How Do Criminals Use Money Laundering?

In the latest assessment conducted in 2016 by the Financial Action Task Force (FATF) of Singapore’s financial system, it was reported that Singapore has a strong framework to combat money laundering and terrorism financing.

Despite these encouraging results, the report also found that the island republic still has room to improve financial institutions’ understanding of emerging risks and to follow up on more cases of complex transnational money laundering offences. The deep integration of the international finance system means that consequences of compliance breaches could spill over into other countries that are not involved in the first place.

For instance, following the scandalous 1MDB case in Malaysia in 2016, the compliance sector of the Singapore financial scene has been under the spotlight with swift arrests and charges made to bankers involved in the saga, with the latest BSI banker being slapped with a fortnight in the slammer and fine of S$10,000.

Why Do People Launder Money?

Typically, criminals launder money for two reasons:

  1. ‘Cleaning’ money that originated from dirty or illegal sources
  2. Tax evasion

In 2015, there was an increase in the number of suspicious transactions reports and cash movement reports of 4.91% and 19.7% respectively in Singapore.

The seriousness, complexity and increasing number of cases being exposed warrants a quick run through on how individuals (including government individuals) operate to make this financial crime work.

Step 1: Placement

The first step to laundering your dirty money is to try and insert your cash into the legitimate financial system. The launderer would use ‘smurfs’ who are individuals to exchange these illicit amounts for highly liquid instruments like bank drafts or to simply deposit these illicit funds in smaller denominations into savings accounts.

This is to avoid alerting authorities of large financial inflows of cash into the system that would warrant them to investigate the source of these amounts. Subsequently, the launderer would use these financial instruments to begin the layering stage.

For example, in the 1MDB scandal, the placement process was actually the use of public money (selling of $1.2 billion worth of bonds that was backed by the Malaysian government) to create 1MDB to legitimise the use of the public money that was apparently meant for investment purposes.

Step 2: Layering

During the layering stage, these illegal funds could be deposited in financial institutions in multiple accounts to break them down into smaller denominations to avoid detection by regulators.

The funds would be moved around the system electronically and may even cross international borders to create a layer of financial transactions. The money can take the form of offshore bank accounts, assets or may even be used to pump money into legitimate businesses to cover the audit trail of the funds. Subsequently ties with the illegal source of the funds would be obscured.

We can see in the 1MDB case how the layering process can become incredibly complicating for the sole purpose of throwing off authorities from following the money trail.

In this case, there were multiple transactions from 1MDB to different companies under the guise of investing in joint ventures with them. Such transactions included numerous investments with PetroSaudi and conversion of equity stakes with PetroSaudi into loans that eventually led to the sale of their stake in the PetroSaudi joint venture, which amounted to $2.32 billion.

This amount was later deposited into a unit of 1MDB called Brazen Sky Ltd that apparently invests in a Cayman Island fund (which is a country known for being a haven for tax evasions and shell companies). This, along with other long-winded movements of money between 1MDB and other companies (e.g. SRC International etc.), including money pumped into the making of the movie, Wolf of Wallstreet, constitutes the layering process required to make it seem that the money is being used for investment purposes.

Read Also: Top 5 Movies To Learn About Finance Without Falling Asleep

Step 3: Integration

If the criminal can get this far into the game without getting caught, then he has already won ¾ of the battle! The final step would be to return the funds back to the criminal perhaps, but not limited to, the form of physical assets that does not draw too much attention to them from the authorities, such as luxury items and properties, allowing the launderer to enjoy their illegal proceeds.

In the final leg of the 1MDB saga, amidst the flurry of the transactions, a substantial amount of money (over $681 million) was deposited into Najib’s account with the source of it allegedly being a donation from the Saudi government.

Why Should You Care?

While information concerning money laundering may seem to be more relevant to the authorities, since they are the ones who can persecute the crooks, the average joe should also be in the loop of how in line their banks are in accordance to compliance rules and regulations.

If banks were found to have breached such regulations, the negative impact could affect their share prices. According to reports, top banks such as JPMorgan Chase witnessed a fall in its share price by 1% after a security breach in the US.

In extreme cases where too many compliance breaches were made, it could lead to the shuttering of banks, such as with Falcon Private Bank in Singapore this year. In fact, we have seen how breaches of compliance that are not necessarily limited to money laundering, has led to the collapse of banks as witnessed in the 2008 Global Financial Crisis, indicating the seriousness of taking swift action to reprimand even minor breaches to prevent larger ones from occurring.

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