Money laundering, the most discussed term in the financial sector. It not only causes troubles for businesses but also causes reputational damages for countries. The global watchdog put countries on grey lists and blacklists over the weak compliance with AML regulations. Countries have to make stringent AML rules and monitor businesses in their territories for better compliance. The anti-money laundering integration is becoming inevitable in this era, where they’re more sophisticated attempts of financial crimes.
Money Laundering: A Cancer to the Financial System
The shielding of original illegal sources of money and giving a legitimate one using legal business and ways is known as money laundering. The reason behind this practice is that the money earned from illegal ways is not acceptable in the financial system. Whenever a person goes to a bank to deposit his money, it will ask him for the source. As the sources are illegal, he can’t present them to the bank. The funds having sources like human trafficking, drug dealing, arms sale, prostitution, and corruption needed to be laundered for easy usage in the system.
Money launderers choose different businesses, they just want a complicated business structure and complex financial records. They manipulate the financial records of the business, a restaurant is a common example of it. The owner can increase the number of monthly customers and the number of bills easily. As the bills are paid by various people in a smaller amount, manipulating them is much easier.
Money laundering is a three-stage process, as described below:
This is the first and most vulnerable stage, this is a very sensitive stage because money has the highest risk of being spotted as illegal. The funds enter the system through multiple ways e.g forex exchanges, property business, money mules, loan replacements, and smuggling.
Forex Exchanges deal with converting currencies and sending them offshore at the same time. This is the ideal condition for money laundering, as their funds can be easily converted and transmitted to the other country.
Properties are purchased and then resold to cover the source. The property business is not much regulated and also does have proper ownership. Buildings can be bought through front companies and frontmen. Knowing the owner of the assets is a difficult task in this case. Money launderers choose properties having high prices so that the large amount can be laundered in a go.
Huge loans are requested from banks and loan corporations. Then these loans are repaid with a mixture of white and black money. The blending is done in such a way that the exact amount of black money can’t be calculated.
As the amount of illegal money is heavy, it is divided into smaller chunks to avoid suspicion. Smurfs carry broken money and deposit it in the bank accounts. Two approaches are used in smurfing:
- Depositing money in the same account but different timings
- Transferring the cash to a different account at once
Smurfs are sometimes the employees of a financial institution that makes the process easier. They do not have a share in the amount but are paid accordingly. Money launderers hire smurfs that have small-scale businesses and blend their illicit funds into their businesses.
The funds entered the system in the first stage and circulated in this stage. For example, the money deposited in the banks is then transferred into other accounts multiple times. By doing so, the link with the source breaks, and the investigation becomes harder for law enforcement agencies.
In this updated world, where digital channels are used for payment transfer. They can also be used for layering illegal funds.
The money is extracted back from the system. Now the funds are not illegal anymore, they have all the documented proofs for its legitimacy. Among all the other two stages, this is the easiest. No association with the illegal sources creates ease in getting it back from the system.
Anti-Money Laundering Integration
Anti-money laundering practices are utilized for combating the illicit flows of cash in the system. These are the set of practices and regulations against money laundering. First, the customer is verified by presenting their identity documents. Then he is screened against global criminal lists. The process is known as AML screening.
Wrapping it Up
The rise in money laundering can be controlled through automated AML solutions. They will verify and screen customers in real-time. The process is quick, convenient, and AI-powered giving the most effective and reliable results.