaction
Or when they Conduct smurfing, which refers to structuring a large amount of money into small/multiple transactions.
You should know that awareness is the best preventive solution against money laundering. DIFX has a well-established AML program along with KYC checks and CDD process prior to onboarding each client and employee.
We also conduct suspicious activity reporting along with an EDD standing (Enhance Due Diligence) as per the requirements. Furthermore, all suspicious activity/client identification/transactions are reported to our Legal and Compliance department. Additionally, DIFX also participates in regular compliance training and workshops.
As a financial platform, it is a business and ethical responsibility to conduct customer due diligence known as CDD to keep the funds safe. To conduct a thorough CDD, the following steps must be done:
The first step is to Identify the Customer by answering the question: who exactly is the customer?
To ensure all these steps are followed for a thorough CDD, a verification process is conducted where the customer’s identity and information are verified. This process is called Know Your Customer or KYC, where the identity is verified for each and every individual customer by verifying their valid Identification.
When the customer is a business, a Know Your Business or KYB is conducted. Here the business needs to provide legal entity incorporation documents to prove authenticity and the identity of the true beneficial owner.