The international financial realm has grown by leaps and bounds over the past decade alone. The rise of digital technologies and the expansion of legitimate payment options available outside of the scope of traditional fiat currencies has undoubtedly become a driving force behind this surge at the global scale, with the whole of the financial services sector (which encompasses the various banking, lending and wealth management arms within this industry) accounting for 20%-25% of the world’s economy.1 In spite of this growth and the rise in number of financial outlets now available for exploitation by bad actors however, the premise behind traditional money laundering has all but withstood the test of time. Money laundering remains the process of injecting funds of illegal origins back into a legitimate financial system, exchanging illegally acquired funds for “clean” money so as to obscure their source and subsequently allow those behind this activity avoid detection by law enforcement. The process can occur via a number of avenues, and has now grown to also include the cryptocurrency space that continues to skyrocket with respect to investment as it moves towards achieving both mainstream and government approval. Most often though, money laundering centers around traditional bank transfers and the abuse of legitimate businesses to wash illicit funds.
Given a major uptick in government-backed efforts to raise awareness on various forms of financial crime found both domestically and abroad, there is arguably a greater sense of public knowledge as to how the money laundering process occurs, and red flags to watch out for, than ever before. This holds especially true for those operating within the banking space who have been tasked to uphold today’s stringent regulatory safeguards while acting as the gatekeepers for the personal financial information of consumers around the world. These positive developments coupled with adoption of global AML/CFT suites offering robust machine learning and risk management processes have better mitigated various forms of financial crime across numerous financial service providers worldwide to date, while also leading to the apprehension of those behind these exploits in a growing number of cases. While improving, the AML process remains far from infallible, with financial criminals employing new and sophisticated tactics to successfully bypass certain defenses and make off with quick cash. As such, there remains a greater sense of unknowing regarding the whereabouts of the illicit activity that slips through the cracks and what becomes of the dirty funds that are ultimately laundered. Rather than taking their money and running after eluding financial authorities and regulators alike, criminals are often actively searching for ways to “reinvest” their freshly laundered money back into legal ventures. The same holds true with respect to reinvestment into illegal ventures and the need to continue finding new and legitimate sources of income to add to their dirty dealings. This practice is known as “reverse money laundering” and while it remains a lesser-known commodity, it’s growth has effectively allowed a cycle of destabilizing activities such as drug and human trafficking, and even the orchestration of terrorism to continue around the world.
The process of reverse money laundering (RML) works nearly as straightforward as it sounds: instead of “dirty” money being washed “clean”, clean money is turned dirty. Under these circumstances, legitimate funds can be used to purchase assets or to provide funding to individuals and entire enterprises that are actually fronts for illegal activities such as organized crime, terrorism financing, and even political corruption. Given its wide array of usage, RML has developed into a popular choice amongst criminals, and especially terrorist organizations, seeking alternative ways to keep their revenue streams flowing – the latter in spite of the staunch economic sanctions these groups generally face. Global terror groups will often attempt to bankroll their operations with crowd-funding efforts in which they pose as charitable organizations or a group in need of humanitarian aid. They ultimately will receive charitable donations from various entities around the world, in addition to government funding in many cases, which they will later move for purposes of providing logistical support for planned attacks, encouraging terrorist recruitment, and providing additional support to their destabilizing operations.
For both terrorists and general criminals, once these funds are obtained their conversion into illegal activities can commence and the opportunities become seemingly endless. Most often they turn to “trade-based” money laundering (TBML). TBML Is the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins. The Financial Action Task Force (FATF), an intergovernmental organization which created policies to combat money laundering and other forms of financial crime around the world, has called attention to TBML as it has developed into a significant channel of criminal activity and an important money laundering and terrorist financing vulnerability for the United States and its international counterparts. Most often, the process involves false invoicing (over- or under-billing) for legitimate and illegitimate products, with the sole purpose of retaining the surplus values created. The end goal of course is to make it nearly impossible to tell where the legitimate funds end and illegitimate funds begin. When used in conjunction with more conventional money laundering efforts, as well as the misuse of shell companies to hide the true ownership of funds and traces of transactions, the process becomes nearly fool-proof.
Given the expansion of these practice, federal authorities have encouraged covered financial institutions to be vigilant for suspicious activities that could be signs of reverse money laundering. These can include:
- Suspicious transactions: Exchanges occurring outside of a usual consumer or business’ typical client base or a dollar amount that varies significant from that of their usual financial activity. A suspicious transaction could also be one that simply has no obvious purpose.
- Spontaneous growth: An individual or business may suddenly see a large influx of funds with no legitimate explanation behind it. In these circumstances, organization will often be looking to quickly distribute these funds without delay.
- Complex ownership structures: Criminals often invest their money into shell companies to give themselves an appearance of legitimacy, while also hiding behind complex layers of beneficial ownership structure in an attempt to throw off the proper authorities seeking to following the money trail.
Overall, the practice of reverse money laundering plays a key role in allowing the operations of both domestic and international fraudsters to continue unimpeded. Luckily for financial institutions, reverse money laundering can be tackled through many of the same ways that traditional money laundering currently is. One of the keys to prevention of these activities is staying up to date in maintaining enhanced due diligence (EDD) processes. Advanced risk assessment protocols (i.e. performing comprehensive background screens and security checks on high-risk customers and suspicious transactions – especially those with ties to high-value assets and/or foreign governments affiliations) will not only limit a bank’s potential exposure to illicit financial activity in their own right, but also allow authorities to follow-up on the information provided if warranted. Transaction monitoring can also help to flag unusual patterns of activity to be investigated further, prior to the money laundering cycle proving fruitful for those behind these ploys. All told, analysts agree that employing a robust, all-in-one anti-money laundering solution that also utilizes global sanctions, politically exposed persons (PEPs), and adverse media screening is arguably the top way to stay on the offensive against illicit financial activity of this variety.
Citations
- Ross, Sean. “Financial Services: Sizing the Sector in the Global Economy.” Investopedia, 15 Aug. 2024.
