ComplianceLegalFinanceJuly 02, 2020

Protecting your business from money laundering

The use of money laundering to allow illegal money to be run through legitimate and sometimes unsuspecting businesses has grown due to advances in technology.

Money laundering is the process of running the ill-gotten gains from criminal acts through our financial systems to disguise their illegal origins and make them appear to be legitimate and, therefore, spendable funds. Money laundering can be linked to any crime that generates significant proceeds such as drug trafficking, arms smuggling, extortion, fraud, racketeering, insider trading, tax evasion and other crimes.

It should be noted, however, that laundering techniques are sometimes used to illegally hide perfectly legal funds. Wealthy CEO divorce cases come to mind, for example! And then there's the tendency of government agencies to circumvent spending limitations by reallocating or re-characterizing resources.

The fraud: The money laundering process involves these three basic steps that, in banking parlance, are known as:

  1. Placement — physically placing illegal cash in banks or purchasing goods with it . . . such as art, precious metals, real estate, gems or jewelry and so forth.
  2. Layering — the act of separating the proceeds from their criminal origins through complex moves such as wire transfers; conversion of cash to financial instruments; sale of high value goods such as art, precious metals, etc.; and real estate investments. And offshore shell companies are a common layering tool as well. Shells obscure the beneficial owners through restrictive offshore bank secrecy laws, not to mention attorney-client privilege.
  3. Integration — making the wealth derived from the illicit proceeds appear legitimate. Using funds on deposit in foreign financial institutions as security for domestic loans is a favorite technique. Another ploy is over-billing or producing false invoices for goods allegedly sold across borders.

There are many ways to launder money in a way that the business used to run it through would not even suspect. For example:

  • a large deposit is placed for a custom order and later canceled, a penalty perhaps paid and the balance refunded in nice, clean dollars. This type of scam is used by launderers who kickback a tidy sum to purchasing staff to collude in the transaction.
  • Online auction sites are used by launderers to legitimize cash. A fellow fraudster lists an item, the launderer overpays for it which excludes competitive bids, and the seller of the product receives the overpayment through PayPal. The phony transaction washes the money through a legitimate source and the two crooks split the take in some pre-arranged fashion.


Small businesses are often used to launder cash, particularly those kinds of businesses that normally receive large amounts of cash. These might include:

  • vending companies
  • car washes
  • taverns
  • taxis
  • restaurants
  • currency exchanges
  • casinos, of course
  • art galleries
  • laundromats (pun unintended?)

These kinds of businesses don't have a lot of paperwork to falsify which makes the ruse that much simpler to execute.

The flaw: In the past you'd have to rely on the collusion (or abject stupidity) of others to accomplish most laundering schemes, but these days we've got cybercash, ebanking and the anonymous joys of EFTs and wire transfers. The high-tech tool of encryption facilitates obfuscation at the speed of light! And the sheer volume of transactions (legal and otherwise) makes scrutiny a huge challenge for the financial industry and regulators.

It's often difficult to determine which country's banking laws have jurisdiction over cross-border transactions. The Internet, offshore banks and shell companies provide a perfect environment for "layering." Trying to find an audit trail among the morass of virtual entities is almost impossible.

Many countries have secrecy laws preventing access to any information. Offshore shell banks are formed to give launderers access to our banking system while insulating them from having to comply with our regulations.

Smurfing. Huge phony purchases in the U.S. are made with illegal funds laundered via a technique called smurfing. Smurfing is sometimes referred to as structuring. Co-conspirators make small deposits (under $10K) into several differently titled accounts in several U.S. banks. These transactions are designed not to call attention to themselves, therefore not triggering Suspicious Activity Report (SAR) filings to alert authorities of possible criminal intent. The items purchased with these funds (e.g., heavy equipment, et. al.) can be shipped to overseas buyers at inflated prices. The laundered money and profits are then split among the confederates.

The fix: Since the USA Patriot Act was signed into law on October 26, 2001, the government has been given extraordinary powers to stem illegal activity being used to fund terrorism. Even before 9/11, there was significant legislation attempting to regulate money laundering, but much of it pales in comparison to the USA Patriot Act.

