According to the International Monetary website, in the AML/CFT context, the term “typologies” refers to the various techniques used to launder money or finance terrorism. Criminals are very creative in developing methods to launder money and finance terrorism. Money laundering and terrorism financing typologies in any given location are heavily influenced by the economy, financial markets, and anti-money laundering/counter financing of terrorism regimes. Consequently, methods vary from place to place and over time.
1/. Trade-based money laundering methods vary in typology from the most basic to very complex schemes. Basic schemes include misrepresenting the price and quantity of goods and services (over and under invoicing), and invoicing the same goods or services more than once (double invoicing), also submitting invoices and opening standby letter of credits for the items that have never been and never were intended to be shipped.
One of the oldest ones is called Colombian Black Market Peso Exchange (BMPE). It was originally driven by Colombia’s restrictive policies on currency exchange. To circumvent those policies, Colombian businesses bypassed the government levies by dealing with peso brokers that dealt in the black market or parallel financial market. Colombian drug traffickers took advantage of this method to receive Colombian pesos in Colombia in exchange for U.S. drug dollars located in the United States. According to the U.S. State Department’s 2007 INCSR, similar black market exchange systems are found in Venezuela and in the tri-border region of Argentina, Brazil, and Paraguay. The U.S. State Department also reports that trade goods in Dubai as well as Chinese and European manufactured trade items are being purchased through narcotics-driven systems similar to the BMPE.
To understand this section better let’s have a look at Trade based ML typologies report published by Asia-Pacific Group in 2012
http://www.fatf-gafi.org/media/fatf/documents/reports/Trade_Based_ML_APGReport.pdf
There is a growing concern on how the rapid growth in the global economy has made
international trade an increasingly attractive avenue to move illicit funds through financial
transactions associated with the trade in goods and services. TBML is a complex
phenomenon since its constituent elements cut across not only sectoral boundaries but also
national borders. The dynamic environment of international trade allows TBML to take
multiple forms.
Most jurisdictions do not distinguish TBML from other forms of ML. A major obstacle in
devising strategies to tackle TBML has been the lack of reliable statistics relating to it.
Distinguishing features of the dynamic environment for TBML include:
a) TBML using international trade occurs over more than one jurisdiction, while other forms
of ML may be only of a singular jurisdiction. Cross border transactions provide
opportunities to take advantage of differences in legal systems of various jurisdictions. A
jurisdiction may have less restrictive Customs checks (Free Trade Zones) and less stringent
AML set-up than trading partner. The high volume, regularity and speed of international trade
increase vulnerabilities.
b) TBML necessarily requires intermingling of the trade sector with the finance sector.
Criminals take advantage of vulnerabilities of both the sectors. Merely having an AML
regime for the finance sector becomes inadequate unless such a regime effectively covers the
corresponding trade sector. Moreover, cross-referencing of trade-data, with that of trade
finance becomes essential when investigating TBML.
c) International trade is denominated in terms of internationally acceptable currencies. Trade
becomes exposed to the vulnerabilities of the foreign exchange market.The conversion of
currency at market determined exchange rates enhance the scope for criminals to launder the
proceeds of or instruments of crime.
d) The long supply chain necessary for international trade make the trade more vulnerable to
TBML. This chain of manufacturer, trader, consigner, consignee, notifying party, financier, shipper, insurer and freight forwarder broaden the scope for abuse of the system by the
criminals because of all the vulnerabilities that exist.
2/. Next few typologies I would like to discuss are coming from Money Services Businesses practice. Why is this area finding itself under constant scrutiny of national regulators and International AML bodies? Answer will become obvious we look at “Money Laundering and Terrorist Financing (ML/TF) Typologies and Trends for Canadian Money Services Businesses (MSBs)” published by FINTRAC in 2010.
| Common designated offence types involving the MSB sector | |
| Commonly Observed MONEY LAUNDERING (ML) Designated Offence Types |
Proportion of Cases of This Type Involving Transactions at an MSB (%) |
| Substantive offence not identified | 30% |
| Drug offences | 25% |
| Fraud | 20% |
| Terrorist financing (TF) | 12% |
| ML (and/or TF) + Tax evasion | 4% |
| Human smuggling / trafficking | 2% |
FINTRAC identified and focused on 126 cases (from 2008-2009), which were the most illustrative of how MSBs could be exploited for money laundering and terrorist financing purposes. Does it mean that MSBs are not very successful with their AML detection and control systems? Not necessarily so, however most of their clients are using their services on case by case basis thus their client data to analyze red flags of a specific relationship is very limited comparing to banks and other financial institutions (credit unions, investment and insurance companies etc).
In this context, the most commonly observed money laundering techniques are described below:
1/.Structuring or attempting to circumvent MSB record-keeping requirements
2/. Attempting to circumvent MSB client identification requirements
3/. Smurfing, using nominees, and/or other proxies
4/. Exploiting negotiable instruments (cheques, money orders, drafts)
5/. Refining (conversion small denomination banknotes into large ones, typically used in drugs trafficking but also noted in suspected human smuggling cases)
For specific case studies, red flags and other risk factors for MSBs read http://www.fintrac-canafe.gc.ca/publications/typologies/2010-07-eng.asp
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