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3
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What are the 5 major domains covered in Money Laundering?
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1) Fundamentals & Definitions, 2) High-Risk Vehicles & Customers, 3) Money Laundering Methods & Schemes, 4) Case Studies (Russia Laundromat, Mirror Trades, etc.), 5) Detection & Prevention Frameworks
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===FUNDAMENTALS: Definition & Scale===
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5
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Money Laundering: What’s the FATF definition and the estimated annual scale?
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Definition: ‘Processing of criminal proceeds to disguise their illegal origin.’ Scale: 2-5% of global GDP = $800 billion to $2 trillion annually (UN estimate)
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How does Terrorist Financing differ from Money Laundering across 7 key dimensions?
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1) Purpose: political/religious vs financial gain, 2) Source: licit/illicit vs illicit only, 3) Destination: illegal vs legal activity, 4) Timing: short/medium vs medium/long term, 5) Amounts: small (attacks need little) vs large, 6) Traceability: linear (consumed) vs circular (returns to originator), 7) Detection: onboarding/terror lists vs KYC/CDD
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What are the 3 overlapping methods used by both Terrorist Financing and Money Laundering?
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1) Cash couriers or mules, 2) Money services businesses, 3) Trade-based money laundering (TBML)
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What are the 3 stages of Money Laundering and their core functions?
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1) PLACEMENT: initial entry of funds into financial system, 2) LAYERING: separates proceeds from source through layers of transactions, 3) INTEGRATION: puts laundered proceeds into legitimate economy to appear legitimately derived
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Follow the Money: In the 7-step $10m flow example, list all 7 entities and their jurisdictions/functions.
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1) Company A (Cyprus Shell) - front/no ops, 2) Company B (Lux Holding) - royalties for fake patents, 3) Importer C (Singapore) - fake/over-invoicing, 4) Trading Co D (Dubai Free Zone) - re-export/different AML regime, 5) Trust E (UK Nominees) - dividends/hides ownership, 6) Investment Vehicle F (Channel Islands) - portfolio/secrecy laws, 7) Luxury Real Estate (London) - integration
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In the 7-step flow, which steps represent Placement, Layering, and Integration?
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Placement: Step 1 (Cyprus Shell receives $10m), Layering: Steps 2-6 (through Luxembourg, Singapore, Dubai, UK, Channel Islands), Integration: Step 7 (London real estate purchase)
11
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What makes layering effective? List the 4 key characteristics.
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1) Same $10m flows through each step, 2) Each link looks commercially plausible, 3) Multiple jurisdictions create opacity, 4) Only holistic view reveals laundering
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===PLACEMENT STAGE: Methods===
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13
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Placement Stage: List all 7 methods for initial entry of funds into the financial system.
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1) Cash businesses (car parks, strip clubs, tanning studios, car washes, casinos), 2) Smurfing/cash couriers making many small deposits, 3) Front companies (cash-intensive businesses), 4) Exchanging cash for commodities (precious metals, stones, high-value goods), 5) Exchanging cash for virtual assets, 6) Changing currency to cashier’s/traveler’s checks, 7) Using gatekeepers (attorneys, wealth managers)
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Placement Stage: What 3 additional methods involve complicit parties or digital assets?
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1) Using complicit/corrupted financial institutions (banks, broker-dealers), 2) Utilizing gatekeepers (attorneys/wealth managers) - either complicit or unwitting, 3) Purchasing digital currencies in cash via direct contact or online sites
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Why are criminals most vulnerable during the Placement stage?
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They’re moving large bulk amounts of money and placing it directly into the financial system, making detection easier through AML procedures that focus on sniffing out illegitimate sources
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===LAYERING STAGE: Methods===
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17
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Layering Stage: What are the 5 primary methods to separate criminal proceeds from their source?
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1) Electronic fund transfers (most important method), 2) Creating multiple shell corporations, trusts, offshore accounts or legitimate businesses and shifting assets between them, 3) Leveraging securities and financial instruments, 4) Converting deposited funds into multiple different financial instruments or commodities (precious metals), 5) Transferring ownership of accounts/assets/properties between entities controlled by the criminal
18
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Why do money launderers target certain countries during the Layering stage?
