Knowing your ML/TF Typologies
Learning how money laundering and terrorist financing occurs will help you fight financial crime effectively.
Money laundering and terrorist financing typologies show the various methods, techniques, schemes and instruments criminals use to conceal, launder or move illicit funds.
Recognising money laundering and terrorist financing typologies is an essential skill for any compliance officer to be effective in their fight against financial crime and to ensure regulatory compliance for their financial service as a regulated entity.
Created out of real world examples and case studies of money laundering and terrorist financing, ML/TF typologies are a useful way for an AML/CTF compliance professional to build a set of indicators or ‘red flags’ to look out for when performing their compliance obligations. This post contains many of the money laundering typologies from 2019 found in the typology reports shared by regulatory bodies.
It is important to recognise that money laundering and terrorist financing typologies are always evolving, as the financial sector innovates so too does the capabilities of criminals. For this reason a compliance officer should always be looking to update and learn more typologies, focusing on those most relevant to their product or service. Indicators by themselves may not always lead to a reasonable suspicion of criminal activity but can be a very useful control to trigger enhanced due diligence and further monitoring.
Finance Intelligence Units and International Regulatory Organisations publish yearly reports on money laundering and terrorist financing typologies based upon their enforcement experiences. These reports are useful reference material for executing on an AML/CTF compliance risk based approach.
Money Laundering and Terrorist Financing Indicators
Based on the reports published by financial intelligence units and global regulators we have put together a glossary of indicators and AML typologies. Drawn from the most recent 2019 money laundering and terrorist financing typology reports, we have compiled a concise list of typologies for compliance professionals use as a reference and keep track of.
Predicate offences are powerful indicators to recognising money laundering typologies. A predicate offence is any criminal activity which predicates the need for money laundering to utilise the proceeds of crime. Here is a list of predicate offences:
- Illegal Acts
- Bribery of judicial officers
- Child pornography
- Breach of trust by a public officer
- Keeping a common bawdy house
- Procuring juvenile prostitution
- Frauds on the government
- Keeping a gaming or betting house
- Betting, pool-selling and bookmaking
- Secret commissions
- Fraudulent manipulation of stock exchange transactions
- Possession of uttering counterfeit money
- Money increment scheme
Money Laundering Typologies
Unusual Customer Behaviour
Tracking customer behaviour is important when trying to recognise any signs of money laundering or terrorist financing, some examples of unusual customer behaviour as indicators to ML/TF include;
- The transaction was inconsistent with the customer's profile
- Associations with multiple accounts under multiple names
- High volume of transactions within a short period
- Cheques issued to a family member(s) at arms length from person
- Cheques made out regularly to companies and individuals not linked to the account
- Early surrender of insurance policy incurring substantial loss
- Elaborate movement of funds through different accounts
- Frequent early repayments of loans
- Frequent deposits of winning gambling cheques followed by immediate withdrawal of funds in cash
- Use of multiple names to conduct similar activity
- Unexplained income inconsistent with economic situation
Usage of large amounts of cash
The use of large cash deposits and transactions can be an indicator of ML/TF if your business deals with cash, for example;
- Large cash deposits used for investment
- Large cash deposits into company accounts
- Large amounts of currency exchanged for traveller's cheques
- Large amounts of cash from unexplained sources
- Obtained loan and repaid balance in cash
- Use of safety deposit box to store large amounts of cash
- Withdrawal of a large amount of funds in cash
Smurfing is a method of ML/TF involving numerous transactions (deposits, withdrawals, transfers), often various people, high volumes of small transactions and sometimes numerous accounts to avoid detection threshold reporting obligations. Indicators of smurfing are;
- Multiple individuals sending funds to one beneficiary
- Multiple chip cash-outs on the same day
- Multiple cheques cashed into one bank account
- Multiple loans obtained over a short period of time with repayments made in cash
- Multiple issuance of stored value cards and debit cards accessed offshore
- Multiple transactions of a similar nature on the same day in different locations
- Structuring cash to purchase traveller's cheques
- Structuring the placement of betting transactions
- Structuring the purchase of bank drafts
- Structuring cash deposits/withdrawals
- Structuring chip cash-outs
- Structuring wire transfers
Unusual Insurance Claims
Insurance claims can be used to obfuscate the proceeds of crime. For example;
- Insurance policy being closed with request of the payment to be made to a third party accounts
- Insurance policy cashed outside the jurisdiction of purchase
- Large amount of cash used to purchase insurance policy
- Purchase of an insurance policy followed by immediate surrender
- Regular claims made less than the premium payments
- Use of intermediary to make insurance policy payments
- Use of an offshore company to pay the premiums for an insurance policy taken out privately by individuals
Association with Corruption
Corruption (bribery of officials) to facilitate money laundering by undermining AML/CFT measures, including possible influence by politically exposed persons (PEPs): eg investigating officials or private sector compliance staff in banks being bribed or influenced to allow money laundering to take place. See Verifying Politically Exposed Persons for more details on working with PEP customers.
Currency exchanges can be used to assist with smuggling proceeds of crime to another jurisdiction or to exploit low reporting requirements on currency exchange houses to minimise risk of detection.
Purchase of Portable Valuable Commodities
A technique of ML/TF is to purchase instruments for purpose of concealing ownership or to move value without detection and avoid AML/CTF controls, for example moving diamonds to another jurisdiction.
- Large purchases of gold with transportation of the gold conducted by the individual
- Physical carriage of cash and/or bearer negotiable instrument out of Australia
Purchase of Valuable Assets
Criminal proceeds are invested in high value negotiable goods to take advantage of reduced reporting requirements to obscure the source of proceeds of crime. Introducing Tranche 2, will increase the reporting obligations when transactions involve high value goods.
