Financial transactions and services mechanisms refer to the methods and techniques used by criminals to launder money or finance their activities. These mechanisms often involve complex financial structures and transactions designed to obscure the true source of funds and evade detection.
Financial Transactions and Services Mechanisms
- Bank accounts: Criminals often look to co-mingle illegal and legal proceeds, placing funds generated from crimes linked to land conversion into legitimate business accounts. This is a particular risk for FIs as it leaves them directly exposed to criminal or corrupt clients who may seek to use their accounts to intermix and hide illicit proceeds, unbeknownst to the FI. Often, criminals will present illegal earnings as legitimate earnings from a legal business activity they also undertake in tandem, making it harder to identify and differentiate illegitimate funds or activities from legitimate ones.
- Nominees, trust companies, and intermediaries: Criminals may look to use a network of intermediaries, including nominees or custodians, as well as trust companies, to disguise the beneficial ownership of a bank account, investment fund, or other financial instrument to avoid detection and to prevent such accounts from being linked back to an individual or company with criminal history. The FATF has highlighted the use of this approach in various environmental crimes, including illegal logging.
- Shell companies: Criminals may use shell companies —corporate entities without active business operations or significant assets—to launder money, facilitate illicit trade or purchase clandestine assets, to obfuscate beneficial ownership of financial assets held in their name, and for the purposes of tax evasion and fraud.
- Transactional manipulation: Criminals can manipulate financial transactions to avoid detection. This can be done by using rapid fund movements such as multiple cash deposits, internal transfers followed by multiple cash withdrawals, or multiple cash deposits into financial accounts followed by multiple cash withdrawals. This technique is used to avoid triggering reporting thresholds that FIs must follow, as well as to layer illicit funds and obscure the source of those funds. Creating a high volume of complex transactions can overwhelm monitoring systems and investigators as well, making it more difficult to spot patterns indicative of money laundering.
- Bank or wire transfers: Criminals may use third party wire transfers under the guise of payments for goods or services that make sense within the sector in which they conduct their illicit dealings, such as agricultural goods or legally mined metals. It is therefore important for FIs to monitor who their clients are transferring money to, to see if funds are going to individuals or entities with higher risk characteristics, such as offshore accounts or newly established companies with no clear legitimate business operation.
- Informal Money Value Transfer Systems (MVTS): The abuse of informal or underground MVTS such as Hawala is another key mechanism used by criminals looking to launder proceeds from crimes linked to land conversion. The risk of informal MVTS being used to move illicit funds is particularly high for certain industries and sectors, such as the mining sector, as these services are also common in source regions for minerals and other mined commodities, such as East Africa.
- Shadow banking: Criminals may also turn to shadow banking networks to avoid having to use regulated financial services, including using lenders, brokers, or other credit intermediaries that fall outside regulated banking. These entities and activities can include a wide range of financial institutions and instruments, such as the use of peer-to-peer lending platforms, structured investment vehicles, and limited-purpose finance companies.
- Round-tripping: Criminals may look to transfer illicit proceeds linked to land conversion out of a country to an offshore entity through a series of complex financial transactions. The criminals will then re-route the money back into the original country, often through investments in assets such as real estate, stocks, or businesses. The original illicit funds will now appear as legitimate foreign investments.
- Digital currencies: Cryptocurrencies and other digital currencies may be used by criminals engaging in crimes linked to land conversion to launder illicit proceeds. These currencies appeal to criminals due to their decentralised nature and the ease of transferring large sums across borders. Criminals may purchase cryptocurrencies through peer-to-peer exchanges or unregulated exchanges.
- Cash-intensive businesses: Criminals, especially those operating in illegal mining or logging, may use large cash transfers from cash-intensive businesses to beneficiaries in areas with high levels of illegal land clearing activity. Another risk relates to firms with unusually high volumes of business turnover in cash transactions, especially in countries with at-risk zones related to land conversion.
