Money laundering is an illegal activity that involves taking money that was earned from criminal activity and making it appear to have come from a legitimate business. For instance, criminals take money from drug trafficking rings – which is considered dirty money – and “launder” it to make it look clean.
The money laundering process involves three steps: placement, layering, and integration. Placement requires the perpetrators to put the dirty money into a legitimate financial system, like a bank.
The next step is layering, which conceals the illegal source of the money by processing it through a series of transactions and adjustments that make it difficult to track.
The last stage is integration. At this point, the laundered money is taken out of the legitimate account and used for whatever illegal purposes the perpetrators intended it.
Terrorist financing refers to the solicitation or collection of money with the intention that it be used to support terrorist organizations or acts. The funds can have legitimate or illegal sourcing, but the perpetrator willfully intends to use the money to support terrorism.
The goal of terrorist financing is not necessarily to cover up the source of the funding, but rather to conceal the nature of the activities they are financing. In this scenario, the crime is financing terrorist activities or organizations.
How Are They Connected?
At first glance, it may seem like money laundering and terrorist financing are complete opposites – one aims to clean up money obtained from illegal activities, while the other seeks to use funds, regardless of the source, to finance terrorist organizations.
However, these illegal activities both take advantage of the financial system and often are done together. A majority of terrorist financing comes from illegitimate sources like the black oil market or drug trafficking.
As a result, organizations must implement anti-money laundering (AML) and counter-terrorism financing (CTF) procedures to detect and prevent these illegal activities.
While money laundering and terrorist financing is a risk anytime money is exchanged, there are industries where the risk is significantly higher. These industries include any financial institution like banks, currency exchange houses, check cashing facilities, and payment processing companies. Others include those involved in the sale of real estate, cars, or boats – or any industry with branches located in high-risk countries.
The following characteristics are indicators of a high-risk industry.
When customers are reluctant to provide information or create unnecessarily complex ownership structures involving nominee or bearer shares, there is a heightened risk for money laundering and terrorist financing.
Similarly, if an industry has customers that primarily pay with cash, it can be an indicator of illegal activities. Consider real estate transactions that are paid up in cash and where the source of that cash is unclear. This is also a risk for arms dealers, money service organizations, and privately-owned liquor or convenience stores.
Conducting business with customers who are PEPs – politically exposed persons – also puts you at greater risk for money laundering or terrorist financing. These individuals often have a high net worth and can influence government contracts or public decisions, requiring businesses to implement additional due diligence measures.
Clients who exhibit unusual behaviors may also indicate a higher risk. For example: if their activity or level of spending is inconsistent with their lifestyle, they have multiple accounts with no explanation or have professional advisors that turn over rapidly there is a good chance illegal activities are occurring.
Likewise, if transactions do not make commercial sense or the clients seem to be paying higher fees than normal without specific reasoning, the behavior should be investigated.
There is also a heightened risk when customers are known to have a criminal history or are linked to terrorist organizations.
High-Risk Products or Services
Industries that involve certain products or services can also be a factor contributing to a higher risk of terrorist financing or money laundering.
A large volume of electronic payments like ACH, wire transfers, remittances, and prepaid cards can be indicative of illegal activities. There are additional risks since you are not verifying the identities of your consumers in person. There is also the potential that many transactions are being performed at once to allow for layering.
If a business engages in electronic banking services and allows for online account opening or remote mobile deposits, there is a better chance that criminals will try to exploit them.
These industries include investment businesses, trust and company services, accounting services where books and records may have been falsified, and insolvency services.
Similarly, companies that are involved in the sale of cars, boats, planes, real estate, and other real property also have a higher risk level, as buying expensive assets is a way for money launderers to clean up dirty money.
High-Risk Delivery Channels
Businesses that provide services to clients virtually and never actually meet them are at higher risk of being used for money laundering and terrorist financing.
This includes remote banking and payment services, as well as currency exchanges and real estate transactions where the buyer is not present.
High-Risk Geographic Locations
Industries that have business locations centered in certain countries have an inherent risk of money laundering and terrorist financing. The Financial Action Task Force (FATF) or other international governing bodies identify such locations.
Countries that have weak AML frameworks or are susceptible to corruption are more likely to have organizations that conduct illegal activities using their financial systems. Other locations that are at higher risk include bank secrecy havens, emerging countries that are looking for hard currency investments, and places where there is a large volume of illegal drug trafficking.