Money laundering is the illegal process of taking money generated by criminal activity and making it seem to have come from legitimate sources by passing it through the financial ecosystem. As an example, in August 2023, the Singapore Police Force conducted a massive money laundering offensive and arrested 10 foreigners for alleged money laundering and forgery offences. In total, they seized or froze $737 million in assets, including properties, luxury goods, vehicles, and gold bars. Of these assets, they issued prohibition of disposal orders against 105 properties, which included luxury situated in the prime enclaves in Singapore.
A slew of other high-profile money laundering crackdowns this year revealed that criminals are increasingly using virtual currencies, online gaming, blockchain technology, decentralized finance (DeFi), and investment scams to launder money.
With criminals using new technology and digital methods to launder cash, we explore these tactics, and the actions and regulations used to support AML and CTF efforts.
Money laundering typically comprises three stages: placement, layering, and integration.
Placement
The start of the ‘wash cycle’ for dirty money is when financial criminals inject illicit funds into the financial ecosystem. These funds come from illegal sources, such as: drug trafficking, gambling, organized crime, fraud, and more.
Increasingly, digital transactions are facilitating money laundering activity – illicit use in cryptocurrency hit a record $20.1 billion in 2022, according to a report by blockchain data firm Chainalysis.
Earlier this year, the Australian Transaction Reports and Analysis Centre (AUSTRAC) cautioned that cryptocurrency has also grown as a mainstream channel for money laundering and terrorist financing.
On August 23, 2023, the US Department of Justice charged the founders of cryptocurrency mixer, Tornado Cash, with money laundering and sanctions violations.
Besides cryptocurrency, criminals are also turning to virtual currencies and in-game items in online gaming platforms to launder money. They could potentially use ill-gotten gains to purchase in-game items and sell them to other users in legitimate transactions.
Layering
At this stage, criminals obfuscate the origins of their funds through multiple complex layers of financial transactions.
Besides the common red flags for trade-based money laundering, compliance professionals should look out for suspicious transactions from new layering methods:
Integration
After complex layering, the funds are carefully integrated through legitimate sources to make the money look ‘clean’. Once the money has been integrated into the financial ecosystem, criminals may use successfully laundered funds to:
In response to the growing risks posed by illegal use of cryptocurrencies, online gaming, and other sophisticated means of money laundering, FATF and national regulators have updated or added new AML/CFT measures, calling for more stringent know your customer (KYC) checks and enhanced due diligence.
Cryptocurrency regulation
FATF: In 2019, the financial watchdog updated Recommendation 15 to include virtual assets (VA) and virtual asset service providers (VASPs). FATF’s most recent review in June 2023 revealed that 75% of the jurisdictions assessed against the updated standards are either non-compliant or semi-compliant with the requirements. The report underscored the importance of recognizing the increasing threats from terrorist financing and proliferation financing, with both the public and private sectors encouraged to implement appropriate risk identification and mitigation measures.
Online gaming regulation
America: The American Gaming Association (AGA) expanded its AML guidance on best practices for AML and compliance to cryptocurrency, digital wallets, and online gaming among others.
Ultimate beneficial ownership
Regulations are being extended to sectors outside of financial services in a bid to promote beneficial ownership transparency and mitigate money laundering risks.
Australia: The country is currently consulting on Tranche 2 reforms to its AML/CFT regime, which will align Australian law with international standards by extending KYC processes to traditional “gatekeeper” professions and industries businesses – such as lawyers, accountants, real estate, trust and company service providers.
Singapore: Under the Housing Developers Act, Singapore announced new AML/CFT requirements for property developers, mandating that appropriate due diligence checks must be done on new and existing buyers based on risk profiles.
Moody’s Analytics KYC solutions automate customer onboarding and continuous risk monitoring across a range of compliance processes. Integrated with leading data sets, financial institutions can conduct due diligence and enhanced due diligence, with a platform that delivers an always-on profile of risk for individuals or entities.
We help customers mitigate AML and CTF risks in 197 countries, across 211 jurisdictions: completing +45 million new customer and third-party checks each day, including screening against our database of +19 million risk profiles, +460 million entities, and +17,000 sanctioned entities.
Please get in touch to discuss your approach to AML and CTF, we would love to hear from you.
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