Corporate Governance
Could you be a target for money laundering?
Money Laundering is a crime in itself. Its about taking dirty money, getting it into the legitimate system and then to be able to use it without anyone knowing that it comes from criminal activites. Banks and the financial services at large have far reaching systems and legal obligations to monitor and report suspected behaviour. That means that many criminals are seeking to wash their money with smaller businesses, in particular the cash intense ones. Here we take a look at whatit entails, how it is done, and howyou can save your business from becoming a target.
How does money laundering occur
Money laundering typically happens in three stages, we break them down here:
Placement
The first step will be placement. Its taking the illigally obtained money and placing it into the legitimate system. This should of course be done in a way that does not lead to detection.
Layering
The second stage will be the layering. Here the aim is to create legal paper trail making the trace back to the origin of the money hard or impossible to detect. It involves moving the money, disguising its origin, and having it co-mingled with legitmate transactions.
Integration
Here is the final step that is closely intertwined with the layering process. The money is now re-introduced as "clean" into the system. The money should now have been integrated and hence appear as legitimate, ready to use.
Typicall examples of money laundering using small businesses
Refund please
A customer comes in and buys your products, often - but not necessarily - paying in cash. Then, within short, the customer comes back and asks for a refund. Now the money has a "clean" transaction behind it as it comes from your business. Often the customer asks you to put it in a bank account, and often it is not the bank account that was used when doing the purchase.
Cash please
Wanting to pay in cash can always be a warning sign as cash payments come without any direct trail. Hence the money can enter the system through your business without anyone being able to trace its origin.
Smurfing
This is when smaller transactions are made in order to avoid triggering reporting requirements. It might take longer to wash dirty money this way but it is generally considered safer.
Buffing up the legitimate profits
It is easier, but riskier, if the business owner is in on the money laundering activity. Then you can take legitimate proceeds and simply add some extra revenue on it. Imagine that you run a flower shop and have proceeds of 3,500 USD every week - but what if you reported a revenue of 5,000 USD every week? Then you layer the money, pay tax on it - and then the integration is completed.
Getting friends to spend
If you run your own restaurant - why not give your friends 2,000 USD cash in hand each and then invite them to spend it at your place this weekend? Then the money comes into the system, integrated, taxed and you can use them as you want. You might have to share a small portion with each of your friends, but that is a commission you are happy to give up in order to get that dirty money clean. Be careful and look for warnings signs!
Gifts
In many jurisdictions gifts are tax free. When something is tax free this can mean that the there is little to no requirements to report it. What if someone buys gifts through your business, or wants to channel gifts through your business? Be mindful.
Flow-through
Many times criminals work in team where they want to channel money through an honest business. It can be a real estate transaction, buying and selling a car, doing a fake business transaction etc. If you have a business that could be approached as a flow-through, it can be an agent, a car dealer, a law firm etc, then be very careful to do your KYC - know your customer, including your source of funds.
Deposits
Same as above, if your business includes holding deposits you must be extra careful because deposits are a great way to layer illegal funds, creating complexity so that the origin is hard to discover.
Second hand
If someone has a large stack of second hand products out online, or non-used products such as ten ipads? Watch out, watch out! Does it make sense, or is the offer strange or to good to be true?
Lavish lifestyle
Finally, the criminal might not wash the dirty money through any of the above but instead use the funds in small portions to sustain their own life style. So payments in cash will again be the major warning sign.
What should you do?
Watch of suspicious behaviour
Avoid cash
Stick to established credit card payments
Keep records
Watch out for customers who avoid giving identity details
Watch out for customers who are unclear about the source of funds
Keep records of your customer due diligence and AML-processes
Educate you staff, even a 15-year old summer assistant in a small shop should know the key indicators in order to react in time.
Report any suspicious activity
Don´t tip the customer off that you are reporting them (this can in many jurisdictions in itself be prohibited)
Stay on-top of local AML-regulations
Final words
Money laundering regulation is constantly updated as to ensure it stays relevant, so do keep an eye open to ensure you understand your obligations. In particular if you operate in a high-risk industry and/or cash intense business must you be mindful and ensure compliance. And never accept any pressure tactics from a customer, if they feel they can get a hold of you they will not let go. So report and stay compliant. If you are hesitant, wondering if you have done all that is needed of you, do consult a lawyer to ensure professional help.
