# Comprehensive Study Notes on Money Laundering and Related Topics --- ## **Stages of Money Laundering** Money laundering typically occurs in three stages: **placement**, **layering**, and **integration**. Below is a breakdown of these stages with examples and key concepts. ### **1. Placement** This is the initial stage where illicit funds are introduced into the financial system. - **Example**: Purchasing significant stored value cards with cash, breaking up large amounts of money into smaller deposits (structuring), or smuggling currency across borders. - **Techniques**: - Blending of funds with legitimate business revenue. - Depositing cash into bank accounts in small amounts to avoid detection. Placement is the riskiest stage for money launderers because it involves handling large amounts of cash, which can easily attract attention. --- ### **2. Layering** This stage involves separating the illicit funds from their source through complex layers of financial transactions. - **Example**: Overpaying a credit card balance and requesting a refund, or transferring funds through multiple accounts in different jurisdictions. - **Techniques**: - Use of shell companies or offshore accounts. - Converting funds into other financial instruments like securities or gold. --- ### **3. Integration** The final stage where the illicit funds are reintroduced into the economy as legitimate assets. - **Example**: Investing in real estate, luxury goods, or businesses to make the funds appear legitimate. - **Techniques**: - Using funds to purchase high-value assets. - Establishing legitimate businesses as a front. Credit cards are most commonly used in the **layering** and **integration** stages due to their ability to facilitate international transactions and refunds. --- ## **Key Concepts and Definitions** ### **Structuring** Structuring is the act of designing financial transactions to evade reporting requirements. - **Example**: Breaking a large cash deposit into smaller amounts and depositing them into separate accounts or on different days to avoid triggering currency transaction reports (CTRs). Many people confuse structuring with legitimate small transactions. The key difference is the intent to evade reporting requirements. --- ### **Politically Exposed Person (PEP)** A **PEP** is someone entrusted with a prominent public function, either domestically or internationally. This includes their relatives and close associates. - **Risk**: PEPs are at higher risk for corruption and money laundering due to their access to public funds and influence. --- ## **Money Laundering Risks in Specific Sectors** ### **1. Electronic Transfers of Funds** Indicators of money laundering through electronic transfers include: - Transfers to/from high-risk geographic locations without a clear business reason. - Large incoming transfers for foreign clients with no explanation. - Repetitive or unusual patterns in fund transfers. Unexplained payments or receipts with no link to legitimate goods or services are a major red flag. --- ### **2. Remote Deposit Capture (RDC)** **RDC** allows customers to scan and electronically deposit checks. - **Risk**: Reduced human intervention makes it harder to detect fraud, such as altered checks or multiple deposits of the same item. --- ### **3. Payable Through Accounts (PTAs)** PTAs allow foreign institutions to access banking services through a correspondent bank. - **Risks**: - Weak customer due diligence (CDD) by the correspondent bank. - Subaccount holders with currency deposit/withdrawal privileges. - Offshore institutions with weak supervision. --- ### **4. Concentration Accounts** These accounts aggregate funds from multiple sources. - **Risk**: If customer-identifying information is separated from transactions, the audit trail is lost, increasing the risk of misuse. Concentration accounts are often used in large financial institutions but require strict controls to prevent abuse. --- ## **Sector-Specific Vulnerabilities** ### **1. Securities Industry** The securities industry is vulnerable due to: - Speed of transactions and international nature. - Ease of converting holdings to cash. - Use of nominee accounts and weak AML programs. --- ### **2. Casinos and Gambling** Red flags in casinos include: - Converting cash to checks or chips and requesting repayment. - Minimal gambling activity without explanation. - Using casinos for banking-like services. --- ### **3. Gold** Gold is highly vulnerable due to its intrinsic value, portability, and anonymity in transactions. - **Example**: Criminals can convert illicit cash into gold, which can then be sold or transported across borders. --- ### **4. Real Estate** Real estate is attractive for money laundering because: - It can be purchased with cash. - Ownership can be disguised through shell companies. - Value can be increased through renovations. --- ## **Trade-Based Money Laundering (TBML)** TBML involves manipulating trade transactions to move illicit funds. - **Techniques**: - Overinvoicing and underinvoicing. - Ghost-shipping (falsifying shipping documents for non-existent goods). - Black Market Peso Exchange (BMPE): A system where illicit funds are used to purchase goods, which are then sold for clean money. In BMPE, a peso broker buys illicit dollars in the US, deposits them in US bank accounts, and sells checks or wire transfers to legitimate businesses for purchasing goods. --- ## **Emerging Risks and Technologies** ### **1. Virtual Currency (VC) Ecosystem** Roles in the VC ecosystem: - **User**: Purchases goods/services using VC. - **Exchanger**: Exchanges VC for real currency or other VCs. - **Administrator**: Issues and redeems VC. ### **2. Prepaid Bank Cards** Risks include: - Anonymous cardholders and funding. - High value limits and global ATM access. - Offshore issuers with weak regulations. --- ## **Controls to Mitigate Risks** ### **E-Money Institutions** To mitigate risks, e-money institutions can: - Implement transaction monitoring systems. - Set limits on storage values and transaction amounts. - Use geolocation and IP tracking to detect discrepancies. - Restrict geographic use of e-money products. --- ## **Gatekeepers and Their Role** Gatekeepers like attorneys, notaries, and accountants can facilitate money laundering by: - Creating and managing corporate vehicles. - Buying or selling property to disguise fund transfers. - Providing financial and tax advice. The role of attorneys in AML/CFT is controversial due to client confidentiality concerns. --- ## **Key Takeaways** - Money laundering involves three stages: placement, layering, and integration. - Different sectors, such as casinos, real estate, and securities, have unique vulnerabilities. - Emerging technologies like virtual currencies and prepaid cards pose new challenges. - Effective controls, such as transaction monitoring and customer due diligence, are critical in mitigating risks. Always look for unusual patterns, unexplained transactions, and inconsistencies in customer behavior as potential red flags.