What is Money Laundering? Why is it used in Scams and Fraud?

Welcome to Scams, Hacks and Frauds.  Do you have a strange shop or restaurant in your town that no-one goes to but never seems to close down?  That might be a front for Money Laundering.

This episode we're taking a step out of our story episodes, as it occured to Cee that although we talk about Money Laundering a lot on the show, we've never really given a good explanation on what Money Laundering is, how it works, and why Scams and Fraud usually result in criminals having to go through this process to realise their ill gotten gains.

Along the way - and please do not try this at home - Cee will explain some of the more common ways that Criminals do money laundering so that if you're asked to participate in money laundering, you'll know what to look for, and why you should stay away.

Cee also talks about some of his own personal experiences having to deal with money laundering checks, and why financial companies might just mysteriously close your bank account or ask strange questions if they think something strange is going on.

We publish new content every other Monday. The  10 minutes our episodes may save your wallet, and help protect your family.

If you like shows like "The Perfect Scam" or "Darknet Diaries" then this show might be for you.  

On our website you’ll find more computer hacking, identity fraud, impersonation, consumer rights and Romance Scams.  To find these and to access our transcripts, visit us at www.scamshacksandfrauds.com.

The transcript and spoken audio are available under the Creative Commons, Share Alike, With Attributions license. For more information on this visit creativecommons.org.  

Transcript

So, we talk a lot about money laundering on this show, but I don’t think I’ve ever really taken an opportunity to fully explain what it is.    So this week we’re going to take a break out from the stories, and talk about what money laundering is, and what some common money laundering steps might look like, so you too can help keep your family safe from Scams, Hacks and Frauds.

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So, if you’ve never heard the term before, Money Laundering might convey pictures of putting large amount of cash into a laundry machine to wash the notes and coins of whatever grime might be on them.  Unfortunately actual Money laundering is nothing nearly so whimsical, it involves a lot of bookeeping and accounting.

It gets its name because it's the art of taking money from a “dirty” source, which might be the sale of drugs, a scam, or just outright theft, and disguising its origins so you can’t tell where it came from, or make it “clean” money.

Regardless of what form it takes, Money Laundering is illegal in its own right, and often, the way the law is written, you can potentially be convicted of it without even knowing you’re doing it.  We’ve previously covered the tragic story of Ebony King, who was convicted when a family friend who owed her money overpaid her directly into her bank account, which she then took out of an ATM to pay the friend back.  It should go without saying that this is something you absolutely should not try to do at home.

Money laundering operations are typically split into 3 phases, Placement, Layering, and Intergration.

In Placement, the criminal's goal is to get the dirty money into the financial system.  Typically, criminal transactions are done in cash, although cryptocurrency is also popular; they don’t typically take Visa or Mastercard.  But if a criminal were to make a large cash or crypto transaction, it would undoubtedly raise questions about where the money came from.

So what is a criminal to do?  Sometimes they call in the Smurfs.  No, really.  Criminals will break their ill gotten gains into smaller amounts for others, the “Smurfs”, to place into their bank accounts, and then pass on the chain.  The more grownup name for this is structuring, as you’re structuring your transactions in sizes and frequency not to set off alarms, but the idea of smurfs with little bank accounts breaking up big money into smaller amounts… well it seems cute.

Other times, they’ll set up a business and issue fake invoice, or pretend to sell goods without ever sending any goods; if you’ve ever gone past a shop or restaurant that never looks like its open, or nobody ever seems to go into, but never seems to close down, I’m not saying for sure thats a front for money laundering… But it could be.  Here in the UK, American Candy stores are often accused of being linked to money laundering, disguising illegitimate funds within real purchases.

We also have previously covered the story of a Chinese ring that would take ill gotten gift cards, buy thousands of dollars of tech at a time, and pass them on to other members of the gang to sell later.

We now move onto the next phase.  Layering.  This phase can take a lot of different forms, and as times change, new ways are discovered to do this all the time.  This could be moving money between bank accounts, buying things to refund them, going to a casino to buy a load of chips, not staying very long, and then cashing them out.   A Criminal could also use fake invoices like before.

