Money laundering is raising as a major threat to the economy worldwide. With the advent of technology and using newer methods to commit financial crimes, many illegal proceeds are camouflaged and made to appear as legal assets. These crimes are very much organized, and their network is evolving, through which they hide their illicit activities from authorities all over the world. The other major threat that money laundering has is that the funds are directed toward terrorist groups, crime syndicates, drugs, and fund criminally minded networks.
Several methods for organising financial crimes such as placement, layering, and integration, are some of the widely used methods, which will be discussed in detail in this blog. The UN Report 2020 says that it is estimated that almost $800 billion to $2 trillion has been laundered. Alarmingly, this is equivalent to 2-5% of global GDP. It is highly essential for financial institutions to be cautious and bring effective AML measures, that would curb illegal activities. This blog post will unravel this white-collar crime, its types —its kinds, and its consequences.
Understanding Smurfing the Challenges it poses on financial institutions:
What is Smurfing?
Smurfing, in financial terms, refers to structuring or layering. It involves breaking down huge portions of money into smaller units, which becomes less suspicious while doing transactions and can avoid detection. The launderer may use multiple individuals or entities to conduct numerous small transactions, making it difficult for authorities to trace the source of the funds. Smurfing often involves cash transactions, as they are harder to track compared to electronic transactions.
How does smurfing work?
To understand how smurfing operates, it is important to understand the various steps involved and their methods. Smurfing is done using credit cards, multiple bank accounts, or shell companies. It is important to note that smurfing is not illegal in itself, but it is mostly used to support many other criminal activities such as tax evasion, terrorism financing, and drug trafficking.
This simple example would illustrate how smurfers operate. For instance, if they want to traffic $10,000, they digress the cash into small amounts. That amount would be less than the threshold of AML reporting requirements. The total money is divided into ten or twelve different bank accounts over a week. Thus, it becomes too challenging to suspect any illegal activity.
Money laundering involves a complex three-stage process, called placement, layering, and integration. In the first stage of placement, smurfs introduce their ill-gotten gains into money markets by cleverly structuring deposits to go unnoticed. In the process of layering, they involve various shell companies and offshore accounts as part of an intricate web designed to disorient law enforcement when tracing these sequentially transferred funds. Finally comes integration, where criminals can claim legitimate ownership of the money.
As financial institutions are required to report any transactions over a certain amount, it becomes easier for them to evade and bypass the checks. Though smurfing may look like an effective way to launder money, it will not become unnoticed on the radar of various financial institutions and AML regulators.
How to detect Smurfing:
First and foremost, financial organisations must have a clear KYC strategy to effectively prevent the exploitation of any weaknesses by malicious actors. Thorough customer due diligence is critical in detecting potential smurfing activities. This can involve verifying the identity and background of customers, understanding their business or occupation, and assessing the legitimacy of their transactions. By implementing structured monitoring, and analysing transactions, a large number of fraudulent transactions can be curtailed.
Customer behaviour and transaction pattern analysis are crucial components of fraud detection systems to identify anomalies or suspicious activities that could indicate fraud. By analysing the average amount per transaction and it is possible to identify transactions that are significantly larger or smaller than usual, which could be a red flag for fraud. Sometimes the money may be deposited from unusual places, or through different modes of transactions, which are different than usual. By scrutinising the spending pattern of the customers, the anomalies can be detected easily. It is always not just one type of change that is taken into account, but rather several factors are considered, which should be in conjunction with other fraud detection methods to ensure the highest level of accuracy.
There are several tools and techniques involved in fraud detection. Transaction monitoring tools are used by banks and other financial institutions to identify patterns of transactions that may be indicative of structuring. Duplicate document check involves comparing documents submitted by customers to detect duplicates or falsified documents, to detect duplicate or falsified documents. Counter the challenges of Terrorism Funding, requires monitoring tools, comprehensive due diligence, and watchlist screening to identify suspicious transactions and individuals.
Development in technology is transforming judgment-making in financial institutions. By combining activities such as social media lookup, data enrichment, and device fingerprinting into one process – what used to take many hours of human labour can now be automated in mere moments. Tthe accuracy rate increases while errors caused by manual work drop significantly.
Unexplained or suspicious transactions, inconsistent transaction patterns, or lack of a legitimate business purpose can be red flags for potential smurfing. Cash transactions are often used in smurfing activities and monitoring and flagging multiple cash transactions conducted within a brief period or across different accounts, particularly if they are below the reporting thresholds, would be a great way to curb illicit activities.
Using tools from FinTech to cater to challenges in smurfing, and tackle threats.
The growth of FinTech has marked a paradigm shift in how the banking system operates, bringing a lot of tools, and checks, and introducing various safety parameters, which can bring many safety measures. It can also early detect anomalies, observes patterns, and ensures seamless operations in banks and other financial institutions.
