Category: AML

Bitcoin, the world’s first decentralized digital currency, has gained immense popularity since its inception in 2009. Initially hailed as a revolutionary alternative to traditional currencies, Bitcoin’s anonymity and decentralized nature have also made it an attractive tool for illicit activities, including money laundering.

Introduction to Bitcoin

Bitcoin operates on a peer-to-peer network, utilizing blockchain technology to facilitate secure transactions without the need for intermediaries like banks. Its decentralized nature and cryptographic security have led to widespread adoption, with millions of users globally.

Understanding Money Laundering

Money laundering is the process of concealing the origins of illegally obtained money, typically by transferring it through a complex sequence of banking or commercial transactions. The primary goal is to make the funds appear legitimate.

Bitcoin’s Role in Money Laundering

Bitcoin offers a level of anonymity and pseudonymity unmatched by traditional financial systems. Transactions are recorded on a public ledger, but the identities of the parties involved remain largely anonymous. This anonymity makes it challenging for law enforcement agencies to track illicit activities.

Dark Web and Bitcoin

The dark web, a hidden part of the internet accessible only through specialized software, has become synonymous with illegal activities such as drug trafficking, weapons sales, and money laundering. Bitcoin is the preferred currency for transactions on the dark web due to its anonymity and ease of use.

Challenges in Regulating Bitcoin

Unlike traditional currencies, Bitcoin operates outside the control of central banks or governments. This lack of centralized authority poses significant challenges for regulators seeking to combat money laundering and other illicit activities. Additionally, the pseudonymous nature of Bitcoin addresses makes it difficult to trace transactions back to their origin.

Addressing Money Laundering Risks

To mitigate the risks of Bitcoin-related money laundering, various blockchain analysis tools have been developed to trace transactions and identify suspicious activity. 

Additionally, regulatory measures, such as Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations, are being implemented by cryptocurrency exchanges and financial institutions.

Real-world Cases of Bitcoin Money Laundering

Several high-profile cases have highlighted the use of Bitcoin for money laundering purposes. For example, the Silk Road, an online marketplace notorious for selling illegal drugs and other contraband, relied heavily on Bitcoin transactions to facilitate its operations.

Impact on Financial Systems

The rise of Bitcoin and other cryptocurrencies has raised concerns among traditional financial institutions and regulators. The decentralized nature of Bitcoin challenges the existing regulatory framework, prompting efforts to integrate blockchain technology into mainstream financial systems.

Future Outlook

As Bitcoin continues to evolve, regulators are working to adapt their strategies to address the unique challenges posed by cryptocurrency-based money laundering. Innovations in blockchain analysis and regulatory frameworks offer hope for combating illicit activities while preserving the benefits of digital currencies.

Conclusion

Bitcoin’s anonymity and decentralized nature make it an attractive tool for money laundering, posing challenges for regulators and law enforcement agencies worldwide. However, with the development of advanced blockchain analysis tools and regulatory measures, efforts are underway to mitigate these risks and ensure the integrity of the financial system.

Frequently Asked Questions

The AML landscape is evolving continuously, so fraudsters come up with new ways to launder money. One of these new and unique ways to exploit the financial systems and launder money is cross-border trade.

Trade-based money laundering is becoming an issue. To prevent trade-based money laundering, new steps are being taken.

In this guide, we’ll dive into trade-based money laundering, and how it works.

What is Trade-Based Money Laundering?

Trade-based money laundering is when a fraudster moves illegal funds through the international trade system to clean them. TBML practices often include:

• Falsification of original price.
• Quantity and quality of the imported/exported goods.

TBML takes advantage of the complicated system of the trade system. Especially the international trade system where multiple parties and jurisdictions are involved. Multiple jurisdictions mean overlapping KYC, AML, and CDD rules and regulations.

TBML is slowly becoming a major concern for governing bodies around the world. It rose to its peak during the COVID era when supply chains and the regulatory landscape were disturbed.

Since then, several global firms have embedded supply chain risk management into their AML programs. Over 45% of global businesses claim that they’re focusing on improving the management of supply chain risks in 2023 and beyond.

How Does Trade-Based Money Laundering Work?