Often, Students are recruited to take part in this process.  Desperate for money and short on time for legitimate work, they’re prime targets for money mule teams.  Money is transferred into their bank account, and the student transfers it out again.  Not only is this illegal if it is money laundering, but if they’re caught it can see them lose access to bank accounts and other essential financial services for the rest of their lives.

Layering also looks for ways to move money across borders, particularly to accounts in countries with less security and scruitiny, and changing the currency also helps disguise where it comes from.

In the Cryptocurrency world, you’ll often see advertisments for services called tumblers, or mixing services.  With Crypto, all transactions are in a publicly accessible blockchain, so in theory all transactions should be traceable, but what these tumblers do is mix things up.  A group of crypto users who also want some additional anonymity pool a group of their coins.  The Tumbler then gives each one of the users an equivalent number of crypto from the other participants, sometimes broken up into different transactions to mask them further, and they usually take a small commission for their effort.

The Stock market can also be used for layering.  Rapid buying and selling can make it very difficult to understand what is going on and where the money has originally come from.

Layering can happen repeatedly, the more layers you add, the harder it is to trace the money, but you do lose a little money with each layer, so there is a bit of a trade off. 

The last step in money laundering is Intergration.  If you think of Money laundering as being like a slot machine, the money slot is placement, the spinning wheels are layering, and Intergration is the tray where the money comes out.  You usually end up with less than what you put in.  The money is now dispersed and absorbed into the normal, legal money system.  You now take whatever form the money has taken at the end of the layering process, sell it or turn it back into money you can use, and cash it out.  If you’re bought crypto, sell the crypto.  If you bought stocks or real estate, sell that.  Whatever is left at the end of the process is now clear to use, in theory at least.

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Financial companies in most countries have very strict obligations to look for and stop money laundering and fraud.  When I worked in Insurance in the UK, we were not even allowed to call the team that deals with fraud “The Fraud Team”, at least where a customer could hear - they were instead given some generic name like Customer Relations, or we said there was some sort of underwriting issue.  That might sound weird, but if we were to let a customer know that we suspected fraud, that could actually be a criminal offence itself - called “Tipping Off”, which can result in fines or even jail time.

We mentioned students being recruited as Money Mules earlier when talking about layering.  The very first thing that many of these students experience that tells them that they’ve done something wrong is letter recieved in the post telling them their bank account will be closed.  This letter will not give a specific reason - remember the bank can’t tip them off - leaving the recipient confused about whats going on, and noone at the bank will be willing to explain it… And since Banks do share information about Fraud with each other, they’ll be even more confused when other banks also say no.

If you’ve made a large purchase, like a house, you may have heard of an AML check, or anti money laundering check.  When I bought my home I was required to show where I got my down payment funds from, which meant showing the bank accounts it had come from, and how I’d gotten the funds to put into that bank account.  It's a hassle, but this is why they do it: they have to stop money laundering happening, they have to look for it happening, and if it happens on their watch, they’re potentially liable for it.

You may have also been asked for information about yourself when taking a new financial service such as your income or employer, as well as your address history, even if you’re not borrowing money.  These are called KYC, or know your customer checks.  As part of this process its common for your name and other ID information to be checked against lists of people who have committed fraud before, or who are not allowed to engage in financial transactions due to international sanctions.

If you are asked to do one of these checks, or asked for this information, please don’t take any frustration out on the customer service agent.  They literally don’t have a choice; they don’t get a say in what gets asked, and those checks are to keep criminals out of the financial system.

And if you are asked to do something with your bank account or crypto that seems strange or you don’t understand, stay away.

I’ve been Cee, and this has been scams, hacks and Frauds.  Next time we’re going to look an an employment scam, which, if it wasn’t a scam, would have been textbook layering, and might still actually be layering on top of the scam.  So please, share us with someone you know who’s looking for work so we can help keep them safe too.