London, 2025-03-11 Author: Kat Strandberg Email: Kat@stgcommerciallaw.com
How does money laundering occur
Money laundering typically happens in three stages, we break them down here:
Placement
The first step will be placement. Its taking the illigally obtained money and placing it into the legitimate system. This should of course be done in a way that does not lead to detection.
Layering
The second stage will be the layering. Here the aim is to create legal paper trail making the trace back to the origin of the money hard or impossible to detect. It involves moving the money, disguising its origin, and having it co-mingled with legitmate transactions.
Integration
Here is the final step that is closely intertwined with the layering process. The money is now re-introduced as "clean" into the system. The money should now have been integrated and hence appear as legitimate, ready to use.
Typicall examples of money laundering using small businesses
Refund please
A customer comes in and buys your products, often - but not necessarily - paying in cash. Then, within short, the customer comes back and asks for a refund. Now the money has a "clean" transaction behind it as it comes from your business. Often the customer asks you to put it in a bank account, and often it is not the bank account that was used when doing the purchase.
Cash please
Wanting to pay in cash can always be a warning sign as cash payments come without any direct trail. Hence the money can enter the system through your business without anyone being able to trace its origin.
Smurfing
This is when smaller transactions are made in order to avoid triggering reporting requirements. It might take longer to wash dirty money this way but it is generally considered safer.
Buffing up the legitimate profits
It is easier, but riskier, if the business owner is in on the money laundering activity. Then you can take legitimate proceeds and simply add some extra revenue on it. Imagine that you run a flower shop and have proceeds of 3,500 USD every week - but what if you reported a revenue of 5,000 USD every week? Then you layer the money, pay tax on it - and then the integration is completed.
Getting friends to spend
If you run your own restaurant - why not give your friends 2,000 USD cash in hand each and then invite them to spend it at your place this weekend? Then the money comes into the system, integrated, taxed and you can use them as you want. You might have to share a small portion with each of your friends, but that is a commission you are happy to give up in order to get that dirty money clean. Be careful and look for warnings signs!
Gifts
In many jurisdictions gifts are tax free. When something is tax free this can mean that the there is little to no requirements to report it. What if someone buys gifts through your business, or wants to channel gifts through your business? Be mindful.
Flow-through
Many times criminals work in team where they want to channel money through an honest business. It can be a real estate transaction, buying and selling a car, doing a fake business transaction etc. If you have a business that could be approached as a flow-through, it can be an agent, a car dealer, a law firm etc, then be very careful to do your KYC - know your customer, including your source of funds.
Deposits
Same as above, if your business includes holding deposits you must be extra careful because deposits are a great way to layer illegal funds, creating complexity so that the origin is hard to discover.
Second hand
If someone has a large stack of second hand products out online, or non-used products such as ten ipads? Watch out, watch out! Does it make sense, or is the offer strange or to good to be true?
Lavish lifestyle
Finally, the criminal might not wash the dirty money through any of the above but instead use the funds in small portions to sustain their own life style. So payments in cash will again be the major warning sign.
What should you do?
Watch of suspicious behaviour
Avoid cash
Stick to established credit card payments
Keep records
Watch out for customers who avoid giving identity details
Watch out for customers who are unclear about the source of funds
Keep records of your customer due diligence and AML-processes
Educate you staff, even a 15-year old summer assistant in a small shop should know the key indicators in order to react in time.
Report any suspicious activity
Don´t tip the customer off that you are reporting them (this can in many jurisdictions in itself be prohibited)
Stay on-top of local AML-regulations
Final words
Money laundering regulation is constantly updated as to ensure it stays relevant, so do keep an eye open to ensure you understand your obligations. In particular if you operate in a high-risk industry and/or cash intense business must you be mindful and ensure compliance. And never accept any pressure tactics from a customer, if they feel they can get a hold of you they will not let go. So report and stay compliant. If you are hesitant, wondering if you have done all that is needed of you, do consult a lawyer to ensure professional help.
London, 2025-03-11 Author: Kat Strandberg Email: Kat@stgcommerciallaw.com