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As financial crimes evolve, so must financial institutions. But how can financial institutions develop their strategies against modern financial crimes? AML typologies can provide critical insights into methods used by criminals to launder money and fund terrorism.
Many financial institutions face vulnerabilities to money laundering through features like remote account opening, digital operations, and fast transaction speeds. These features are for customer convenience but criminals can exploit them using fake identities or quick transfers to convert illicit funds and avoid detection.
This guide will explore the various AML typologies, their relevance to traditional financial systems, and effective techniques for detection and prevention. With this knowledge, institutions can improve compliance measures and protect their operations from illicit activities, ensuring a robust and secure financial environment.
What are AML typologies?
Money laundering typologies are methods or techniques criminals use to hide illegally obtained money. These strategies use financial system weaknesses to escape anti-money laundering controls.
Early tactics like cash deposits and withdrawals have given way to more advanced approaches due to stricter regulations, electronic transactions, and global banking.
Understanding these typologies is essential for businesses, especially in finance. Without this knowledge, companies risk unintentionally helping illegal activities, damaging their reputation, and facing legal consequences. Awareness will help financial institutions detect, prevent, and respond to suspicious activities, strengthening defenses against financial crimes.
To know more, check out FATF’s guide to new AML challenges.
Examples of AML typologies
AML typologies include a wide range of methods and techniques that criminals use to launder money and finance terrorism. Let’s look at some examples of AML typologies.
- Money laundering typologies
Money launderers and terrorist organizations are very creative and highly motivated to disguise or hide their illegal and facilitate money laundering. When examining common money laundering methods, it’s crucial to recognize that criminals can readily adapt or modify these techniques in various ways. As soon as countermeasures are put in place, offenders often find new and innovative ways to circumvent them. This adaptability makes it challenging for law enforcement and financial institutions to stay ahead of the evolving tactics used to conceal the origins of illicit funds.
Predicate offenses
Predicate offenses are criminal activities that generate proceeds that criminals then attempt to launder. In other words, criminals earn from these offenses and get the initial illicit funds that money launderers seek to disguise or clean through various methods.
Unusual customer behaviour
Tracking customer behavior is important in detecting signs of money laundering or terrorist financing. Some examples of unusual customer behavior that may indicate money laundering or terrorist financing include:
- The transaction didn’t match the customer’s usual activity.
- Multiple accounts linked to different names.
- The high volume of transactions in a short time.
- Writing checks to family members not closely related.
- Regular checks to unrelated companies or individuals.
- Surrendering insurance policies early, with large losses.
- Complex movement of funds across accounts.
- Early repayment of loans occurs often.
- Depositing winning gambling checks, withdrawing cash right away.
- Using various names for similar activities.
- Unexplained income does not fit economic circumstances.
Money laundering through online gambling
Money laundering through online gambling occurs when criminals use internet gambling sites to transform illegal funds into apparent gambling winnings. These platforms provide anonymity and global reach, complicating efforts to track where the money comes from and goes. Criminals often place large or frequent bets to launder money quickly and effectively.
Read more about the regulatory challenges that online gaming companies face.
Money laundering through money remittance and currency exchange providers
Money laundering through money remittance and currency exchange providers involves using legitimate financial services to transfer illicit funds across borders without attracting suspicion. Criminals exploit these services to convert dirty money into different currencies or move it to jurisdictions with lax regulations.
They may use multiple transactions, shell companies, or offshore accounts to mask the origin and destination of the funds, making detection challenging for authorities.
Read more about how criminals use shell companies for money laundering.
Money laundering through virtual assets
In virtual currency modeling of money laundering crimes, the criminal uses cryptocurrency, digit art, or other digital currency to obscure the origins of funds obtained illegally. These digital assets provide anonymity and methods for conducting financial transactions that cannot be traced by any centralized agency.
With no paper records to serve as evidence, it is difficult for the authorities to find where funds were sent and where they ended up.
Other money laundering typologies, such as:
- Structuring (smurfing): Breaking large sums of money into smaller transactions to avoid detection.
- Cash couriers/ currency smuggling: Physically moving cash across borders to avoid scrutiny.