Financial reporting laws attempt to curb money laundering

In 1970, as part of the Bank Secrecy Act, banks and other businesses were required to report transactions involving amounts in excess of $10,000 (in cash or negotiable bearer instruments) coming into or going out of the U.S. Accounting for these payments, which must be reported on Form 8300, is a real hot-button issue for the IRS.

In 1994, the Bank Secrecy Act was amended to prevent the sale of money orders or cashier's checks for more than $3,000 unless the purchaser's identity was verified.

Millions of Suspicious Activity Reports (SARs) and other reporting mechanisms are filed and recorded every year.

Financial institutions are main line of defense

Our financial institutions are the main line of defense against this destructive crime. The "Know Your Customer" policy for banks is critical to insuring that suspicious transactions are reported to law enforcement via the forms provided by the government.

The U.S. Treasury Department also requires U.S. financial organizations to file specific information about transactions occurring in countries identified as primary money laundering havens.

Small business has role in preventing money laundering

You, too, are part of the national safeguard efforts to prevent money laundering. Perhaps you thought money laundering was only for offshore banks, Vegas casinos and wire transfers bouncing through the global banking system. Not! Your business could easily become an unwitting part of this process as well.

So what can you, the small businessperson, do to identify and prevent money laundering? Let's say you're a jeweler, for example, or an art gallery owner, an antique dealer, or a small CPA firm. 

When dealing with your customers, you might want to ask yourself questions like these:

  • Do I really know this customer? Was he referred by a reliable source or is he of obscure or unknown origin? If a seemingly affluent new client suddenly falls off a bus at your doorstep, alarm bells should ring! Especially if he stops in every other day to buy $9,750 worth of jewelry with cash or travelers checks.
  • Do I really understand this customer's proposed transaction and am I going to be comfortable executing it? Does this transaction make sense considering what I know about the customer and his business?
  • Is this the usual and customary way such transactions are done or are there some curious kinks in it? Why would a total stranger offer to invest a lot of cash in my little business, for example?
  • Are there any records I should be keeping to protect myself? There's no such thing as too much documentation.
  • What technology tools might help me prevent any involvement with money laundering schemes?
  • What can I do to keep myself up to date on the latest ploys?

Work smart

Take some time to peruse the following web sites and learn as much as you can, particularly about the basics of this crime and its drastic economic and social effects.

Keep in mind that money laundering is a crime that affects us all as individuals, business people and responsible citizens. Be aware of how launderers are adapting to the new technologies and opportunities of the 21st century, and do your part to help stop this dangerous threat to society.

An example of technology raising the rate of money laundering activity is the use of prepaid cards.

Prepaid credit cards facilitate money laundering

Prepaid cards are found everywhere—by the checkout counter at your grocery store and deli, at your bank and pharmacy, and even on websites. They are increasingly a popular alternative to cash or paper checks, and a nice option for the "unbanked" segment of the population. Payrolls are being disbursed by these cards, as are some government entitlement programs.

The fraud: Prepaid credit cards exist in two forms, and both rely on remote databases that must be accessed to process a transaction such as MasterCard or visa.

  • Closed-loop prepaid cards are usable only at a certain store or service, such as Target or Starbucks or the Chicago Transit Authority. In general, they are not reloadable, although that is rapidly changing as the technology improves.
  • Open-loop prepaid cards are the ones that pose the anti-money laundering compliance threat. They can usually be reloaded and they can be used anywhere debit or credit cards can be used.

The flaw: Prepaid (stored value) cards are convenient for everyone . . . particularly money launderers. They are completely anonymous and transportable across borders and not subject to normal regulatory controls.

Also, they are not subject to Suspicious Activity Reporting and vigorous due diligence that our banking system relies on to catch crooks.

The fix: Banks and other issuers of the cards have been actively working to protect their product lines from abuse, but the inherent risks are still there.

Improved regulatory control could be imposed upon these instruments, just as it is on all other banking/monetary systems.

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