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They target countries that fail to enforce AML regulations, allowing easier movement and obscuring of funds through multiple jurisdictions
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===INTEGRATION STAGE: Methods===
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20
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Integration Stage: What are the 4 primary methods to reintroduce laundered proceeds as legitimate wealth?
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1) Trade-based ML using false/over-invoiced import/export transactions, 2) Purchasing/investing in legitimate businesses using laundered proceeds, 3) Making investments in securities with laundered funds, 4) Business arrangements between controlled entities (zero-interest loans between shell companies, purported debt repayments, false invoicing schemes)
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Why is money almost impossible to trace once it reaches the Integration stage?
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The money is considered ‘clean’ and it’s nearly impossible to distinguish whether the launderer’s wealth is legal or illegal, allowing them to spend without concern
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===HIGH-RISK CUSTOMERS===
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23
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What are the 4 categories of High-Risk Customers for money laundering?
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1) Politically Exposed Persons (PEPs) and their associates, 2) Casinos, securities brokers, dealers in precious metals/stones, 3) Domestic and offshore shell companies, 4) Casas de cambio, currency exchanges, money transmitters
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===HIGH-RISK VEHICLES: Financial Institutions===
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What are the 6 Financial Institution vehicles most vulnerable to money laundering?
1) Correspondent Banking Accounts, 2) Private Banking, 3) Online/Internet Banking, 4) Money Transmitters, 5) Securities Broker-Dealers, 6) Crypto Platforms
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What are the 5 Non-Financial Institution vehicles used for money laundering?
1) Insurance, 2) Casinos, 3) Dealers in precious metals, jewelry and art, 4) Politically Exposed Persons, 5) Sport washing
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According to Europol 2023 data, what are the 8 money laundering tools by estimated relevance?
From most to least relevant: 1) Banks & payments, 2) Trade-Based ML (TBML), 3) Cash, 4) Shell companies & nominees, 5) Real Estate/Arts, 6) Crypto/virtual assets, 7) Hawala/Underground, 8) Gambling & casinos
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Within 'Banks & payments' category, what are the 7 specific methods?
1) Correspondent banking & cross-border wires, 2) Domestic wires/ACH/RTGS, 3) MSBs/remittance operators, 4) Payment institutions/EMIs/neobanks, 5) Card rails & merchant acquiring, 6) Prepaid/stored-value, 7) Money-mule accounts
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===CORRESPONDENT BANKING===
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Correspondent Banking: What's the definition and what are the 3 key ML vulnerabilities?
Definition: Provision of banking services by one bank (correspondent) to another bank (respondent). Vulnerabilities: 1) Financial institution carries out transactions on behalf of customer of another institution, 2) Large transactions with limited information, 3) Different regulations, degrees of controls, lack of due diligence (nesting)
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Correspondent Banking Relationships (CBRs): What's the trend since 2011?
7,000 banks use SWIFT network for CBRs. Total CBRs have declined 20-25% since 2011
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What are the 5 major CBR laundering corridors/schemes?
1) From Russia → Global banks ('Russian Laundromat'), 2) From Russia → London via IB ('Mirror trades'), 3) From Latin America → HK/UK Bank via CBRs (Drug cartels), 4) From Lebanon → U.S. via LCB (Terror/Drug financing), 5) From Baltic/Nordic branches → Global banks
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===CASE STUDY: Russian Laundromat===
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Russian Laundromat: Describe the complete 7-step scheme using fictitious companies.
1) Russian launderers create two fictitious companies overseas, 2) Company A becomes 'creditor' (on paper) of Company B which promises to repay, 3) Debt guaranteed by Russian company AND Moldovan citizen, 4) Co. B defaults, Co. A called to repay, 5) Since Moldovan citizen involved, Moldovan court (corrupted judge) issues repayment order, 6) Moldovan court appoints executor to arrange transfer from Russia to Moldavian Bank, 7) Russian money now in Moldova, moves via Correspondent Banking to EU/US/Rest of world
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Russian Laundromat: What was the scale, timeframe, and bank infrastructure?
