Money Laundering is actions aiming that the "dirty money" that has been gathered illegally appears to have been obtained legitimately. To simply answer "what is money laundering?", money laundering is the process of turning the profit of illegal financial activity into a legitimate income. Money laundering is the process of concealing the proceeds of crime and integrating them into the legal financial system and also a method used to hide the nature, source, location, situation, and movement of a crime or to give a legitimate source image to the proceeds of crime.
Because of its veiled and underground nature, there is no exact data on the magnitude of laundered money. However, the numbers reached already give an idea of the big picture, which is unfortunate for all.
International and regional authorities such as the Financial Action Task Force (FATF) work to combat money laundering and financing terrorism. There are legislative constructions globally and locally to protect the public and businesses from this kind of criminal activity and fight money laundering. Financial institutions must comply with Anti-Money Laundering (AML) regulations to prevent the spreading of crime and to protect their business from financial and reputational hazards.
What are the Four Stages of Money Laundering?
Money laundering is essential for criminal organizations to use illegally obtained money effectively in the legitimate financial system. The money laundering stages usually consist of four basic steps:
What are the Methods of Money Laundering?
Although there are many ways to launder money, new ones continue to be added to the list. The impact of global digitalization and rapid developments of technology widened the range during the last decades. Today, money laundering is sophisticated, complex, and hard to trace more than ever. Here, there are some traditional and novel methods of it;
- Terrorist Financing: It is the collection of money with both legal and illegal ways to finance terrorist group and their activities. Whereas most money laundering methods depend on illicit money sources, not legitimate sources, this is listed here because of the area of usage of money. This type is generally detected by scanning names in the lists provided by states globally.
- Corruption: This is one of the most common ways of money laundering, with its illegal sources of money. Because of its nature, detection is the hardest step in the AML process. In many countries, high-level government officers, people in the roles of judiciary or legislative bodies, and police and military forces can be involved in corruption.
- Trafficking: Drug and human trafficking are the ways that have the most significant impact of money laundering on society. The line generally starts with third-world countries as suppliers and ends with developed countries. This method includes international connections and wires between businesses. FinCen states that 150 billion dollars are laundered annually via these industries. Syrian and Ukrainian migrations also affected the numbers. The refugees are vulnerable targets of traffickers.
- Cryptocurrency: Digital assets have been involved in our daily and economic lives for ten years. They came with both advantages of technology and higher risks. Until the last one or two years, they were an open and attractive source for money laundering because of a lack of regulation and awareness. However, there is a global tendency to accelerate the process of including them in the legislative system. Additionally, some states consider them a beneficial source of investment. The UK is taking steps to be the first jurisdiction for companies working in this area.
- Cybercrimes: In recent years, sophisticated methods have been applied to fraud and laundering money. Social Engineering and Synthetic Identity Fraud are two of the most common methods under this title. Contrary to other types, cybercrimes are generally conducted by individuals, not by organizations. Like the cryptocurrency market, cybercrimes have risen due to improvements in technology.
- Importation and Exportation: It is a method frequently used in Europe in recent years. It refers to the use of exporting or importing to any country on paper. The transfers of goods never happen, but money is laundered.
- Stock Market: Money can be laundered and displayed as a business by buying stocks or bonds through brokers. This is a unique type because large amounts are seen even though it is not an organizational crime.
- Luxury items: Antiques, paintings, and real estate are taken with money that cannot be transferred. Later, these are sold with foreign currency, and money laundering occurs. Trading luxury items is one of the high-risk fields in terms of money laundering because of its usage as a cover for sources. Therefore, it facilitates laundering.
What Should Businesses Do To Prevent Money Laundering?
- Risk assessment processes are important to identify the risks of the company.
- Tax evasion should be prevented in all steps, from production to consumption.
- Financial transactions should be monitored, especially the anomalies.
- Local governments should be fully authorized in the areas.
- The media should fully support the fight money laundering and against organized crime and should not broadcast to legendary mafia members.
- In the private sector, cartels should be prevented.
- KYB and UBO checks must be conducted to detect shell companies.
- The underground economy should be reduced by eliminating tax-free earnings as much as possible.
- Companies must have a compliance officer or a team.
- All customer transactions must be monitored to detect suspicious activity.
- Businesses can protect themselves from financial crimes and strengthen AML compliance processes using AML software like Sanction Scanner.
AML Solutions to Combat Money Laundering
AML Name Screening
Name screening is the backbone of AML compliance to scan customers during onboarding processes. Sanction Scanner’s product offers name-screening software working with more than 3000 global sanction lists, PEPs Lists, United Nations lists, and Adverse Media Data updated every 15 minutes.
AML Transaction Monitoring
While there has been a significant increase in financial crimes, especially money laundering, it has become very difficult for companies to survive with old, manual, and operational methods. At this very point, Sanction Scanner has implemented the Real-Time Customer Transaction Monitoring product as an AML solution, making it easier for companies to offer machine learning-supported software that allows companies to monitor customers' financial activities for example, instantly, cash transactions between bank accounts, and determine other actions accordingly. This effective AML solution can detect suspicious financial actions and stop investigations to protect your company.
AML Risk Assessment
Another necessary AML solution is the Customer Risk Assessment product, which is developed to visualize strategy and risk management data. Companies can determine the risk levels of the customers based on their own rule sets in accordance with businesses’ needs and working areas, and they can regulate all related transactions mediated by their companies regarding this information. As a result of the evaluation, companies can strengthen the AML compliance of their businesses by learning more about their high-risk customers.