AML Transaction Monitoring Overview: Types of crimes being targeted and detected

Introduction

Over recent years the media has paid a lot of attention to money laundering and the huge fines were imposed on financial institutions for their involvement in the process of laundering funds generated by criminals. Usually, money laundering is associated with terrorist financing and diversified criminal activity.

It is incredibly difficult to define which criminal activity is related to the highest amount of laundered money. According to the United Nations Office on Drugs and Crime (“UNODC”), about 2%-5% of global GDP is being laundered, which equals to between USD 800 billion - USD 2 trillion[1]. Margin of error in the estimated amounts is significant as the estimate is based on investigations from recent years and some profits which were laundered might only be identified many years later when the criminal investigation is being conducted.

Very often involvement in criminal activity can be identified by financial institutions while reviewing customer transactions conducted on daily basis or within defined period of time. Unusual customer behavior when submitting the transaction for processing, as well as applying unusual or highly suspicious patterns of transactions, need to be reported by the Bank’s employee to a specially designated national governing body.

Activities that are the source of funds for money laundering are related to illegal actions and businesses. Terrorist financing, however, may be sourced also from legal business activities. What terrorist financing and money laundering both have in common is their aim to prevent the authorities from identifying the connection between the origins of funds and destination.

This article focuses on 5 illegal actions: tax evasion, antiquities trafficking, wildlife smuggling, human trafficking and drug trafficking and on presenting the ways to identify the methods used for laundering funds generated through these illegal activities.

Tax evasion

Leaks of company register agents’ customer data (such as Panama Papers from Mossack Fonseca) identified lots of incidents or suspicions related to tax evasion.[2][3] Although the international losses due to tax evasion are extremely hard to measure and each case requires a very long investigation from a national tax authority, the amounts are considered to be over few billion dollars annually. For example between 2016-2017 in Australia, the Australian Taxation Office managed to collect net USD 5,6 billion in extra tax due to more scrutiny in taxation of multinational corporations[4].

Among the methods used to avoid taxes the most common are shell companies or front companies incorporated in offshore jurisdictions, very often the ones with high bank secrecy laws and low taxes.

According to the 2018 Financial Secrecy Index, jurisdictions considered as having the highest Secrecy Score (defined as lowest level of banking system’s transparency, measured based on scanty banking data existence, limitation in the effective access to this data, and/or sanctioned breach of banking secrecy) are Vanatu, Antigua and Barbuda, United Arab Emirates, Bahamas, Paraguay, Brunei, Maldives, Thailand, Kenya and Liberia[5].

While countries with the highest Financial Secrecy Index values (defined as Secrecy Scores multiplied by jurisdictions’ share in global financial services export) are: Switzerland, USA, Cayman Islands, Hong Kong, Singapore, Luxembourg, Germany, Taiwan, United Arab Emirates and Guernsey[5]. These countries are vulnerable to people seeking secrecy in their banking activities and are also commonly used as the country of incorporation for shell companies.

Common patterns applied for tax evasion purposes that can be identified in transaction monitoring include shell companies in offshore jurisdictions which are remitting/receiving multiple wire transfers to or from other entities with similar profiles and locations. Sometimes, these transactions can also be supported with false invoices or receipts showing traded goods. It might happen that the entity will be providing the same invoice to several financial institutions, claiming that the conducted transactions were part of this business deal.

Antiquities trafficking

High value and luxury products are famous for being related to laundering of funds, as it's value is subjective and additionally can be considered as a type of investment. Criminals, and especially terrorists in unstable regions for example ISIS in Palmyra and Syria, are generating huge profits from illegal sale of antiquities. According to Global Financial Integrity Report from 2018, the annual revenue generated from the illicit trade in cultural property is estimated at approximately USD 1.2 billion to USD 1.6 billion[6].

Countries with a high level of poverty, political instability or in armed conflict provide the greatest opportunity for trafficked products to be sourced, since the opportunities to source such items are high - very often these jurisdictions have extensive cultural heritage, but due numerous internal problems the protection of cultural heritage is not developed or limited. Middle East (Egypt, Iraq, Syria and Yemen), Africa (Libya, Mali) and Eastern Asia (Cambodia, Myanmar, Laos, Vietnam) often top the lists of most likely sources for trafficked antiquities.[7][8]

Antiquities trafficking covers wide range of activities – illicit looting, thefts from museums, trafficking of goods with falsified documentation such as certificates of origin, invoices and movement of artifacts for significant distances. For citizens from the poorest regions the possibility to earn additional or any funds is crucial to meet basic needs. These individuals function as middlemen. They are looking for potentially valuable products and are selling them on street markets or directly to people who ordered a specific artifact.

A significant number of these artifacts are being bought by representatives of criminal organizations, who are buying products at a very low price and then using their knowledge of the real value of the goods to sell them for significantly higher prices. Products such as coins or pieces of jewellery are easy to transport and often do not raise suspicion once put on sale on internet auctions[9].