Scale: Over $70 billion laundered. Timeframe: Primarily 2011-2014. Infrastructure: Just ONE bank in Latvia (Trasta Komercbanka), ONE bank in Moldova, but 19 banks in Russia. Money went to 5,140 companies with accounts at 732 banks in 96 countries
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===CASE STUDY: Mirror Trades===
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Mirror Trades: Describe the complete scheme and which EU bank was involved.
EU Bank's Moscow branch purchased Russian blue-chip stocks (Gazprom, Sberbank) in rubles. On the same day, a related party sold the same Russian stock at the same price through EU Bank's London branch in USD. Money wired to offshore accounts in USD. Result: converted rubles in Russia to dollars elsewhere with no legitimate economic rationale
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Mirror Trades: What were the key statistics and penalty?
Typical trade size: $2-3 million. Total trades: 2,400. Overall amount: $10 billion. US Penalty (NY DFS): $425 million for compliance failures. Timeframe: Scheme ran until discovered in January 2017
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===CASH COLLATERALIZED LOANS===
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Cash Collateralized Loans: Describe the Type 1 Participation Agreement structure with 7 steps.
1) Borrower and cash collateral provider approach Bank X to propose deal, 2) Collateral provider deposits amount X in cash with Bank X, 3) Bank X proceeds to accounting entry and blocks the deposit, 4) Bank X grants loan to Borrower for amount X (maturity ≤ deposit maturity), 5) Borrower pays interest/principal to Bank X for loan, 6) Bank X pays interest/principal to Collateral provider for deposit, 7) Two contracts: Loan facility agreement (Bank X-Borrower) + Participation agreement (Bank X-Collateral Provider)
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Cash Collateralized Loans: What happens when the borrower defaults, and how does this launder money?
When borrower doesn't pay (step 5 doesn't complete): Bank X has right to transfer loan to collateral provider by exercising participation agreement rights. The collateral deposit is set-off against consideration for loan transfer. Result: Money is laundered as the 'legitimate' loan creates a legal paper trail for the funds
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Cash Collateralized Loans: How can this be combined with Smurfing?
Illicit source makes multiple deposits below reporting thresholds through 'Bank Account 1, 2, 3, 4' (placement via smurfing) → deposits layer into 'Foreign Bank Account' and 'Domestic Bank Account' → 'Loan Agreement' created (justification) → results in 'Laundered Proceeds' that can buy luxury items (integration/investment)
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===INSURANCE===
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Insurance as ML vehicle: What type of policy is most vulnerable and what are the 3 key vulnerabilities?
Most vulnerable: Insurance policies with CASH VALUE. Vulnerabilities: 1) Decentralized oversight, 2) Sales-driven objectives, 3) Lack of control over intermediaries
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Insurance ML: What are the 4 primary methods?
1) Purchase and redemption of single premium insurance bonds, 2) Early withdrawal from policy (paying penalties), 3) Launderer buys policy with illicit money, claims changed mind, pays penalty, gets 'clean' money back from insurance payout, 4) Funds now appear legitimate as 'insurance payout'
46
===CASINOS & GAMBLING===
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Casino ML Method 1: How does the chip purchase and check repayment scheme work?
Launderer buys chips with cash from crimes, then requests repayment by check drawn on the casino's account. This is a typical way to pay for corruption - dirty cash converts to a 'legitimate' casino check
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Casino ML Method 2: How does the international transfer scheme work?
Gambler claims to be traveling to another country where the casino chain has establishment. Asks for credit to be made available there. Withdraws it as a check in the other jurisdiction - money has now crossed borders with casino as intermediary
49
Gambling ML: What are the 2 common hedging techniques?
