Anti-Money Laundering in the Era of Digital Finance

Bitcoin is usually the preferred currency of cybercriminals, and they are generating a large amount of money from cybercrime activities. Money laundering is a technique commonly used by financial criminals to shield illegal and violent activities.

What is Money Laundering?

Money laundering is a process of making money generated by criminal activity and appears to come from a legitimate source. Criminals use a variety of techniques to make illegal money appear clean and legal. Online banking and digital currency have made it easier for criminals to transfer and transact money without leaving a trail. Most criminal transactions handle cash, and banks are required to report large cash transactions. Moving a large amount of illegal cash without attracting the attention of authorities and criminal law enforcement is difficult.

The Internet has put a twist on old crimes. Online banking, anonymous online payment, and peer-to-peer electronic payment systems have made it more difficult to detect illegal transfer of money. Moreover, money laundering is done through gambling websites, online sales, and virtual gaming websites, where the money is converted into gaming currency or tokens and then again into real and usable money.

Financial regulators and criminal prosecution authorities are facing challenges due to these decentralized and peer-to-peer payment systems because, as per existing rules for the prevention of financial terrorism, the knowledge about transactions of their customers is necessary.

How Do Money Laundering Schemes Work?

Since cryptocurrencies are a new challenge to Anti-Money Laundering Regulation (AML) and know your customer (KYC) rules. Bitcoin, which is a peer-to-peer electronic payment system, does not require any intermediate trusted party for transferring payments, and users can send money directly to each other without the interference of any financial institution.

For a money laundering scheme to operate, three cycling goals must be achieved for any scheme to be successful.

1. Placement

Placement is the stage where the money is deposited in the bank. Detection risk is greatest during the placement phase because there is a lot of investigation when a large amount of money is deposited. Banks are required to keep track of such suspicious activities, but placement through a series of regular small deposits over time and in multiple accounts does not require reports. This step is widely riskiest, and if the deposits are scrutinized at this stage, no justification will exist later in the scheme.

Money launderers use alternate financial systems to avoid scrutiny. Digital assets and cryptocurrencies are not subject to these regulatory requirements, and these modes are beyond the reach of Government Financial Regulators.

2. Layering

Layering is the stage where illegal money is blended with clean money. It primarily serves to reinforce the appearance of legitimacy by passing money through layers of transactions. Layering is basically a process of making the source of illegal money difficult to detect by adding legitimacy to it. During this phase, money is circulated between different accounts, countries, currencies, and financial institutions to make it difficult to trace.

Layering is typically safer than placement and difficult to catch, but if launderers make mistakes, they can still be caught.

3. Integration

At this stage, money re-enters the legitimate economy. This is the point at which

Dirty money can no longer easily be traced. Cryptocurrency can be changed to fiat currency through an exchange process. By using exchange, they convert their illicit proceeds to Bitcoins and then change the cryptocurrency to fiat currency.

Money Laundering Schemes

There are several examples of money laundering which include casino schemes, cash business schemes, smurfing schemes, and foreign investment schemes.

The Casino Scheme

Casino scheme works by using the money through gaming. The money is converted into casino chips that can again be converted into cash. Casino money is laundered by first placing money and delivering it to a proxy which will take payment in cash and then exchange it into chips. During the layering phase, cash is carried into the casino and used for gambling. Money laundered through casinos is relatively easy to integrate.

The Smurfing Scheme

Smurfing is the distribution of large cash into small amounts and a series of accounts and depositing the money incrementally. To avoid inquiry, smurfing follows all three steps of money laundering. The placement stage occurs when the cash is distributed through a network of people and the layering stage starts when the money is deposited back into one or several accounts. And the money can be extracted when it is moved back into the account.

The Foreign Scheme

Investment in the US business is encouraged by many countries. The launderers deliver the cash to foreign investors and placement occurs at this stage. When the money is laundered through foreign investors the layering stage takes place. Money can be extracted from the profits that the investment generates.

Best Practices for Anti-Money Laundering

There are effective Anti-Money Laundering (AML) programs to ensure AML compliance, effective policies, procedures, and technologies to protect people and organizations from money laundering. The reason for AML regulation is to make it harder for criminals to get away with illegal gains. Ensure that any decision-maker who has an impact on your business understands the importance of compliance.

Here are some AML fundamentals that need to be followed:

  1. Think through policies carefully, state them clearly, and write them out.
  2. Consider a senior-level individual who takes responsibility for the program, files all reports, and ensures that the system is running smoothly.
  3. Every employee should understand your company’s policies and procedures, legal requirements, techniques used by money launderers, and how to report suspicious activities.
  4. AML red-flags: Money laundering is about trying to legitimize illegal gains, so always have a look for unusual activities such as large cash transactions, transactions connected with gambling, and transactions connected with potential money launderers.
  5. AML screening: Detect and manage problematic or suspicious accounts before they become a risk.
  6. AML monitoring: Financial institutes must monitor activity to ensure that no fraud is committed.

Conclusion

For money-laundering prevention, there should be a check on customers and potential business partners. Knowing your customer (KYC) helps to prevent criminal activity. If a party has a criminal record or has been investigated for a crime, it is advised not to do business with them. Failure to follow AML compliance will land a business in trouble.