Money Laundering, Terrorist Financing Typologies

AML/ CFT Introduction – A Recap

As you may have learnt from our introductory post on AML CFT, money laundering  (or “ML”) is a severe financial crime that governments globally attempt to eradicate. To recap and put it simply, money laundering is the process of taking money that was made illegally and making it appear legal. In a similar vein, ‘financing of terrorism’ (or “FT”) is another financial crime that involves the collection or provision of funds for terrorist purposes. To combat it, countering the financing of terrorism (or “CFT”)  methods work to prevent terrorist organisations from acquiring financing to carry out their aims. It is important to note that while financing for these aims could come from legitimate sources, they may also be obtained through illegal activities such as trafficking in weapons.

To combat these crimes, it is imperative to learn the importance of ML and Terrorism Typologies. Typologies study the various methods, techniques, schemes and instruments criminals use to conceal, launder or move illicit funds.

What are Typologies?

In AML/CFT, the term ‘typologies’ refers to the diverse techniques used to launder money or finance terrorism. Criminals indulging in these practices often develop obscure methods to launder money and finance terrorism. Identifying key typologies thus becomes imperative to combat the crimes and serves as a helpful way for an AML/CFT compliance professional to build a set of indicators or red flags to keep your eyes out on performing their compliance obligations. For example, one common indicator or typology pertains to false identification or identity fraud. This common typology often leads ML and FT experts to syndicates carrying out ML. 

Before we proceed, it is essential to note that the prevailing country's economy, financial markets, and AML CFT regimes influence money laundering and terrorism financing typologies in any given location. With this in mind, as the financial sector innovates more and more, so do the methods of criminals, and so do the ML & FT typologies. Resultantly, typologies vary from place to place and over time.

Annual Typology Reports 

Finance Intelligence Units or FIUs (as you may recall from our  AML CFT Acronyms post) publish yearly reports on ML & FT typologies based on their experiences while enforcing AML/CFT compliance measures. These reports act as useful reference material for executing an AML/CFT compliance risk-based approach.

With that in mind, we have put together a rough list of common typologies based on a few Annual Typology Reports that you can consult on the go. Here are a few typologies that regulatory authorities keep an eye out for

Shell Companies

A shell company is an inactive company used as a mask for financial reasons or kept dormant for future use in some other capacity. Shell firms exist only on paper but typically have no physical staff, location or revenue. They may, however, have bank accounts or investments. 

The secrecy associated with these companies and criminals' purposeful attempts to escape regulatory inspection allows room for nefarious activities such as money laundering.

Predicate Offences

For the uninitiated, a predicate offence is any criminal activity that predicates the need for money laundering to utilise the proceeds of crime. Here are a few that are relevant:

  • Forgery
  • Breach of trust by a public officer
  • Fraudulent manipulation of stock exchange transactions
  • Extortion
  • Betting, pool-selling and bookmaking
  • Theft
  • Bribery of judicial officers
  • Possession of counterfeit money
  • Robbery
  • Illegal Acts
  • Murder
  • Fraud
  • Child pornography
  • Money increment scheme
  • Fraud committed on the government
  • Maintenance of a betting house

Suspicious Use of Foreign Bank Accounts 

Financial criminals often use foreign bank accounts where financial regulations may be less punitive to move funds away from being intercepted by domestic authorities. They may also obscure the identity of persons controlling illicit funds in these bank accounts.

Purchase of Portable Valuable Commodities

A technique of ML/TF is to purchase instruments to conceal ownership or to move value without detection and avoid AML/CFT controls, for example, moving diamonds to another jurisdiction. Regulatory authorities look out for:

  • Large purchases of gold with transportation of the gold conducted by an individual, or
  • Physical carrying of cash or negotiable instruments out of the country.

Suspicious Customer Behaviour 

Financial transitions inconsistent with the customer's profile are often an accurate indicator of suspicious financial behaviour. Keep an eye out for – 

  • Use of multiple names to conduct a similar activity
  • Cheques are written regularly to companies and individuals not linked to the account
  • Associations with multiple accounts under multiple names
  • Frequent early repayments of loans
  • High volume of transactions within a short period
  • Frequent depositing of winning gambling cheques; this might be followed by immediate withdrawal of funds in cash
  • Use of multiple names to conduct a similar activity
  • Elaborate movement of funds through different accounts
  • Early surrender of insurance policy incurring a substantial loss
  • Unexplained income inconsistent with the person or organisation’s economic situation

Usage of Large Amounts of Cash

The use of large cash deposits and transactions can be an indicator of ML/FT if your business deals with cash. Take, for example, the following situations – 

  • Withdrawal of a large amount of funds in cash
  • Obtained loan and repaid balance in cash
  • Use of safety deposit box to store large amounts of cash
  • Large cash deposits into company accounts
  • Large amounts of cash from unexplained sources
  • Large cash deposits used for investment
  • Large amounts of currency exchanged for traveller's cheques

Smurfing

Although an innocent-sounding phenomenon, smurfing refers to a money-laundering technique that involves the structuring of large amounts of cash into multiple small transactions. These transfers generally avoid detection as they fall within the threshold reporting obligations. Some smurfing indicators are – 

  • Multiple cheques cashed into one bank account
  • Multiple issuances of stored value cards and debit cards accessed offshore
  • Multiple transactions of a similar nature on the same day in different locations
  • Multiple individuals sending funds to one beneficiary

Abuse of non-profit organisations (NPOs)

  • Not-for-profit organisations can be used to raise terrorist funds, obscure the source and nature of funds and distribute terrorist finances. With this in mind, regulatory authorities are mindful of large funds transferred to charities.

Currency Exchanges

Currency exchanges can assist with smuggling crime proceeds to another jurisdiction or exploit low reporting requirements on currency exchange houses to minimise the risk of detection.

Wire Transfers to Tax Haven Countries

Tax havens are countries where there are no or only nominal taxes, allowing non-residents to escape high taxes. Offshore tax havens and financial centres, many of which are located within small, economically developing island nations, have long been recognised for providing highly favourable economic advantages to foreign corporations and individuals. These offshore havens, however, have recently become the centre of intense international criticism, given their role in eroding foreign tax revenues by offering markedly low tax rates and facilitating domestic tax evasion and money laundering through strict financial secrecy laws.

Alternative and Unregistered Remittance Services

Underground banking or informal and unregulated funding systems often remit cash discreetly. With this in mind, it is cause for concern when the following takes place –

  • Depositing multiple large amounts of cash and receiving multiple cheques drawn on that account
  • Use of a remittance dealer to send large cash amounts overseas
  • Frequent remittance of bearer negotiable instruments, e.g. bank drafts, offshore

We understand that AML/CFT is a complex topic with many parts and nuances that you may have trouble grasping. If you’re having trouble applying and assessing your organisation’s vulnerability to ML and FT, feel free to reach out to us - we’d be happy to help! One AML is a team of specialised analysts here to guide you through the regulations. Book a free 15-minute audit today!

Disclaimer

This information is only to serve as a guide for those living and doing business in New Zealand and is not a substitute for the provisions or information in the “Anti-Money Laundering and Countering Financing of Terrorism Act 2009” (AML CFT Act) or any of its allied statutes and provisions. The above information is not a substitute for independent, professional legal advice but is for general information only. The examples in the guidelines are merely suggestions, are not exhaustive, and are illustrative.

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