NetRemit offered by Macro Global, helps prevent illegal financial activities such as money laundering and terrorist financing, analyse transaction data in real-time, and detect patterns of suspicious activity. The system automatically generates an alert, when a transaction is flagged suspicious, which can be taken for further investigation, which helps financial organisations to save money, guard their reputation and save their time which would be otherwise spent on detecting and fighting crimes. Transaction patterns and customer behaviour analysis are automatically detected, and reports are generated based on that. Digital identity verification, automated risk assessments, and regulatory reporting help combat financial crimes.
NetRemit is also fortified with the investigation of real-time data, partnering with third-party service providers, spanning many zones and countries involving different currencies. Especially focusing on anti-money laundering (AML) and know-your-customer (KYC) regulations by verifying customer identities and monitoring transactions for suspicious activity with ken focus on sanction checks, PEP, Watchlists enhance compliance.
With an expert team, rendering consultancy support, by leveraging the power of advanced technology and advanced analytics, these tools can help financial institutions stay ahead of evolving criminal tactics and protect themselves and their customers from financial crime. Embedded with tools, and techniques that automatically analyse, detect, and raise a red flag in case of any anomaly detected would enhance the security, while real-time consultancy services and support will fortify the organisation to achieve business goals.
Developments in the area of fintechs are exponentially growing, which enables new platforms, tools, and techniques are continually evolving to detect fraud. With the advent to prevent money laundering, including smurfing, various financial institutions are increasingly adopting technology to enhance their battle against crime.
Types of smurfing in banks:
Surfers and fraudsters use several techniques and are classified as several types of smurfing.
Structuring: Cash structuring or transaction structuring is one of the most used methods of money laundering. The surfer will deposit the amount, which would be lesser than the threshold in different bank accounts to avoid triggering a suspicious transaction report (STR) or currency transaction report (CTR).
Splitting: Splitting involves breaking down a large transaction into smaller transactions to avoid detection. However, splitting may involve dividing the funds into smaller amounts and conducting multiple transactions over a longer period, rather than making multiple transactions at once as in structuring.
Layering: This type of smurfing involves creating multiple layers of transactions or transfers to further obfuscate the source of funds. For instance, a smurfer may transfer money from one bank account to another and often changes banks. This will be very difficult for the banks to trace the source of the funds.
Nominee Accounts: In this type of smurfing, a person or entity opens multiple bank accounts using false identities or using the names of others, and then uses these accounts to conduct multiple transactions on behalf of the actual beneficiary. This can help mask the true ownership and origin of the funds.
Currency Exchange Smurfing: This involves exchanging large amounts of cash into different currencies, often in smaller denominations, through multiple currency exchange transactions. Fraudsters use this method to convert illicit funds into different currencies to further conceal their origin and make them harder to trace.
Risks posed by smurfing:
Over the years, experts in financial institutions, banks, and MTOs have been combatting surfing, and have identified some of the challenges they are:
- Difficult to detect: Fraudsters using surfing use advanced techniques through which they avoid detection intentionally. This creates a lot of challenges for the AML system to identify or detect them.
- Avoids transaction reporting requirements: Illegal surfers pay much lesser amounts, which are not necessary for the banks to detect. Thus, they escape from the radar and do not get detected.
- Facilitates other illegal activities: Along with surfing, they combine other illegal activities, such as drug trafficking, corruption, or fraud, to conceal the proceeds of crime and enable further criminal activity.
Structuring involves conducting multiple transactions in amounts just below the reporting threshold to avoid detection. Structuring involves splitting larger amounts into smaller transactions to stay below the reporting threshold and avoid detection. The process of structuring causes severe damage to the banks, causing serious Legal and Regulatory Risks, when the bank or the financial institution fails to identify and report structuring activities. They may face legal and regulatory risks along with heavy financial risks, including fines, penalties, and sanctions imposed by authorities. They may also be subject to reputational risks, which can impact their brand image and customer relationships.
Money laundering is a serious global threat as it funds inhuman activities. An increasingly popular technique to hide illicit financial activities is smurfing, where criminals take advantage of unwitting money transfer operators using offshore transactions or cross-border payments. This results in severe economic consequences, compliance burdens, regulatory challenges, sophisticated techniques, technological advancements, transnational nature, high-value assets, and political instability. Often, political instability and global unrest are outcomes of unregulated money in the wrong hands.
Effective combatting of money laundering requires coordinated efforts among countries to address these crimes. With robust regulatory frameworks, technological advancements, and international cooperation in place, several crimes were detected early, and several crimes in their earlier stages were aborted. Robust checks and balances in place would be necessary to combat money laundering and bring global harmony.
NetRemit a global cross-border payment solution for money transfers catering to international transactions, with fortified AML technology that safeguards all transactions and includes suspicious activity reporting, offering comprehensive safety to banks and other financial institutions.
To avail NetRemit, and explore a plethora of FinTech products from Macro Global, call us at +44 (0)204 574 2433 or mail us at salesdesk@MacroGlobal.co.uk. We are a revolutionary neo-gen FinTech company incepted to bridge the gap between Financial Organizations and the growing expectation of customers.
Saravanan P. Selvam, CEO of Macro Global at the Seamless Europe 2023 event- Messe-Berlin, brought forth a wealth of expertise and forward-thinking strategies, offering a comprehensive outlook on the topic...