1) Customer routinely bets BOTH SIDES of same sports event (both teams to win) - overall loss minimal (hedging), 2) Two customers frequently bet large amounts to cover both sides of an even bet: betting both red AND black or odd AND even on roulette, OR betting both WITH and AGAINST the bank in baccarat
50
Online casino payouts: What are the 3 main payment methods and their ML risks?
1) Online bank account: eliminates need to enter banking info, works like virtual wallet (not available in US), 2) Credit card payments: can deposit via card but withdraw via Bitcoin, 3) Bitcoin: casinos offer bonuses for Bitcoin use since they avoid fees - highly anonymous
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US Casinos: What are the top 5 suspicious activity types filed in SARs (2014-2022)?
1) Minimal gaming with large transactions (11.35%), 2) Gaming Activities - Other (11.00%), 3) Transactions below CTR threshold (9.90%), 4) Alters/cancels transaction to avoid CTR requirement (8.52%), 5) Two or more individuals working together (7.54%)
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US Casinos: What are key statistics about the industry?
According to American Gaming Association: 1,011 Casinos in US (2023). Gross Gaming Revenue: $108.56 BILLION (2023). Physical casinos must pay winnings above threshold via bank transfer, triggering AML controls
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South-East Asia Casinos: What's the scale of the problem?
UNODC estimated in 2021: 340+ licensed and non-licensed casinos in Cambodia, Lao PDR, Myanmar, PLUS 45 casinos in Macau SAR and 17 in Republic of Korea. In 2020 alone, China arrested over 75,000 suspects involved in illegal cross-border gambling
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Australian Casino Case (2024): What was the $450M penalty for and what were the 5 main violations?
Casino group acknowledged lack of 'appropriate oversight' by board/senior management. Violations: 1) Failure to comply with AML/CTF Act over many years allowed high-risk customers to move millions, 2) Failed to carry out required checks on 121 customers (including those with law enforcement interest), 3) Failed to appropriately monitor billions in transactions including international flows, 4) Relationship with casino junket operator despite known organized crime connections, 5) Private gaming room with 75 incidents of suspicious activity involving millions in cash
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Casino to Real Estate ML Route: Describe the complete carousel scheme with 4 stops.
1) Casino: win dirty money, get 'legitimate' casino payout, 2) London Real Estate: purchase property creating legal ownership structure (possibly through Trust with hidden beneficial owner and offshore company), 3) Bank HELOC (Home Equity Line of Credit): borrow against property value, 4) Cayman Islands Bank ELOC: establish international credit line. Result: money laundered, taxes evaded, credit history built, leverage increased
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===REAL ESTATE===
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Real Estate Market: What's the global market size relative to world GDP?
Real estate market is 6X the World GDP. 2022 values: Residential $469 trillion, Commercial $130 trillion, Total $599 trillion. World GDP in 2022: $101 trillion
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US Real Estate: What percentage of purchases avoid AML checks and why?
US Treasury's 2024 National Money Laundering Risk Assessment: 20-30% of residential real estate purchases are made WITHOUT financing, therefore NOT subjected to AML checks by mortgage lenders. Total annual: 2.4 million unit sales, $1.4 trillion transaction value
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US Real Estate AML: Who performs checks and what's the gap?
AML done mainly by: 1) Banks (if there's financing), 2) Title insurers under GTOs (for certain cash deals). Gap: Many cash transactions OUTSIDE GTO areas have NO systematic AML checks
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===ART & FREEPORTS===
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Art Market: What's the global value and estimated ML percentage?
Global art sales value: $65 billion. Online sales: $13 billion. Art auctions: $26 billion. Estimated ML value: At least 10% of turnover (FATF, UN, WB sources)
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Art ML: What are the 5 favorite techniques?
1) Use of cash for anonymity, 2) Use of shell companies or non-profit organizations to hide identity, 3) Under or over-pricing the art piece, 4) Use of fictitious sales or fake auctions, 5) Forgery (fake art) - e.g., to use as collateral for bank loans
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Art-market AML: How do EU (AMLD5/6) and US federal rules compare across 7 dimensions?
