ON SECURITY
The Basics of Money Laundering: Case Studies
12 MIN READApr 28, 2021 | 09:00 GMT
Stratfor
Editor's Note: The following is part two of a two-part series on money laundering; part one may be accessed here. Part one detailed how money launderers use a variety of tactics to place, layer and integrate illicit funds into the formal economy. In the process, they invariably intersect with legitimate companies and services, ultimately seeking to obfuscate the origin of illicit funds by converting them into legal assets such as cars, properties and investments. Part two will outline recent case studies that illustrate how money launderers use their tactics in real-world situations. It will also explore how technology could change money laundering in the near future and how regulators could expand beyond the financial sector when it comes to penalizing companies for facilitating money laundering operations.
Case Studies
To illustrate how criminals use the tactics and schemes highlighted in part one of this series, the following section will review some recent money laundering cases. Criminal charges related to money laundering are typically associated with charges linked to the criminal activity that earned the illicit revenue such as fraud, theft or drug trafficking. Details of the cases laid out below suggest that authorities first became aware of the illegal activity, which then led them to evidence that supported additional charges related to money laundering. The nature of the charges highlights how money laundering can be difficult to detect on its own, especially in sophisticated cases. Money laundering operations can operate separately from the criminal activity that generates the illicit funds so that a money laundering tactic used for one type of criminal activity (e.g., drug trafficking) could also be applied to another, unrelated type of criminal activity (such as online fraud).
The first case highlights how an amateur money laundering operation facilitates a criminal investigation and allows prosecutors to directly connect illicit funds to the purchase of goods and services. In spring 2020, federal investigators arrested and charged Fahad Shah for making fraudulent applications to the Paycheck Protection Program Congress established to help businesses following the outbreak of the COVID-19 pandemic. As part of the alleged fraud, Shah grossly inflated his company's payroll in order to receive over $3 million in loans. He deposited the illicit funds into his business account (placement), skipped the layering step and proceeded directly to the integration step by purchasing a Tesla, paying off his personal mortgage and making personal investments. Based on the details provided, it is unlikely that Shah was even attempting to launder the money, but his use of illicitly acquired funds made him liable to the charges.
Since 2019, there have been at least three major anti-money laundering (AML) law enforcement actions targeting online scammers. The arrests and indictments of dozens of individuals underscore the growing focus on internet-based cybercrime that has only increased over the past year during the COVID-19 pandemic. With illicit revenue comes the need for money laundering, and cybercriminal groups have proved capable of establishing sophisticated schemes in the recent past.
In August 2019, U.S. federal investigators indicted 80 members of a Nigeria-based cybercriminal group that laundered at least $6 million in illicit funds. Two U.S.-based members of the group established dozens of front companies with associated bank accounts and business registrations — often imitating the names of legitimate businesses in an effort to trick victims. The victims completed the placement stage by transferring funds requested during the scam. The group then layered the illicit funds by transferring them to illicit money exchangers who arranged for payments to the Nigeria-based organizers in the local currency. The actors carrying out the scams and benefitting from the illicit funds presumably remain at large in Nigeria and are free to continue their operations and recruit more money laundering associates abroad.
In March 2020, federal investigators charged and arrested 24 individuals for carrying out similar online scams as outlined above that earned the group upward of $30 million by compromising online accounts and convincing individual and commercial victims to transfer up to hundreds of thousands of dollars at a time. The group used less sophisticated money laundering processes, however, making it easier for investigators to shut down the entire criminal operation rather than just the money laundering aspect. The group set up front companies in the U.S. state of Georgia and established bank accounts associated with those companies to facilitate placement of the funds. Unlike the operation above, the group skipped the layering process and simply withdrew the illicit proceeds from the fraudulent business accounts in order to integrate the funds into the formal economy. The more direct connection between the placement and integration steps of the scheme likely helped investigators capture the whole group and dismantle the entire operation.
