A tremendous amount of money moves around the world every year that is not part of the official flow of money.
Law and regulations requiring anti-money-laundering efforts, as well as Office of Foreign Assets Control sanctions, seek to mitigate laundering. But despite all the systems of control meant to prevent these transactions, they still take place — because someone is highly invested in making sure they still take place.
An important principle in addressing the money-laundering threat is recognizing that an illegal method for moving today is just as likely to be low-tech and old school as it is to be sophisticated. Modern surveillance methods and processes need to be able to counter both.
Let’s start with the low-tech methods. If a criminal can leverage corrupt bankers, that opens the door to a relatively simple means of laundering. Banking secrecy is a longstanding tenet of private banking and asset management in certain countries. This tradition of secrecy means that client names will be protected from the prying eyes of employees, which, by extension, helps circumvent many of the usual legal safeguards in other parts of the world.
With the help of someone inside the bank, a dictator or oligarch can run money through several intermediaries, possibly including a private bank in Switzerland, which then ends up in an anonymous offshore account for a New York hedge fund. A hedge fund manager may have no idea who is behind a majority of the fund’s investors, with all the account holders just being the name of a Swiss bank.
In truly traditional private banks, customers remain anonymous: no address is held on file, and statements are kept at the bank for the customer should he or she ever bother to see them. Cash for deposit really is brought in unmarked envelopes and concealed from view. In certain countries and cities, bankers might meet their clients in anonymous cafes where the transaction is conducted, possibly via an envelope that is passed under a newspaper.
Under more sophisticated methods, Swiss banks have devised complex ways to segregate and wall off the relationships between clients and bankers. Accounts are of course numbered and assigned to specific bankers who manage the relationship. Only the banker knows the identity of the account holder. However, clients are not necessarily satisfied with such levels of care and use intermediaries to further conceal the origin of their cash. The name Hervé Falciani still sends a chill down the spine of Swiss bankers because he successfully managed to download sensitive client data and take it with him outside the country.
Given the added scrutiny of regulators over the sources of funds in private bank accounts, new methods have been devised to avoid detection. One such class of transactions is known as mirror trades. Mirror trades are back-to-back trades executed purely for the purposes of sending money abroad. A trader executes a customer order to buy a certain stock, let’s say for a value of 10 million dollars using Russian rubles. The trader then executes a sale of the same stock on behalf of another company in exchange for dollars, euros or pounds. Both companies have the same owner. Through the two transactions the owner has exchanged rubles for a foreign currency in a process that leaves no obvious trace to regulators.
So how would an internal compliance department identify schemes of varying sophistication?
In the case of mirror trades, a compliance team would look to identify trades made repeatedly for no apparent purpose, in which the purchase and sale of the security resulted in either no profit or just a small loss. Secondly, if the AML specialists had been doing their job properly, the very close relationship between the entities buying and selling funds or intermediaries would have turned up in the checks and controls review. Thirdly, at a macro level, if the volume of transactions was high enough, careful research might reveal schemes to squirrel away funds unofficially.
Sometimes seeing the big picture can help to uncover the small sins of everyday life in banking. Looking at publicly available research to identify the amount of unofficial flows of money between countries can help to show that there is a problem — that there are schemes in play to move money. While researching capital flows between Russia and the U.K. in 2015, Deutsche Bank economists found that about $1.5 billion was flying under the radar every month. This provided a strong sense to regulators and AML departments of how significant the problem of mirror trades was.
It is understandable of course why the modern methods of money laundering still include movements of cash in unmarked envelopes. They are a lot simpler and less costly to execute than more sophisticated means and are still hard to detect. Changes in bank secrecy are afoot in some countries. The Swiss are repealing their secrecy laws, for example, and this will help to combat these simple methods. However, while financial institutions should continue to improve safeguards against newer means launderers are using to avoid detection, they must still remain keenly aware of the possibilities that low-tech solutions are still being used. It just takes one corrupt banker to enable the illegal transfer of cash. Money launderers, in low-tech ways, will still find ways of moving money that cannot be tied to its original source.
Only a strong risk management culture can prevent such events from occurring. A compliance department that enforces know-your-customer regulations and provides balance in its favor against the demands of profits and revenue targets from the front office will always be the best bulwark against the dirty flows of money.