Money laundering: how banks stay one step ahead of criminal activity

Money laundering accounts for billions each year. Here’s how banks fight back with anti-money laundering processes to detect suspicious activity.

6 min read

Money laundering is a technique used by criminals—from mobsters, drug traffickers, terrorists, to corrupt politicians—in order to cover their financial tracks after illegally obtaining money. It’s well-known that money laundering can often involve foreign banks and legitimate businesses—so how do banks actively prevent money laundering from happening? The answer? Anti-money laundering. Anti-money laundering is a way for banks and other financial institutions to detect suspicious activity. By doing so, they help prevent criminal profits from becoming camouflaged and integrated into the financial system. Here’s the lowdown on the techniques banks use to fight back against criminal financial activity.

What is money laundering?

Money laundering is a process that disguises the source of criminal money in order to make it appear legal. Since 1990, money laundering itself has been a crime—and it’s easy to see why. Money laundering is big business, with an estimated €740 billion to €2 trillion laundered each year. That’s an eye-watering 2% to 5% of the global economy. In the EU alone, €197.2 billion is laundered each year.

Profits gained from criminal activity is often known as “dirty” money, because it links directly to the crime and can be traced. In particular, lugging around physical cash—think dodgy deals and briefcases filled with bank notes—is far from logistical. Criminals need to “clean” the money, so that it can appear legal and be used for investments without fear of being caught. That’s what money laundering is—“washing” dirty money to make it clean.

What are the different money laundering techniques?

Money laundering typically follows a basic three-step process. The first step is placement—this is the point where dirty money first enters the financial system. Layering then hides the source of the money using various bookkeeping tricks. And once the source of the money has been successfully disguised, comes the last step—integration, when clean money can be withdrawn or invested. 

Money laundering techniques vary in complexity. The most common method is to process dirty money through another cash-based business. Many criminal organizations own multiple “front organizations,” from restaurants to casinos. Legitimate profits from these businesses mix with criminal money, hiding the source. Breaking Bad fans will remember Walter White purchasing the A1A Car Wash to launder the money that he made from his drug business.

Another technique is called structuring, which is the act of dividing large sums of money into smaller amounts and spreading them across multiple accounts. Anti-money laundering policy in the EU means that transactions of €10,000 and higher are investigated. Structuring bypasses this by depositing multiple smaller amounts that appear less suspicious.

Other techniques used by money launderers include:

  • Currency exchanges where dirty money is exchanged by foreign currency providers. The provider may be unaware of the money’s origin, or that the cash-based business is a front organization.

  • Real estate purchases allow criminals to transform their money into houses and business property, which can later be sold.

  • The art industry has also been targeted for money laundering, due to its levels of secrecy and the potential for high-value items. 

What is anti-money laundering?

In 1989, the Financial Action Task Force (FATF) was created to combat money laundering. The FATF organization sets the framework for anti-money laundering (AML) policies, and supervises countries to make sure that they comply. Individual countries also have their own supervisory schemes that oversee national institutions. Globally, the UN, World Bank and International Monetary Fund all have AML schemes in place.

Anti-money laundering is a framework for putting best practices into action in order to detect suspicious activity. The easier it is for criminals to spend illegal money undetected, the more likely they are to commit crimes in the future. As a result, AML regulations make “obligated entities” be aware of red flags to watch out for, and makes sure that such institutions proactively monitor their clients’ activities. But who exactly are the “obligated entities?”

Obligated entities refers to institutions that encounter financial transactions, which could be targeted by money launderers. These include banks, payment processors, and gaming or gambling businesses. In the EU, the European Banking Authority sets guidelines and regulations on supervision. Anti-money laundering supervisors then monitor each individual institution to see how effectively they carry out their AML tasks.

Institutions have to comply with customer due diligence. The Anti-Money Laundering Directive (AMLD) is a EU-wide law that provides a framework for institutions across Europe. Transactions between “high risk” countries and transaction amounts of €10,000 or more are carefully monitored. Suspicious activity is then reported.

How banking AML works

As the foundation of the financial system, banks need a sharp eye to spot suspicious behavior. Like all institutions, banking AML policies are shaped by the framework set by the FATF. Frontline employees are trained in anti-money laundering techniques and are legally required to report suspicious activity.

Banks may hire employees whose purpose is to boost anti-money laundering practices. These security experts are known as AML compliance officers. In addition, AML banking is supported by three key factors: identity checks, AML holding periods, and AML transaction monitoring software.

Identity checks

Specific institutions, such as banks, are required to follow Know Your Customer (KYC) processes. These are the steps that banks must take to verify the identity of their customers. Although anti-money laundering policies provide the framework, individual banks are responsible for their own customers, and it’s their responsibility to flag high risk transactions.

So what do banks verify? Know Your Customer policies require banks to verify the customer’s name, date of birth, address, and occasionally additional information, such as occupation. Banks typically ask customers to verify their identity with ID documents when opening an account. More recently, banks are using biometric identification, such as face or voice recognition, and fingerprint scans.

AML holding period

Another tactic to help prevent money laundering is the AML holding period. This is a policy where deposits must stay in an account for a minimum of five trading days. Slowing down the process assists with anti-money laundering measures, and allows more time for risk assessments to take place.

AML transaction monitoring software

Many banks have millions of customers, and oversee millions of transactions. With such a high volume, it’s impossible to manually monitor every single transaction. That’s where AML transaction monitoring software comes in—this technology allows banks and other financial institutions to monitor transactions on a daily or real-time basis.

Such software combines different sources of information, such as the account holder’s history, risk-assessment, and the details of individual transactions such as the total sum of the money, countries involved, and the nature of purchase. Transactions can include cash deposits, wire transfers, and withdrawals. When a transaction is deemed to be high risk, it’s flagged by the system as suspicious activity.

By N26

The Mobile Bank

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