1) Scope: EU covers galleries/dealers/auction houses/intermediaries/freeports vs US has NO federal requirement for fine-art dealers (antiquities rules pending), 2) Threshold: EU €10,000 vs US none, 3) Core obligations: EU requires CDD/KYC/BO checks/STR/records vs US has none for art dealers, 4) Freeports: EU explicitly covered vs US no specific rule, 5) BO: EU required as part of CDD vs US no federal mandate on art dealers, 6) Reporting: EU STR to national FIU vs US no SAR duty for art dealers, 7) Supervisor: EU national AML supervisors vs US none (FinCEN for antiquities pending)
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Modigliani Case ('Seated Man with a Cane' 1918): How were shell companies used to hide beneficial ownership?
The painting was looted by Nazis from Jewish art dealer Oscar Stettiner in 1944. Decades later, it surfaced under control of powerful art-dealing family/dynasty. Ownership hidden behind offshore company in PANAMA ('International Art Center') registered through Mossack Fonseca (Panama Papers). Family argued painting belonged to offshore company, not directly to them, obscuring ownership and provenance
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Art ML via Overvaluation: Describe the 4-step NFT/art laundering scheme.
1) Create 'Piece of art' or NFT, 2) Sell to yourself under hidden name, 3) Artificially overvalue at 10x real value (wash trading), 4) Money is now 'laundered' - but to avoid taxes, store art at Freeport to defer capital gains taxes
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Freeports: List the 5 major locations worldwide.
1) Geneva, Switzerland (most famous), 2) Delaware, USA, 3) Senningerberg, Luxembourg, 4) Hong Kong, 5) Changi Airport, Singapore
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Geneva Freeport Problems: What did the 2014 Swiss Federal Audit find?
Spectacular increase in value of objects stored 2007-2014, leading to suspended duties and taxes exceeding 1 billion Swiss francs (CHF). Sales occur in free zone escaping VAT. Registered value depends 'solely on self-declaration' leaving room for over/under-valuing. Transactions 'fall outside AML/CFT legal framework' and 'UBO information not available'
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Geneva Freeport Scandals: What are the 4 major incidents?
1) 1995: Haven for international network of looted antiquities linked to Getty Museum in Los Angeles, 2) 2003: Swiss customs discovered 200 stolen ancient Egyptian treasures including two mummies, 3) 2016: Italian police investigation found looted Roman and Etruscan artifacts stored by bankrupt English art dealer, 4) EU Parliament report called it 'at the heart of a series of scandals'
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Luxembourg Freeport (positive case): How does it differ from Geneva? Describe the 3-layer control system.
Since July 2015, licensed operators are 'obliged entities' under AML law - they are gatekeepers. Controls: 1) Licensed freeport operator must identify UBO of stored assets and keep records, bound to report suspicious transactions to FIU, 2) Indirect tax office provides AML supervision and UBO info access, 3) Direct tax office, Customs, and FIU all have access. This is UNIQUE case for freeports
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===NON-FUNGIBLE TOKENS (NFTs)===
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NFT Market: What was the peak market cap and current scale?
Peak: ~$480 billion (early 2022). Current (2024): ~$18 billion. Major hype cycle has deflated significantly
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NFT as Collectible (Case 1): When is an NFT NOT subject to KYC/CDD requirements?
When it's a unique 1-of-1 digital artwork (e.g., single-edition animated painting) sold once with: 1) No promise of profit, dividends, or utility beyond ownership/provenance, 2) Uniqueness (1-of-1), 3) No expectation of return/yield/buybacks, 4) Non-fungibility (not interchangeable), 5) Function is cultural/expressive (art), not financial. Treated like buying a painting at gallery - generally no KYC required
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NFT as Financial Asset (Case 2): When DO NFTs trigger AML/KYC requirements?
