Digital Currency: The New Face of Money Laundering

I can hear the words loud and clear like it was yesterday. ”Money Laundering consists of three basic steps: Placement, Layering, and Integration. These were the foundational concepts I was taught when I began my career as Anti-Money Laundering (AML) analyst, nearly 10 years ago.

When a person or entity attempts to launder cash, it is normally very simple for the financial institutions AML alerting systems to detect it. Individuals or entities that make deposits or withdraw more than $10,000.00 in cash are required to complete a Currency Transaction Report (CTR), which is subsequently filed with FinCEN by the financial institution. According to the classic AML model, red flags are raised when an individual or entity conducts activity in a manner in which it appears to be an attempt to evade CTR filing requirements. At that point, an alert is sent to the AML team and a formal investigation is initiated to determine if there is potential money laundering activity being conducted.

Now that the paradigm has shifted and currency is now being exchanged with electronic payment transmitters such as Venmo, PayPal, Google wallet, etc., it is becoming increasingly difficult to detect money laundering. And a very tedious task to trace the source of funds, when it can now be sent to multiple countries in a matter minutes via electronic money transmitters.

In prior years, requirements were much more stringent when it came to conducting same day domestic and international money transfers (wires). Prior to the abundance of electronic money transmitters, an individual would have to go to their bank or a Money Services Business (MSB), such as Western Union, to complete a wire. In order to transfer the money, the individual would then need to provide documentary identification (ID, Passport, etc.) as well as state the purpose of the transfer (wire). If there were suspicious actions by the individual, a Suspicious Activity Report (SAR) would be submitted immediately to begin an investigation on that individual or entity’s banking activity.

Fast forwarding to current day, per PayPal.com an individual can send up to $10,000.00 in any one transaction. The site notes that limitations may be imposed on the customer’s account in order to verify information about the customer or their transactions.

Per Venmo.com, an individual may send up to $2,999.99 on a rolling weekly basis ($155,999.48 per year) once their identity is verified.

For most electronic payment sites, the information required to set up an account was an email, name, date of birth, SSN, and address or zip; which is fairly simple information to produce and can be found via open source searches.

Here lies the problem. The way most financial institutions train their AML analysts consists of instructing them to file a SAR for cash and wire activity that appears suspicious in nature, with little to no further guidance. In a perfect world this would be an excellent approach; however, in the AML world it is the furthest thing from it. Unlike careers like accounting, teaching, or engineering you don’t typically choose AML as a career, it chooses you. If you ask most AML professionals how they began their career you will usually hear a response down the lines of, “I stumbled across my first job as an AML analyst and found it to be a rewarding career, so I stuck with it.”

In my years of conducting SAR reviews, I have witnessed countless incidents where analysts swept under the rug large money transfers conducted via an electronic money transmitter, such as PayPal, due to the activity appearing to be for a legitimate activity.

What happens when that is not the case and the individual is a digital money launderer?

Recent studies have shown that Transaction Laundering is becoming an up and coming threat. What is Transaction Laundering? It is when a purchase appears to be legitimate, but it is not.

Example:

John Doe transfers $9,000.00 to Jane Doe via PayPal for the purchase of a car. However, no car is sold, no physical cash exchanges hand, and Jane subsequently uses the funds to purchase counterfeit goods, which will later be sold in the black market.

These type of transactions can be very elusive and easily fly below the radar of a financial institution’s AML alerting system. Once a consistent pattern of activity is formed these transactions may be mistakenly viewed as normal transaction activity.

Here’s the even bigger question. In 2016, how does a financial institution combat money laundering when there is a large percentage of banks that still utilize a piecemeal AML program?

There needs to be a system implemented where financial institutions and electronic payment processors communicate real time, in regards to the source of funds and purpose of money transfers. Think of it as 314b on steroids. Without this information financial institutions and electronic payment processors are basically willingly aiding and abetting money launderers.

The ABA Journal published an article that reported that approximately $300 billion is laundered through the United States financial system annually. It is evident that money laundering is an epidemic that we must take a vigilant approach to mitigate.

If you are an Anti-Money Laundering Analyst, BSA Officer, Chief Compliance Officer, or whatever your role may be, take a moment and ask yourself how you are aiding in the war against money laundering. Are you simply going through the motions to fulfill the minimum job requirements or are you taking an innovative approach to enhance your program.

Remember, money laundering goes far deeper than evading Uncle Sam for tax purposes. Money laundering funds terrorist organizations, drug cartels, and a host of other illegal activities. The war against money laundering goes much farther than being an AML professional in a financial institution. If we do our jobs efficiently, it will make the jobs of our frontline heroes (federal and local law enforcement) somewhat easier.

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