How Money Laundering Schemes Changed in the Digital Age

Technological developments, especially in the financial services sector, have provided criminals with new avenues of money laundering. For instance, criminals exploit potential vulnerabilities in online platforms such as e-commerce websites and digital payment systems to layer and integrate illicit funds into legitimate transactions.

Cryptocurrency further obfuscates money laundering gambits as it provides a high degree of anonymity and enables cross-border transactions that are difficult to trace.

This blog outlines money laundering techniques gaining prevalence in the digital era and methods to mitigate the risks. Curtailing money laundering can help financial institutions reduce the costs due to violations and increase operational margins in the long run.

Digital Money Laundering Techniques

Money laundering is an age-old financial crime that has evolved significantly in the digital age. Criminals are now exploiting technological advancements to launder illicit proceeds across the globe. These include:

1. Digital Transaction Layering

Money laundering in the digital era has evolved to sophisticated layering techniques. Criminals exploit the speed, anonymity, and global reach of digital transactions to obscure illicit funds through mechanisms such as:

• Multiple accounts
• Complex financial structures
• Conversion to different currencies
• Rapid movements across jurisdictions

These techniques make it difficult for banks and law enforcement authorities to track or uncover the underlying criminal activities.

2. Currency Mixing

Also known as coin mixing or coin tumbling, digital currency mixing is a technique criminals employ to enhance the anonymity and privacy of the transactions conducted using virtual currencies or cryptocurrencies, such as Bitcoin, Ethereum, etc. They leverage cryptocurrency tumblers or mixers to obfuscate the origin of the digital currency by blending multiple transactions and combining them with other funds or cryptocurrencies from different sources.

The decentralized nature, use of complex algorithms, and intricate cryptographic techniques make it challenging for financial institutions, regulators, and law enforcement agencies to combat digital currency mixing.

3. Exploitation of E-Commerce and Online Marketplaces

Online marketplaces offer a vast reach, ease-of-use, and a certain level of anonymity. Criminals  exploit these online marketplaces, including e-commerce portals and virtual/online gaming platforms, to convert or move their illicit funds into/through:

• Virtual assets
• Gift cards
• Fake invoices
• Cryptocurrencies
• Money mules
• Fake accounts

These exploits make it difficult for the agencies to differentiate between legitimate and fraudulent or suspicious transactions.

4. Shell Companies and Offshore Accounts

Shell companies exist only on paper and lack any substantial operations or assets. Offshore accounts provide financial anonymity and privacy to fraudsters and criminals.

Criminals and fraudsters establish offshore accounts in the name of shell companies to mask their involvement and distance themselves from illegal activities. Further, money laundering via offshore accounts involves the following stages to anonymize the transactions:

• The money launderer moves the illicit funds from the domestic jurisdiction to the offshore accounts via complex transactions and multiple intermediaries to create layers.
• After the funds are in the offshore account, the launderer engages in various transactions to legitimize the money through:
  • Investments
  • Loans
  • Purchase of virtual assets
• Finally, the laundered money is moved to the home country as legitimate funds —completing the money laundering lifecycle.

The entities and accounts are often registered in jurisdictions with lax regulations, making detection and investigation more difficult.

5. Social Media Mules

People are spending more time on social media nowadays, making it attractive for criminals. Fraudsters and money launderers use online social media platforms to run fake-money-making schemes or programs to lure people and involve them with the scheme.

The launderers then use the persons’ personal bank accounts to funnel the illicit proceeds. They use these people as money mules and often target those with no criminal record to reduce the risk of getting caught.

In a nutshell, here’s how it works:

• Criminals lure young and impressionable people, referred to as mules
• The money is transferred from the mules’ accounts to third-party bank accounts, via transfer or converted to cash
• The money is then converted into cryptocurrency, such as Bitcoin

This increases the intricacy of transactions, making the money laundering process difficult to detect.

6. Gig Economy

Criminals are actively exploiting the Gig economy, which has seen significant growth in recent years. Freelance services are one of the most prevalent activities that criminals exploit by creating fraudulent gig worker accounts or using legit gig workers as intermediaries to transfer illicit proceeds.