When used mainly for payment or investment purposes. FATF R.15/INR.15 extends AML/CFT to virtual assets and VASPs. Platforms offering exchange/custody/payment-like services for NFTs risk being treated as VASPs. Regulators use functional test: if users can trade, platform matches orders, routes value, or holds assets → inside AML perimeter → expect KYC
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NFT ML Red Flags: What are the 4 key transaction patterns indicating potential money laundering?
1) Rapid resale/flip of same NFT among related wallets within short timeframes, 2) Unusual pricing: purchases far above/below market value or inconsistent with artist reputation, 3) Wash trading indicators: same NFT repeatedly sold between small closed group of wallets, 4) Layering: NFTs moved across multiple marketplaces or chains without clear economic rationale
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NFT Platform Issues: Why is it hard to map the legal home of NFT platforms? List 4 reasons.
1) Decentralization and ambiguity: operations (smart contracts, backend, governance) spread across jurisdictions, 2) Use of shell entities: holding/operating companies in tax/regulatory havens not publicly disclosed, 3) Low regulatory/filing obligations: don't have to disclose full global corporate structure, 4) Changing domicile: platforms shift registration or use subsidiaries as regulatory environments evolve
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NFTs as Securities: What changes if NFTs are classified as securities? Cover 3 dimensions.
1) Issuing/Launching: public sales need registered offering or exemption (Reg D/S in US, EU Prospectus exemptions), marketing claims become regulated disclosures, sales may be limited to accredited/professional investors with resale restrictions, 2) Trading venues: secondary trading only on licensed securities venues (US: ATS or national exchange, intermediaries need broker-dealer registration), 3) AML/KYC: becomes 'securities-grade' with full CDD, sanctions screening, SAR reporting, record-keeping - AML trigger comes from securities license itself
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Bored Ape Yacht Club (BAYC) NFT: What's the notable sale record?
BAYC #8817 sold for RECORD $3,408,000 USD. It's the first time it was made available since minted. Less than 1% of all Bored Apes have the gold fur trait. Market cap of all NFTs peaked around $480B (early 2022) but crashed to ~$18B (2024)
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===HAWALA & UNDERGROUND BANKING===
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Hawala: Describe the complete trust-based system with 5 steps using Abil's $1000 transfer example.
1) Abil in US gives Hawala broker $1000 cash and receives password 'abcd', 2) Hawala broker US contacts Hawala broker Pakistan and shares password, 3) Abil sends password 'abcd' to his sister in Pakistan, 4) Sister provides password to Pakistan Hawala broker and receives ~$990 (after commission), 5) No money actually crossed borders - just ledger balancing between brokers. Quick, untracked, cheap ($10 fee), secure
80
Underground Banking (Italy-China): Describe the complete scheme with both parties' actions.
ITALY side: 1) Workshop owners collected cash earnings (often undeclared), 2) Instead of depositing in Italian banks (triggering AML) they delivered to underground bankers ('fei qian' = flying money networks), 3) Underground bankers aggregated cash in Italian cities. CHINA side: 4) They communicated with counterpart bankers in China, 5) Counterpart in China paid equivalent yuan to relatives/suppliers of Italian-based businessmen. Result: Italy case discovered 'secret bank' with branches in 8 major cities moving billions to China via 'special services' (fake invoices + hawala)
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===CRYPTOCURRENCY===
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Cryptocurrency ML: Is tracking Bitcoin holders straightforward?
NO, tracking the real-world identity of a Bitcoin account holder from a transaction is NOT straightforward. HOWEVER, it IS possible, especially with help of blockchain analysis tools
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Crypto Mixers: Describe how mixers work to break traceability (without vs with mixer).
WITHOUT mixer: A→G (10), B→F (5), C→H (30) - direct traceable links. WITH mixer: A, B, C each send to Mixer M (10, 5, 30), Mixer charges fees and pools amounts into M1, M2, M3, then forwards NEW clean funds to G (10), F (5), H (30) with no direct link to original senders. Mixer breaks the on-chain connection
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Crypto Mixers: When are they LEGAL vs ILLEGAL?