Fraudsters use trade-based money laundering in a number of ways, but the most common ones include:

• Over-invoicing – The exporter submits an invoice that’s overpriced to the importer, generating a payment that exceeds the value of the goods shipped. Importers often transfer the stated amount on the invoice instead of checking for the real value. 
• Under-invoicing – The exporter sometimes submits an invoice that has less value than the products. They ship the goods with greater value and then transfer that value to the importer.
• Multi-invoice – The exporter sends an invoice to the importer multiple times for the same product/shipment. The exporter then transfers greater value from the importer to the exporter. 
• Over-or under-shipment – The exporter ships more goods than they previously agreed on. They end up transferring greater value to the importer. Or, the exporter ships fewer goods than agreed on. The importer often pays the original amount without checking the goods.
• Misrepresenting the Quality – Goods shipped to the importers are purposefully misrepresented as being of higher quality. The importer pays for the high-quality goods but receives cheaper quality.

Examples of Trade-Based Money Laundering

There are some examples of trade-based money laundering that every business should be aware of. Prevention can only happen when businesses are aware of the latest trends.

Here are the biggest examples of trade-based money laundering:

• A letter of credit for a high-value cross-border import is highlighted to have anomalies when it is examined by the routing bank. When the bank investigates deeper, it reveals missing and unrecognized documentation with the import agents. The bank then rejects the transaction and returns the drawing documents.
• The first beneficiary of a multi-million dollar letter of credit has to supply medical goods for another country’s Bureau of Health. However, the second and ultimate beneficiary of the credit issues invoices that don’t match those submitted by the first. It’s shown that the first beneficiary has the invoices marked up by 300% and is additionally revealed to have a connection with the firm acting as the agent to the Bureau of Health.
• Several shell companies purchase electronics with funds derived from criminal activities and later sell the goods to buyers in high-risk countries that don’t have any due diligence. The shell companies receive the money. The banks that handle the transactions notice a number of red flags. The biggest red flag is that the companies are registered in high-risk countries.

Steps to Identify Trade-Based Money Laundering

Businesses may have an easier time spotting TBML activity if they’re familiar with the methodologies associated with it.

Here are the indicators of TBML:

• Unusually complicated or illogical corporate structures, such as the use of shell companies or companies registered in high-risk countries. 
• Trading entities registered at mass registration addresses with no reference to any specific unit.
• Trading businesses that have addresses that don’t reflect the businesses in which they’re engaged. 
• Missing, counterfeit, or fake trade documents. 
• Trading businesses that don’t have an online presence or that have an online presence that doesn’t match their business’s stated services. 
• Trading activities that don’t reflect a stated line of business, for example, car dealers trading in textiles or precious metals. 
• Payments for imports that aren’t made by parties other than the account holder.
• Trading entities that purposefully complicate the use of financial products.
• Inconsistencies or discrepancies across trade documents such as contracts and invoices. 
• Trade documents with values that aren’t consistent with market values or other comparable transactions. 
• Trading entities that make very late changes to payment arrangements. 
• Frequent cash deposits are just under the reporting thresholds.

How to Prevent and Detect TBML?

Since TBML can involve multiple parties and jurisdictions, and some of the schemes are very complicated to detect. To mitigate the risk of TBML, compliance teams need to have an understanding of business-wide risk assessments to determine their risk exposure.

Here’s how to prevent and detect TBML:

• Robust CDD

To uncover TBML, businesses of all kinds should implement CDD measures that use a combination of technology and expertise.

Businesses need to obtain a clear picture of all entities they do business with. To able to do that, businesses need to verify documents, ownership documents, address documents, and more. Compliance teams should ensure they have access to real-time document verification solution that helps them verify the identity of every entity they have to verify.

• Reputable Adverse Media Screening

Since adverse media can be a TBML structural risk indicator, businesses need to make sure their negative news screening solution can differentiate between true adverse media content at scale.

Money laundering is a severely growing problem, and it’s not limited to any one country. The United Nations Office on Drugs and Crime (UNODC) that money laundering figures worldwide will exceed the global 2% of global GDP ($1.7 trillion).

Eurojust Report on Money Laundering, states that cases registered regarding money laundering have doubled within the last 6 months. 

Anti-Money Laundering (AML) is a set of guidelines pertaining to financial institutions and other related industries. These guidelines are meant to prevent activities that support the financing of terrorism. Regulated businesses should not knowingly or unknowingly support these activities.