- Purchase of portable valuable commodities: Buying gold or diamonds for easy resale.
- Purchase of valuable assets: Acquiring high-value items like real estate, luxury cars, or art.
- Commodity exchanges (barter): Trading goods instead of cash to conceal money’s origin.
- Use of wire transfers: Moving money electronically through multiple accounts or countries.
- Use of credit cards, cheques, promissory notes, etc.: Exploiting financial instruments to launder money.
Financial institutions must adhere to strict regulations to avoid penalties and protect their reputation. Investing in advanced technology helps them monitor and comply with these regulations more effectively. Training staff to recognize and report suspicious activities is necessary.
Collaboration with regulators and law enforcement agencies is also essential to combat money laundering effectively.
- Terrorist financing typologies
Terrorist financing involves various methods used by extremist groups and individuals to fund their activities. These typologies exploit loopholes in financial systems to disguise the source and movement of terrorist funds.
Terrorist financing typologies are the specific methods employed to raise, move, and use funds for terrorist activities. These terrorist financing methods often involve exploiting vulnerabilities in financial and regulatory systems to avoid detection and sanctions.
Examples of common terrorist financing typologies:
- Terrorist financing through non-profit organizations
- Terrorist financing through investment in capital markets
- Terrorist financing through underground banking/alternative remittance services
- Terrorist financing through trade-based money laundering and Terrorist financing
- Terrorist financing through gaming activities
- Terrorist financing through the use of nominees, trusts, family members, or third parties
- Terrorist financing through foreign bank accounts
- Terrorist financing through identity fraud/false identification
- Terrorist financing through the use of gatekeepers (professional services)
- Terrorist financing through new payment technologies
- Terrorist financing through virtual assets
Financial institutions must strengthen their AML frameworks to detect and stop terrorist financing. They’re under strict regulatory scrutiny and could face high penalties for not complying with AML regulations.
Working closely with law enforcement and regulators is necessary to effectively have financial intelligence units fight terrorist financing and protect the financial system from misuse by extremists.
How to identify AML typologies and techniques
Identifying red flags
Identifying red flags for money laundering includes:
- Multiple large transactions: Numerous large transactions without clear business rationale.
- Frequent and rapid movement of funds: Swift and frequent transfers between accounts or institutions.
- Structuring or smurfing transactions: Regular small transactions just below reporting thresholds.
- Suspicious or unusual activities: Behaviors that vary from typical customer behavior or business practices.
- High-risk geographies: Transactions involving jurisdictions known for money laundering activities.
Monitoring and reporting
Monitoring and reporting are required in anti-money laundering (AML) efforts at financial institutions. They include ongoing scrutiny of transactions to identify suspicious activities like large sums, fast fund transfers, or dealings in risky locations, often with automated tools.
When transactions raise concerns, institutions review customer profiles and transaction histories to validate them. If suspicious activity offshore bank accounts are confirmed, they must file Suspicious Activity Reports (SARs) with regulators. These reports detail the incident and findings.
Collaborating with law enforcement and regulators strengthens these measures through international cooperation, supporting comprehensive investigations, and ensuring compliance with anti-money laundering laws.
Training and awareness
Training and awareness programs are crucial for empowering employees to detect and prevent money laundering. These include regular AML/CFT training for frontline staff to recognize suspicious activities, scenario-based exercises to apply knowledge practically, education on red flags like unusual financial transactions and patterns, and role-specific training to clarify responsibilities.
HyperVerge’s approach to combat AML typologies
HyperVerge offers advanced AML solutions that help financial institutions mitigate risk and comply with regulatory requirements. Our key AML offerings include:
Global sanctions and watchlists check: HyperVerge provides 1000+ checks to ensure 100% compliance with global sanctions and watchlists.
Politically Exposed Person (PEP) check: We cover ~100% of PEP profiles globally to ensure transparency.
Adverse media check: HyperVerge analyzes 150M articles per month and updates 30k profiles daily to cut through noise and identify relevant risk profiles.
With HyperVerge’s AML capabilities, financial institutions can enhance data accuracy, minimize manual processing, better detect and prevent fraud, and scale their compliance efforts seamlessly.
To learn more about how we can help your business, book a demo with our team today.