This allows launderers to blend illicit funds with legitimate earnings and makes it difficult to detect or trace the origins of money.

Mitigating the Money Laundering Risks

Mitigating money laundering in the digital age requires a multi-faceted approach that combines regulatory measures, technological solutions, and collaborative efforts. Here are some strategies banks and financial institutions can employ to combat money laundering in the digital age:

1. Leverage Advanced Data Analytics, AI, and ML

Dealing with cybercrime threats case-by-case is no longer feasible due to the vast threats. Financial institutions need to harness the power of advanced data analytics, artificial intelligence (AI), and machine learning (ML) to strengthen their fight against money laundering techniques. Employing digital solutions powered by these cutting-edge technologies can help banks and financial institutions analyze vast amounts of transactional data in real-time and combat money laundering. It can also help them:

• Recognize Unusual transaction and behavioral patterns
• Detect anomalies
• Determine risks associated with customers and transactions
• Identify suspicious activities
• Find hidden connections
• Prevent illicit funds from entering the financial system
• Reduce the risk of human error and false positives
• Improve compliance and reporting processes

2. Collaboration and Information Sharing

Collaboration and information sharing between financial institutions, law enforcement agencies, and regulatory bodies play a pivotal role in effectively detecting, preventing, and disrupting money laundering activities.

For instance, sharing insights, intelligence, and suspicious transaction reports can enhance the ability of banks and financial institutions to detect and investigate complex and digital money laundering schemes.

Further, banks can use the information sharing platform and publicly available reports by various regulatory bodies, stock exchanges, international organizations, and independent entities to effectively combat money laundering. These include:

• Public databases
• Annual reports
• International body reports
• FATF lists.
• Reputable media sources
• Third-party databases
• Reports by national/supranational risk entities.

3. Know Your Customer (KYC) Regulations

Stringent KYC regulations are an integral part of anti-money laundering (AML) efforts that require financial institutions to maintain a robust customer identification and verification process to prevent money laundering, terrorism financing, and other financial crimes.

Efficiently verifying customer identity, conducting due diligence on high-risk customers, and monitoring transactions can help banks and financial institutions detect suspicious activities and prevent potential money laundering on online marketplaces, social media, and the gig economy. It includes:

• Customer Identification, including digital identity verification (for online presence)
• Risk Assessment
• Customer Due Diligence
• Enhanced Due Diligence
• Report Keeping
• Filing suspicious activity reports (SAR)

4. Blockchain Analysis

Cryptocurrencies are increasingly used in money laundering schemes. However, they always leave a digital trail on the blockchain. However, techniques such as coin mixing, stealth addresses, and enhanced privacy features offered by cryptocurrencies make it more challenging to trace transactions.

With blockchain analysis tools, forensic techniques, and domain expertise, investigators at the bank or law enforcement authorities can:

• Trace transactions
• Identify associated wallets involved in illicit activities
• Collaborate with cryptocurrency exchanges to track down perpetrators

This analysis involves:

• Monitoring the cryptocurrency exchanges
• Tracking the movement of funds
• Grouping addresses based on patterns of activity
• Analyzing the transaction history of a suspicious address
• Identifying high-volume or high-frequency transactions
• Flagging suspicious behavior for further investigation

Suggested reading:

Whitepaper – Mitigating Financial Crime Risks in the Age of Cryptocurrency

Combating Money Laundering with Domain Expertise and AI/ML-Powered Digital Solution

Money laundering strategies are becoming more intricate and sophisticated with the advancements in technology. However, with the right combination of advanced data analytics, digital solutions, collaboration, and due diligence financial institutions can safeguard the integrity of the financial system and combat money laundering activities in the digital age.

Anaptyss helps banks and financial institutions strengthen their anti-money laundering (AML) and countering finance for terrorism(CFT) compliance capabilities with its specialized financial crime compliance and fraud prevention practice.

By leveraging deep domain expertise and ALFA – AI/ML-powered digital solution for real-time transaction monitoring, watchlist screening, and KYC risk profiling – Anaptyss helps financial institutions design and implement robust AML programs to counter money laundering in the digital age.