Internet auctions can be considered as higher risk, as the attached picture and product description do not indicate the origin and the information provided is not sufficient to indicate it was a part of illegal cultural heritage looting. Payments to middlemen are usually conducted in cash, so no significant transaction evidence can be identified by financial institutions.

The buyers are often people, organizations or even the most popular museums in the world[10] that are unaware of the true origin of the artifact they are purchasing. Typical ways to launder funds related to an antiquities sale by a trafficker or organized crime group involve shell companies, which provide anonymity and multiple payment methods – wire transfers, checks, cash. Affiliated shell companies may for some time trade the antiquities between each other to make goods appear legitimate.

Wildlife smuggling

The annual retail value of the illegal wildlife trade is estimated to be between USD 5 billion and USD 23 billion[11], which makes the wildlife smuggling one of the most profitable businesses for criminals. It is usually caused by demand for rare, protected or endangered species (both animals and plants), which cannot be legally traded due to protection laws. Animals can be smuggled alive or the precious parts of the animal (such as ivory, rhino horns or pangolins scales) are removed before trafficking often resulting in the death of the animal.

Similar to antiquities trafficking, smuggled wildlife pieces are sourced mostly from developing countries. Depending on the type of smuggled species the sourcing countries differ. According to TRAFFIC, a non-governmental organization, the most trafficked species are pangolins, African rhinos, African elephants, tigers, and rosewood[12]. The countries with the highest demand for parts of these species are in Asia, especially Vietnam and China where multiple parts of these animals are associated with natural medicine and the pangolin market is legal.

Due to the distance between the sourcing location for most of trafficked mammals (Africa) and the location of the biggest demand (Asia) the trade in wildlife is highly sophisticated and is often in hands of organized crime groups.

The operating scheme is the same as in case of antiquities trafficking. The poorest poachers receive a very insignificant part of funds generated later, after the final delivery and sale of the products by the organized crime groups. For organized crime groups this trade is considered as highly profitable and with low risk since they usually do not take part in the animal hunting itself and are mainly only providing poachers with arms and planning the shipments.

Very often bills of lading and invoices are in the names of shell companies or small businesses for which the transaction volumes are not adequate. In order to identify transactions potentially related to wildlife trafficking it is very important to identify the legal existence, activities and background of transaction parties. Information regarding basic company details can help to identify shell companies for example seemingly located under small rice shop address with unusually high turnover[13]. Additionally, in the event that payment is supposed to be remitted after the shipment of the goods, the confirmation of the shipping documents may be helpful.

Human trafficking

Human trafficking is one of the fastest growing crimes with one of the highest amount of illegal profits generating about USD 150.2 billion annually[14]. Human trafficking can be divided by victim’s age and the purpose of trafficking, with the highest profits generated by sex trafficking (about USD 99 billion) and by forced labour (about USD 51,2 billion)[15].

According to the International Labour Organization (“ILO”) there are estimated 40,3 million victims of human trafficking, out of whom 16 million people are exploited in private sector such as construction, agriculture, manufacturing, 15,4 million people are living in forced marriage, 4,8 million people are victims of sexual exploitation and 4 million people are in forced labour imposed by state authorities[16].

Human traffickers often target vulnerable members of society. They target poorer communities, the homeless, uneducated and unemployed, or those suffering from substance abuse and from addictions, or whose neighbourhoods have suffered from natural disasters.

ILO estimated that the highest number of 11,7 billion of victims of human trafficking characterise Asia-Pacific region with profits of around USD 51,8 billion, while Developed Economies and the European Union estimated number of victims is 1,5 million with profits of USD 46,9 billion[17].

Although, there are a lot of people involved in human trafficking, it is extremely difficult for authorities to start criminal investigation due to human trafficking; instead criminals are sentenced for money laundering, kidnapping, corruption, visa fraud and other related offences. The reason for this is that without the human trafficking victim, there is no criminal investigation related to human trafficking. Sex trafficking victims are often unaware that they are victims, or once they gain freedom they want to leave the past behind and start new life. In case of forced labour, crimes are usually related to underpaying employees and improper taxation, ant victims often do not want to participate in investigations.

Considering the complexity of human trafficking, the involvement of multiple people in different roles and the need for movement of victims, often on a long distance, the methods of money laundering also vary depending on the trafficker’s operating scheme and geographical location.

Especially in the case of sex trafficking the majority of funds is in the form of cash and therefore the methods used to launder the illegal proceeds often include cash deposits e.g. with structuring pattern. Money transfers are often routed through money service businesses (MSBs) or are concealed within the activity of a cash-intensive businesses.

Transactions may also appear to be related to loans or family support (usually victims will try to remit any funds to their families), which may be identified as significantly smaller cross-border transfers when compared to other migrant employees. Alternatively, victims may send funds to criminals stating these are family remittances. Moreover, there might be multiple transactions on a criminal’s account related to accommodation, travels and the basic daily expenses of victims, appearing in transactions as details of unrelated individuals.

