Money laundering is a type of malicious activity that is practised by criminals across the globe. It is the process of converting illicit proceeds into “clean” money, which cannot be traced back to the original source of income. Aside from being a financial crime, money laundering is also associated with other types of crime, such as drug trafficking, human trafficking, and prostitution. The reason why criminals and terrorist groups need to launder their funds is to legitimise them, before introducing them into the financial system as legal currency.
Money laundering and drugs have historically had a close link. The drug war in the 1980s prompted governments to implement money laundering regulations in an attempt to trace and seize the proceeds of drug trafficking in order to apprehend drug gangs and banks that aided them. In this post, we’ll take a closer look at how drug cartels launder money and how banks are engaged in the process.
Where do drug dealers hide their money?
It’s important to know and understand the vast range of money laundering processes within the trade-in narcotics industry. According to the think tank Global Financial Integrity’s Transnational Crime and the Developing World report, the global illicit drug market had an estimated size of between US$426 and US$652 billion in 2014 alone.
This shows the large scale at which money is being laundered by drug cartels. Drug cartels hide their profits by flushing them through the vast global financial market, using various methods including internet payment platforms, cryptocurrencies, payment cards and real estate. Then, they use the laundered cash to underwrite their trafficking.
The quantity of funds to be laundered is high which makes it difficult for drug cartels to not be suspected. As such, criminal activity of such an enormous scale can not only damage those directly involved in the criminal group but also affect the stability of financial markets – all while encouraging the widespread use of drugs. A 2014 Financial Action Task Force (FATF) report titled Financial Flows Linked to the production and trafficking of Afghan opiates, sheds light on some of the methodologies employed in the production and trafficking of Afghan opiates including heroin.
The stages of cleaning dirty money
Money laundering takes place in three stages. The stages are placement, layering, and integration. These stages are commonly used by launderers to launder their illicit funds and assets. Let’s understand how these stages help them to hide illegal money from detection by enforcement.
Placement
Placement is the initial stage where the drug dealers try to introduce the illicit proceeds or financial assets made from their deals to a legal financial institution. There are different methods that can be used, such as smurfing, using shell companies, trade-based money laundering, or bulk-cash smuggling. This is to make sure that the drug dealers can hide the source of the funds from law enforcement since the money being laundered is in bulk and could attract more attention.
Layering
The purpose of layering is to cut down the bulk of funds and make them into smaller transactions that can be transferred to different jurisdictions virtually. The layering/structuring stage is meant to convert the illicit money into a series of complex transactions that will prevent law enforcement agencies from tracking the source of income. There are different techniques of layering, such as a virtual transfer of funds, which is also known as a wire transfer; transferring funds to an offshore account, which is an account held in an offshore (foreign) bank; a walking account, where funds are supposed to be transferred through various layers of different accounts, shell corporations, etc. The funds can also be used to trade stocks in a foreign market in order to cover the money trail.
Integration
Integration is the final stage of money laundering, in which the illegal money can now become a part of the financial system, allowing the laundered funds to be reintegrated into the economy as ‘legal’ funds. After the money has been broken down into smaller transactions and its original source has been converted from unlawful to legal, this is achievable. Drug dealers can utilise their laundered money as legitimate income at this stage of integration. They may use these monies to buy luxurious assets, items, or homes that will not attract much attention or appear suspicious to the authorities.
Money laundering techniques used by drug cartels
As previously stated, washing dirty money entails employing the three stages of money laundering and the strategies associated with each. The launderer utilises the illegal proceeds to reintroduce them into the financial system in a legitimate manner. The monies are then structured in a complicated series of transactions before being integrated into the legal economy, which moves around from conducting financial transfers to becoming a true ‘financial asset or purchase.’
Since integration is the last stage of the three-stage model for cleaning dirty money/money laundering, by this time, tracing the funds back to the original narcotic sale sources is a highly difficult task for law enforcement agencies. At this time, the funds have travelled past too many legitimate procedures. This is why drug cartels use money laundering methods to make their illegal profits legal without the authorities being able to detect it.
The following are some of the techniques used by drug dealers to clean dirty money:
Cash Smuggling
Common smuggling of currency seems to be on the rise. Cash smuggling means physically transferring/moving the cash to another country and depositing the amount in a bank located there. In order to make transferring the funds easier, shipment officials or businesses have been set up by the drug dealers. Customs will be less likely to check the shipment leaving the country than to check the shipment entering the country.
Structuring or ‘Smurfing’
In this scenario, one needs to break down their total cash deposits into pocket amounts below the reported threshold of $10,000. There are couriers known as smurfs, who are used to make these deposits into different banks or buy cashier’s cheques in small denominations.
Wire transfers
The transfer of funds virtually, from one country to another, is called a wire transfer. This may include sending the money to a person, an entity, or an account. Wire transfers remain the main tool at all stages of the money laundering process, especially in the stage of layering operations. The illicit funds can be transferred through various banks in different countries to merge and hide the trails to the original source.
Shell companies
Drug dealers make use of shell companies or front companies as a way to buy other financial assets that can help them move the money during the layering stage. This way, the money can be used to buy property, sit still in an account in a foreign jurisdiction for safekeeping, and so on. Shell corporations help to move the funds/assets around, a person can use one or more to complicate the money trail even further.
Big banks involved in laundering drug money
In order to counter drug trafficking and money laundering, many countries introduced or strengthened border controls on the amount of cash that can be carried. They have also introduced central transaction reporting systems where all financial institutions have to report all financial transactions electronically.
These anti-money laundering regulations have emerged as a much larger burden for banks and financial institutions and enforcement has stepped up significantly. During 2011–2015, a number of major banks were caught laundering drug money and were given hefty fines for breaches of regulations. Two of the most prominent ones are given below.
Wachovia
Now part of Wells Fargo, Wachovia was one of the biggest banks in the US. In 2010, the bank was found to have allowed drug cartels in Mexico to launder close to US$390 billion through its branches during 2004-2007. The drug cartels used to smuggle US dollars received from drug sales in the US across the Mexican border. Then, they used money exchangers to deposit the money into their bank accounts in Mexico, where regulatory requirements with regard to the source of funds were not on par with current standards. Later, the money was wired back to Wachovia’s accounts in the US, and the bank failed to check the origin of these funds. In addition, the drug cartels used Wachovia’s bulk cash service to ship back bank notes to the US.
HSBC
In 2012, HSBC agreed to pay a $1.9 billion fine to regulators for serving as a middleman for drug cartels. The bank provided money-laundering services of more than US$881 million to drug cartels including Mexico’s Sinaloa cartel and Colombia’s Norte del Valle cartel.
Detection of money laundering by drug cartels
While criminals are quick to adapt to technological advancement with financial transactions such as cryptocurrencies, financial institutions and regulators need to be more proactive to counter the misuse by drug cartels. Meanwhile, financial institutions should look at technological opportunities to prevent money laundering with these new-age transaction methods.
A provider of proven and in-deployment AML solutions for large and small financial institutions, Tookitaki developed a first-of-a-kind Global Typology Library which effectively addresses the pitfalls of the current AML transaction monitoring ecosystem. Our growing centralised repository of money laundering typologies is sourced from financial institutions, AML experts and regulators. Typologies refer to patterns that are used to finance or launder money for illicit activities like drug trafficking, forced labour, forgery, terrorism etc.
As our Global Typology Library can be scaled to include any type of typologies across products, locations, techniques and predicate offence, our solution can detect money laundering by drug cartels. Our solution provides improved risk coverage for financial institutions. It enhances process efficiency with accurate triaging of alerts and helps make faster business decisions with around a 70% reduction in manual work.
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