- Cash used to purchase large amounts of gold
- Gold transported by the individual but purchased with funds drawn from a company account
- High level of funds placed on stored value cards
- Purchasing high-value assets (e.g. motor vehicles) followed by immediate resale with payment requested via cheque
- Purchase of high-value assets e.g. diamond ring, bullion, motor vehicle, property
- Regular sale of large amounts of precious metals and jewellery
- Regular sale of large amounts of gold with payment received in cash
- Sale of large amounts of gold from an individual
A commodity exchange has the potential to avoid the use of money or financial instruments in value transactions and therefore avoiding any AML/CTF controls, eg direct exchange of methamphetamine for gold bullion.
Use of Wire Transfers
Electronically transferring funds between financial institutions and often to another jurisdiction to avoid detection and confiscation.
- Wire transfers to tax haven countries e.g. British Virgin Islands
- Wire transfers from third parties located in tax haven countries
- Wire transfers used to purchase insurance policies
Underground Banking / Alternative and Unregistered Remittance Services
Informal mechanisms based on networks of trust used to remit monies. For example hawala and hundi, these services are exploited by money launderers and terrorist financiers to move value without detection and to obscure the identity of those controlling the funds. AUSTRAC has recently launched a campaign to reduce the number of unregistered remittance dealers in Australia.
- Depositing multiple large amounts of cash and receiving multiple cheques drawn on that account
- Frequent remittance of bearer negotiable instruments e.g. bank drafts, offshore
- Use of a remittance dealer to send a large amount of cash
- Use of a remittance dealer to send large cash amounts overseas
Trade-based Money Laundering and Terrorist Financing
Typically trade based ML/TF involves invoice manipulation and uses trade finance routes and commodities to avoid financial transparency laws and regulations.
Gaming activities can be used to obscure the source of funds, for example buying winning tickets from legitimate players, the usage of casino chips as currency for criminal transactions and online gaming to obscure the source of criminal proceeds.
- Deposit of gambling proceeds into a foreign bank account
- Frequently playing games with low returns but with higher chances of winning
- Inserting funds into slot machines and immediately claiming those funds as credits
- Leaving large amounts of cash with a bookmaker and requesting a cheque in return
- Purchasing and cashing out casino chips with no gaming activity
- Transfers from company accounts to private betting accounts
- Use of third parties to purchase gaming chips
- Use of a third party to gamble proceeds through casinos
Abuse of non-profit organisations (NPOs)
Non for profit organisations can be used to raise terrorist funds, obscure the source and nature of funds and to distribute terrorist finances.
- Funds transferred to a charity fund
Investment in Capital Markets
Capital markets are used to obscure the source of proceeds of crime to purchase negotiable instruments, often exploiting relatively low reporting requirements.
Mingling (business investment)
A key step in money laundering involves combining proceeds of crime with legitimate business monies to obscure the source of funds. Organised crime often purchase high cash flow businesses to facilitate this process.
Use of Shell Companies/Corporations
A technique to obscure the identity of the persons controlling funds and exploit relatively low reporting requirements.
- Use of companies to move funds under the guise of legitimate transactions
Use of Offshore Banks/Businesses, including Trust Company Service Providers
To obscure the identity of persons controlling funds and to move monies away from interdiction by domestic authorities.
- Drafts cashed for foreign currency e.g. euros, US$
- Cash deposited domestically with the funds subsequently withdrawn from ATMs offshore
- Numerous bank drafts purchased domestically and subsequently deposited internationally
- Regular use of stored value card to withdraw funds overseas
- Use of internet banking to transfer illicit funds into 'mule' accounts
- 'U-turn' transactions occurring with funds being transferred out of Australia and then portions of those funds being returned
Use of Nominees, Trusts, Family Members or Third Parties
Obscuring the identity of persons controlling illicit funds through the use of third parties or corporate structures.
- Frequent transfers indicated as loans sent from relatives
- Investment cheques issued to a family member
- Third party present for all transactions but does not participate in the actual transaction
- Transferring funds into third-party accounts
- Using third parties to undertake wire transfers
- Use of an intermediary to make large cash deposits
- Use of third parties to undertake structuring of deposits and wire transfers
Use of Foreign Bank Accounts
To move funds away from interdiction by domestic authorities and obscure the identity of persons controlling illicit funds.
- Investment funds sent to countries of interest
- Large sums credited into accounts from countries of interest
- Transferral of wealth to countries with high banking secrecy. For example Switzerland.
Identity Fraud / False Identification
Used to obscure identification of those involved in many methods of money laundering and terrorist financing.
- Use of non-resident accounts
- Use of false and stolen identities to open and operate bank accounts
New Payment and Financial Services Technologies
Use of emerging payment technologies for money laundering and terrorist financing.
- Use of internet banking to frequently access Australian-based accounts internationally
- Use of anonymity enhancing digital currencies
- Use of cryptocurrency exchanges with no KYC reporting, such as decentralised exchanges
Use of “Gatekeepers” Professional Services (lawyers, accountants, brokers etc)
Gatekeepers are used to obscure the identity of beneficiaries and the source of illicit funds. This may also include corrupt professionals who offer ‘specialist’ money laundering services to criminals.
- Use of gatekeeper (e.g. accountant) to structure deposits and purchase real estate.
Understanding money laundering and terrorist financing typologies is essential for any AML/CTF compliance officer to achieve their compliance obligations and effectively fight financial crime globally.
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