A February 2021 indictment accused six members of a cybercriminal group of laundering and transferring $55 million in illicit funds they stole through business email compromise and fraudulent applications for COVID-19 financial relief to organizers in Ghana from 2013-2020. In addition to establishing dozens of bank accounts to handle the placement of illicit funds, the suspects also established at least nine import/export front companies that layered the funds through trade-based money laundering. The suspects used the illicit funds to purchase items such as vehicles or food products, which they then exported to Ghana via the import/export companies they had established. Once in Ghana, local co-conspirators sold the products on the local market and directed the proceeds to the criminal organizers based there for integration. The more sophisticated efforts to layer the illicit funds could explain why this group operated longer and turned over more illicit revenue than the previous two groups despite their having conducted similar online criminal activities. While police were able to arrest the six suspects based in the United States, the criminal organizers in Ghana presumably remain at large.
One of the most sophisticated money laundering operations in recent years became public in a September 2020 indictment accusing five people of laundering millions of dollars in illicit drug revenue since 2008 from the United States to Mexico via China in an elaborate trade-based money laundering operation. This scheme added an extra step in the layering process by using illicit funds to purchase goods in the United States and export them to China, where local co-conspirators used proceeds from those sales to purchase additional goods for export to Mexico and other countries in Latin America. The money launderers then sold the products in Latin America to legitimate businesses at a profit and transferred the proceeds of the sale to the drug-trafficking leaders. While this particular operation serviced illicit revenue from drug sales, similar money laundering structures could handle illicit funds from other criminal activities.
Such a money laundering operation is complicated, but this one succeeded judging from the fact that the suspects were able to carry out the scheme for 12 years. In addition to being operationally secure by disguising the money laundering operation as a legitimate trans-Pacific import/export business, it provided several other advantages:
By distributing the money laundering scheme in the United States and China, it contained the damage done from the arrests in the United States. Even though those members were taken out of the operation, which likely led to disruptions, the Chinese and Latin American nodes of the network likely remain intact.
As a major global producer, China maintains sizable trade relationships with countries around the world, making it easier to conceal illicit activity within the larger stream of legitimate trade. The United States and China conducted $558 billion in trade in 2019 while Mexico and China conducted $90 billion.
Finally, the scheme turned a profit by selling the products converted from illicit funds at a markup. Money laundering operations generally result in a net loss due to the costs associated with obfuscating sources of illicit revenue and moving funds around.
New Technology
The proliferation of new technology has benefited criminals, creating entirely new fields of financially motivated crime that allow them to exploit email and social media and scam victims on the other side of the world. Money launderers have also exploited new tools such as money-transferring applications, encrypted communication platforms and cryptocurrencies to hide and move illicit funds. Like legitimate users of the technologies, criminals use the new tools because they are convenient, cheap and widely adopted throughout the world. Additionally, money laundering operations benefit from the higher degree of anonymity such platforms provide, which supports plausible deniability in case of law enforcement scrutiny.
New technology, however, also presents liabilities for criminals. Reliance on private companies for communications and money transfers means that investigators can access records through warrants presented to the host companies.
Cryptocurrencies that operate on blockchain technology (such as Bitcoin) are also open to scrutiny since transaction amounts and account numbers are essentially public information. Finally, the centralization of activities and information on personal electronic devices means that if investigators are able to seize a smartphone, tablet or laptop, they can typically gain access to a trove of valuable evidence and intelligence they can use to shut down larger criminal operations.
Person to Person (P2P) money transfer platforms such as Zelle, Venmo and Cash App are tools criminals can use against their victims to transfer money in the first place, facilitating the placement stage. They have gained popularity during the pandemic and their newfound acceptance is likely to persist. Additionally, P2P money transfer platforms assist money launderers in the layering process because they can move the funds across multiple accounts, obfuscating the destination of the funds and complicating investigation efforts.
An April 2021 indictment accused a Detroit-area drug trafficker of using Zelle and Venmo to transfer and conceal illicit funds.
Encrypted communication services such as WhatsApp, Telegram and other custom services allow criminals and money launderers to communicate among themselves and coordinate financial activities.