ILLEGAL situations: 1) When used by criminals to provide anonymity by breaking traceability (e.g., 2020 FinCEN vs Harmon case), 2) Illegal in many countries regardless of intent. LEGAL conditions: 1) When registered as Money Services Business (MSB), 2) Must comply with regulatory requirements, 3) Must implement AML system, 4) Identify suspicious activities and report through SARs, 5) Maintain user records
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Decentralized Exchange (DEX) vs Centralized Exchange (CEX): What are the 3 key differences?
CENTRALIZED (CEX): 1) Regular cryptocurrency exchange where the exchange company controls the process, 2) Uses KYC requirements, 3) Examples: Binance, Coinbase. DECENTRALIZED (DEX): 1) Operates without central authority, 2) Enables users to conduct transactions directly with one another without intermediary, 3) NO KYC requirements
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Nested Exchanges: Describe the scheme and the issues created.
Example scheme: 1) I open account on Binance, 2) I create my own website 'BitXswap', 3) Someone sends money to me thinking they're using full exchange, 4) I use MY Binance account to buy/sell/trade on their behalf. Issues: 1) No KYC (user never vetted by real exchange), 2) Risk of Money Laundering, 3) Frauds, 4) Example: Suex OTC was a notorious nested exchange
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===MONEY LAUNDERING STRATEGIES===
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What are the 5 major ML strategy categories?
1) International Trade Price Manipulation, 2) Smurfing, 3) Structuring, 4) Black Market Peso Exchange (BMPE), 5) Trade-Based Money Laundering (TBML)
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International Trade Price Manipulation: What are the 3 techniques?
1) False reporting on invoices (commodity misclassification), 2) Commodity over-valuation or under-valuation, 3) Repeated importation and exportation of same high-value commodity (carousel transactions)
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Smurfing: What's the definition and mechanism?
Dividing illegal proceeds between multiple persons ('smurfs') who then make multiple deposits into many separate accounts, often at different institutions, to avoid reporting thresholds
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Structuring: How does it differ from smurfing?
Structuring: splitting up funds into multiple deposits below certain thresholds to avoid triggering reporting requirements. Similar to smurfing but focuses on the threshold avoidance aspect rather than the people aspect
92
Black Market Peso Exchange (BMPE): Describe the complete 6-step Colombia drug cartel example.
1) Colombian cartel sells drugs to US market for US dollars, 2) To launder USD, cartel contacts intermediary (peso broker), 3) Broker takes cartel's US dollars in exchange for Colombian pesos, 4) Broker's US employees place dollars in US banking system, 5) Broker offers US dollars to Colombian importer in exchange for Colombian pesos (at favorable rate), 6) Importer uses drug US dollars to buy US goods which are shipped to Colombia. Circle complete - widely used for legitimate purposes too
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BMPE Recent Case: Describe the mobile phone scheme with 4 steps.
1) Drug cartels sold drugs to Italian buyers as credit, 2) Profits invested by brokers across China, Turkey, US into companies implicated in conspiracy, 3) Chinese-based company ordered mobile phones from domestic distributors, shipped them to Colombia via United States, 4) Upon arriving in Colombia, phones resold on local market and proceeds delivered to cartels - circle complete
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Trade-Based ML - Under-Invoicing: Using the OECD diagram, describe the complete scheme from stolen goods to laundered proceeds.
PLACEMENT: Stolen goods from illicit source (drugs, guns, cash) at market value $900,000 sent to Foreign Company A. LAYERING: Same owner controls Domestic Company B. Goods sent at deflated price $600,000 from A to B (under-invoiced). Company B receives goods at market price but only shows $600,000 cost. INTEGRATION: Company B sells goods at market price $900,000 to Domestic Company C, generating $300,000 'legitimate' profit. Result: Laundered proceeds can buy luxury items (car, house, watch, island). Justification and Investment stages complete
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Cash-Intensive Business ML: Why are restaurants ideal for laundering and what's the 4-step process?