Drug trafficking

The criminal activity that is generating the highest estimated profits is drug trafficking with USD 426 billion to USD 652 billion earned annually[18]. The vast majority - if not all - of criminal organizations and terrorist groups are involved in drug trafficking.

Drug trafficking includes the cultivation, manufacture, distribution and sale of cannabis, cocaine, opiates and synthetic drugs. It does not include new psychoactive substances and medicines which require prescriptions, even though these also often cause addiction. Drug trafficking occurs in every part of the world, however, cocaine and opiates only grow in specific geographic locations, unlike synthetic drugs which can be produced all over the world.

Cannabis is estimated to generate the highest profits, already in 2014 amounting to more than USD 287 billion[19], which is also expected to grow further significantly from 2018, as the legalization of cannabis in several states in the United States and Canada will impact its accessibility and provide significant profits amounting to few billions USD yearly[20][21].

Both cocaine and opiates market values are up to USD 150 billion annually[22]. In the case of cocaine and opiates the market value is partially caused by a limited amount of drugs and the need for very long distance transportation, also connected often to a higher level of corruption.

The high profits are accompanied by the significant number of methods used to launder them. Among the most popular money laundering methods used for drug trafficking are wire transfers and transactions remitted through MSBs in amounts below country’s reporting thresholds (i.e. transaction amount thresholds that exceeded require reporting the transaction to a specially designated national governing body), the use of shell/front companies and trade based money laundering.

Trade based money laundering is one of the most common methods for criminals as it is one of the most difficult schemes to detect. Drug related profits are exchanged into products (e.g. dishwashers, washing machines, etc.) and further sold to retail customers. Even legitimate businesses may unwittingly become involved in trade based money laundering.

Financial institutions usually consider international trade financing as higher risk than domestic trade, as it may include falsified shipping documentation and invoices, over- or under-invoicing, movement of illicit goods or involvement of sanctioned parties. The review of shipping documents has to be done manually, as banking systems triggering specific transactions for review are not able to understand terms and conditions, good description and price relation to value and volume of goods.

Conclusion

The common thing for all described types of trafficking or smuggling, is that the source countries are usually less developed than the destination countries. Criminal activities are generating huge profits, however, the actual amounts staying in the place where they were generated are significantly lower. As an example - in case of cocaine Colombian farmer earns about USD 1,3 per kilo of cocoa leaves, 600-800 kilo of leaves is required for 1 kilo of cocaine, which is later on sold for few hundred thousand USD depending on location[23].

Most of the funds are being laundered and moved out of the source country with the use of complex money laundering schemes. With the support of people with specialized knowledge and the bribes, via the purchased luxury goods or the sequence of cash deposits and/or wire transfers, the funds can quickly change location and jurisdiction. The funds are later used to develop other criminal activities, provide a stable life for criminals or for terrorist financing.

To prevent from being involved in the laundering of funds sourced from the above described illegal actions (tax evasion, antiquities trafficking, wildlife smuggling, human trafficking and drug trafficking) as well as many others types of crimes, financial institutions need to comply with international AML/CFT standards, have implemented proper laws and regulations into their procedures and conduct ongoing review and assessment of customer profiles, their activity and vulnerability for being involved in money laundering.

Moreover, crucial for proper assessment of customers may be implementation of risk based approach, that allows to focus on customers more vulnerable for money laundering. Financial institutions’ procedures and policies should be adequate for the served customers (i.e. address risks related to particular types of customers), for the products offered (with special focus on correspondent banking, private banking, etc.) and for the geographical areas related to transactions (e.g. with focus on involvement of high risk jurisdictions).

Transaction monitoring is considered as one of most important elements of money laundering prevention. Detailed analysis of the transaction based on data maintained by the bank, identification of transaction’s remitter and beneficiary and their relationship, review of publicly available sources for any negative or unusual information related to parties involved in the transaction, identification of the purpose of transaction, identification of patterns (for example structuring) and review of trade documents (for example bills of lading, invoices) will support financial institutions in detecting unwanted customers and criminal activity and may facilitate to identify transactions related to described activities and enable proper reporting to relevant authorities.

Footnotes:

[1] UNODC, Money-Laundering and Globalization

[2] BBC News, 6 April 2016, Panama Papers Q&A: What is the scandal about?

[3] BBC News, 4 December 2018, Panama Papers: Four charged in US with fraud and tax evasion

[4] Tax Avoidance Taskforce helps net $5.6 billion in first two years , 11.10.2018

[5] Financial Secrecy Index - 2018 Results

[6] Global Financial Integrity Report 2017, Transnational Crime and the Developing World, p.14

[7] Two new ICOM tools to fight illicit traffic in cultural goods, 12/16/2015

[8] Christine Adler, Duncan Chappel, Kenneth Polk, Perspectives on the organisation and control of the illicit traffic in antiquities in South East Asia, p.3

[9] Save culture, end trafficking of stolen antiquities, 29/09/2016

[10] If You Steal It, the Art Vigilante Will Find You, 26/06/2018

[11] Global Financial Integrity Report 2017, Transnational Crime and the Developing World, p.14