In August 2020, U.S. law enforcement agencies dismantled an al Qaeda-led money laundering operation that used WhatsApp to reach out to followers and solicit Bitcoin donations to support terrorist networks in Syria.
In March 2021, a federal grand jury returned an indictment against the chief executive officer of Canada-based Sky Global, a company investigators accuse of providing customized, encrypted electronic devices specifically designed to allow criminals to evade law enforcement detection. The indictment alleges that Sky Global facilitated the distribution of heroin, cocaine and methamphetamine to markets around the world and laundered illicit funds from those markets to the criminal organizers. Among the services Sky Global allegedly provided was the ability to remotely delete communications or other files that could be used as evidence of the illegal activities.
Cryptocurrencies such as Bitcoin help anonymize financial assets and make them easily transferable worldwide, facilitating an increase from approximately $1 billion in laundered money in 2018 to $2.8 billion in 2019, according to Chainanalysis. Cryptocurrencies are immensely helpful to money launderers in the placement and layering steps of the money laundering process, but vulnerabilities remain.
Chainanalysis also claims 55% of criminal cryptocurrency activity was concentrated in a small subset of 270 blockchain addresses, meaning that investigators could disrupt a majority of cryptocurrency activity by focusing on a relatively small batch of bad actor accounts.
The nature of cryptocurrencies and the blockchain technology that underpins them means that transactions and transfers are carefully documented and in most cases viewable by the public. While cryptocurrency accounts can be anonymized, they still have distinct identities linked to the individual(s) using them to conduct criminal activity. Online criminal marketplaces that sell drugs and other illicit products through the mail often rely on cryptocurrency transactions, but the steady pace of law enforcement disruptions of those marketplaces and associated arrests highlights their weak operational security. Moreover, cryptocurrency exchanges — which facilitate the purchase and sale of currencies — are under increasing scrutiny, as they serve as the bridge between virtual currencies and traditional financial markets.
In January 2021, a California man pleaded guilty to exchanging the equivalent of $13 million in Bitcoin without registering his financial activities. He was arrested after he agreed to facilitate the sale of Bitcoin for over $80,000 in cash for an undercover law enforcement officer posing as a money laundering agent for an international drug trafficking organization.
The vulnerabilities associated with new technologies mean that money launderers are unlikely to abandon more traditional money laundering tactics anytime soon. Instead, it is more likely that criminals will incorporate the new technologies into the more tried-and-true techniques. Criminals can use these technologies to augment traditional money laundering schemes, either by reducing the operating costs of front companies (and reducing losses) by making them online only; using the sale of online services to facilitate trade-based money laundering operations; and increasingly incorporating cryptocurrencies into the placement and layering stages in order to increase the obfuscation of illicit funds over various channels. As in the case studies above, money laundering operations are most successful when they link several techniques together, so adding new technologies into the mix provides more tools to obfuscate the origin and destination of illicit funds.
Threats to Business Operations
As crackdowns on the financial sector make it harder to launder money through banking institutions, criminals increasingly could target companies in other sectors for their money laundering operations. National authorities seeking to crack down on money laundering and other financial crimes penalized companies $10.4 billion in 2020 for various infractions, up from $8.14 billion in 2019, according to Fenergo. While these penalties focus almost exclusively on banks and financial institutions, any private company facilitating money laundering is potentially liable.
Understanding how money laundering schemes work and the variety of criminals involved in them can help legitimate business ventures avoid the associated risks. Whether relying on bank accounts to receive fraudulently acquired government loans, impersonating legitimate companies to conduct scams, or selling products purchased with illicit funds in legitimate retail outlets, money launderers rely on the formal economy. A recent threat assessment of organized crime in the European Union noted that 80% of criminal networks in the European Union use legal business structures to carry out their activities, including money laundering.
Trade-based money laundering, which has been shown to specifically involve attempts to launder illicit funds through the trade of legitimate commercial and retail goods, could see criminal finances and those behind them mix with legitimate businesses — posing risks to reputations and risks of legal liability.