Why ideal: 1) FBI/IRS visits see lots of customers coming/going so revenues justified by clientele, 2) Success hinges on getting dirty money into bank, 3) Expected to have lots of cash on hand. Process: 1) Collect restaurant receipts daily, 2) Make daily deposit at bank with inflated cash amounts, 3) Keep deposits roughly within 10% of same amount each time (bank won't be suspicious), 4) Restaurant appears to have food/alcohol sales justifying all cash - source now looks legitimate
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===MONEY LAUNDERING STRUCTURES===
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What are the 7 key ML structures used to conceal beneficial ownership?
1) Shell Companies, 2) Shelf Companies, 3) Nominees, 4) Fronts, 5) Trusts, 6) Charities and Nonprofits, 7) Corporate Registries
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Shell Companies: What's the definition?
Companies that exist only on paper. They can hold bank accounts and conduct financial transactions while providing no signs that they are a shell
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Shelf Companies: How do they differ from shell companies?
A corporation that has no activity or business. Some may be completely inactive for YEARS before being sold off to a buyer (they sit 'on the shelf')
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Nominees: What's the definition and function?
Person, company or entity into whose name assets, securities or property is transferred, while leaving another person or entity as the REAL owner. Hides true beneficial ownership
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Fronts: What's the definition?
Company or organization that is established and controlled by another company or entity but gives the impression it is NOT affiliated or connected to the entity controlling it
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Trusts: Describe the 3 parties in a trust structure.
1) SETTLOR: person who creates the trust and transfers property to it (may reserve specific powers), 2) TRUSTEE/ADMINISTRATOR: handles and administers the trust, 3) BENEFICIARY: party for whose benefit the property is held
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Charities and Nonprofits ML risk: What are the 2 primary abuse scenarios?
1) Emerged as significant risk for TERRORIST FINANCING, 2) Corruption: corrupt officials sometimes request bribes be paid to charities under their control (appears legitimate on surface)
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Corporate Registries: What are they and why are they ML risks?
Collect and store information about corporations and other legal entities created within a jurisdiction. Typically maintained by government agency or department. Risk: varying levels of transparency and beneficial ownership disclosure requirements across jurisdictions allow criminals to hide behind opaque structures
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===CASE STUDY: Russia Laundromat (Full Detail)===
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Russia Laundromat: What are the 3 key statistics about scale and infrastructure?
1) Scale: Over $70 billion laundered (state-of-the-art system), 2) Cost: Provided exceptionally clean money backed by court ruling at fraction of cost of regular laundering schemes, 3) Infrastructure: Used JUST ONE bank in Latvia (Trasta Komercbanka), ONE bank in Moldova, but 19 banks in Russia
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Russia Laundromat: What made it 'state-of-the-art' and how many entities were involved?
'State-of-the-art': Money was backed by COURT RULING giving it legal legitimacy. Distribution: Money went to 5,140 companies with accounts at 732 banks in 96 countries. Created comprehensive international network with judicial cover
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===CASE STUDY: Mirror Trades (Full Detail)===
109
Mirror Trades: What were the full statistics - size, volume, stocks, penalty, and date discovered?
Typical trade size: $2-3 million per transaction. Total volume: 2,400 trades = $10 billion overall. Most common stocks: Gazprom, Sberbank (Russian blue-chips). US Penalty: $425 million (NY Department of Financial Services). Discovery: January 2017
110
Mirror Trades: What were the 3 violations according to NY DFS?
1) Companies issued orders to EU Bank's Moscow equities desk to purchase Russian blue-chip stocks (paid in rubles), 2) Later (sometimes same day) related party sold same stock at same price through EU Bank's London branch (paid in USD), 3) Selling counterparty (typically registered in offshore territory) paid in US dollars - scheme had NO legitimate economic rationale but effectively exchanged/laundered rubles for dollars
111
===DETECTION: Red Flags and Indicators===
112
What are the 3 fundamental statistics about fraud pervasiveness?
1) 10% of firms commit fraud yearly, 2) Only 33% detected, 3) Destroys $830 billion annually
Financial Crimes
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