Risk-Based AML and Global Regulation

There are several anti-money laundering regulatory bodies that set up rules and regulations that local and international organizations have to follow. For companies to do business in a particular location, they have to comply with the rules and regulations set by the governing body. 

The Financial Action Task Force is the global money laundering and terrorist financing regulatory body. The FATF has the responsibility to set international standards that aim to prevent illegal activities and the harm they cause to society. 

FATF works with several governments and national regulatory bodies to achieve regulatory reforms. Regulations made by FATF cover more than 200 countries and jurisdictions. 

The UK was the first one to propose a risk-based assessment for anti-money laundering. It was further adopted and improved by the FATS in 2012. this led to the development of proactive risk management.

Common AML Risk Factors

A proactive risk-based approach to AML can only be done when there is an accurate risk assessment. And there are 3 distinct areas of risk that regulated industries need to focus on during risk assessment.

1. Individual Risks

Governments need to collect and maintain lists of high-risk individuals. These lists include known fraudsters, money launderers, terrorists, and red-flagged Politically Exposed Persons (PEPs). 

These individuals are considered high-risk individuals because of their influence and access to a large number of funds. During customer onboarding, businesses need to identify high-risk individuals as it’s a KYC requirement. 

2. Location Based Risks

Governing bodies also compile assessments of risk that comes with geographical jurisdictions,  flagging unsatisfactory money laundering and terrorist financing. 

The geographical location determines the laws, regulations, technology, security, data privacy, and data accuracy of a business environment. To take a risk-based approach to AML, businesses need to take location-specific risks into consideration. 

3. Channel Risks

The way a product or service is taken to the market can also affect the risk level. Now that we’re living in an internet-based economy, sales of products and services that happen online always carry a hint of risk. Without robust KYC verification and ID verification process, there’s no way to eliminate the level of risks associated with online transactions.

How to Implement a Risk-Based Approach to AML?

Taking a risk-based approach to AML is similar to managing any other type of risk in your business. A risk-based approach to AML includes:

1. Identifying Business Risks

To be able to take a proactive approach to AML, you first need to identify the risks. A business needs to review products, services, and portfolios, that contain common AML risk factors, such as:

• Customers – How much do you know about the type of customers for your service?
• Geography – What’s the exposure of the target markets to financial crime?
• Delivery channel – By what means the product will be delivered to the customers?
• Industry – How advanced are the regulations of your business’s industry?
• Monetary Value – Does your product and service has a high monetary value?
• Regulatory Controls – If the regulations in the country are advanced enough.
• Process Controls – How well can you document and follow your processes as a business?

2. Analyzing Business Risks

Analyzing and assessing risks that a business has to face is crucial for a risk-based approach to AML. Using a table of risk factors for each product or service, a business can assign risks. Then the level of risk can be categorized as “low, medium, or high”. 

The FATF has a guide that businesses can use to show how to rank risks using a simple matrix.

3. Implement Policies that Eliminate Risks 

Once the risk assessment is complete, businesses need to make policies and implement policies that help mitigate risks. These policies should make sure that the right level of scrutiny is applied to the right type of risks. 

There should be an ideal balance between high scrutiny for high risks, and minimal friction for customers with low risks.

Technologies Involved in Anti-Money Laundering

To manage risk and maintain the risks of a business, there needs to be a solution that can cover every part of the business. There are a lot of AML technologies out there that can automate the risk-assessment process for new customers, and new transactions within seconds. 

Technologies involved in anti-money laundering can be broken down into two categories:

1. Know Your Customer

Know Your Customer (KYC) is the combination of customer due diligence and enhanced due diligence that regulated organizations comply with to make sure their customers are real people and not someone posing as someone else. If there’s a customer that poses a level of risk needs, to be monitored throughout the relationship with the business. 

In an economy that’s moving towards digital solutions, new solutions that cater to online ID verification, and ID proofing are always coming up. These technologies can help businesses identify whether a customer is a genuine person or a criminal with stolen ID data.

2. Transaction Monitoring

The process of monitoring a customer’s transactions, be they small or big is known as transaction monitoring. Transaction monitoring techs are designed to eliminate the risk of money laundering. These techs can monitor digital transactions across all business channels and look for suspicious behavior.

The cost of these solutions to the business is the only consideration businesses need to have before finalizing a technology.

Frequently Asked Questions