Transactional Red Flags
- Large cash withdrawals from financial institutions operating in remote or rural areas that are near or in areas with higher levels of land conversion (e.g. resource extraction or agricultural production).
- Frequent payments from companies in the high-risk land conversion sectors (like timber, extractives or agriculture) to suppliers or beneficiaries unrelated to the legal person’s activity or business.
- Circular transactions between local bank accounts.
- Circular financial transactions between a company’s account and the private account of a company shareholder or director, without a clear business or economic reason.
- Deposits or transfers to a trader, dealer, or third party from foreign companies followed by the immediate transfer of similar amounts to another jurisdiction.
- Transactions between accounts of different companies that are affiliated with the same customer, particularly to or from free trade zones or countries with less beneficial ownership transparency.
- A single bank account being used by multiple businesses.
- Unusual forms of payment for a specific trade/sector, e.g. use of travellers’ cheques in the trade of precious metals or stones.
- The use of services intermediaries such as accountants and brokers or trust or company service providers that help to obscure the identity of persons controlling funds.
- Rapid fund movements such as multiple cash deposits and round amounts, internal transfers followed by multiple cash withdrawals, or multiple cash deposits into account followed by multiple cash withdrawals.
- Significant cash payments into accounts linked to individuals from high-risk land conversion jurisdictions.
- Escrow-type transactions from/to accounts and companies with the same beneficial owner for cross border shipments.
- Structuring of deposits just below suspicious transaction reporting thresholds.
- Transaction references using timber specimen names or veiled speech.
- Illogical or anomalous loans between trading and import/export companies in high-risk zones, especially in source and transit countries for land conversion.
- Use of third parties to create export companies and bank accounts, such as ATM cards registered under third parties.
- Transactions which involve receipt of cash (or other payments like wire transfers, checks, bank drafts or postal money orders) from unrelated third-party entities or an intermediary (either an individual or an entity) apparently unrelated to the seller or purchaser of goods. This may be done to obscure the true origin of the funds (e.g. wires where no apparent business relationship appears to exist between the originator and the beneficiary).
- Transactions which involve the use of repeatedly amended or frequently extended letters of credit without reasonable justification or for reasons like changes of the beneficiary or location of payment.
- Sudden onset and equally sudden cessation of payments—typically wire transfers—within a short duration. This could be an indication that the account is temporarily being used to launder illicit proceeds.
- Multiple deposits occurring in various locations when the account owner resides elsewhere, for example, deposits made in various cities when the account owner resides in a different city.
- Checking accounts receiving cash deposits in amounts under $1,000 as frequently as several times per month. These deposits may be followed by ATM withdrawals in foreign countries. This method, sometimes referred to as micro-structuring, is used by ‘smurfs’ to deposit cash which may then be used to purchase goods.
- Newly established gold (or other minerals) buying companies with rapid accumulation of large amounts of income (cash and bank accounts) showing little real economic activity at their facilities.
- Frequent payments from companies in the logging or mining sectors to individuals or beneficiaries unrelated to the legal person’s activity or business.
- Transfers from country where the gold smelters are located to source countries for gold, and almost immediate cash withdrawal of majority of the transfer.
- Increase in transactions between entities or individuals not registered in mining/logging sector (i.e., non-license-holding) and equipment leasing companies and equipment sales companies.
- Large volume and value of cash transfers from cash-intensive businesses (such as petrol or gas stations) to beneficiaries in areas known as a source of mining and logging and land clearing.
- Sudden and unexplained increases in economic activity (formal and informal) in rural or isolated zones, particularly in source countries for illegal logging and mining.
- High value, volume or frequency of transactions involving banks, money service businesses and remitters (including mobile payment processors and/or electronic money), or unusually high volume of business turnover in cash transactions at businesses providing consumer goods and services in proximity to at-risk zones.
- Recently created companies that register gold exports for significant amounts and noticeably brief period of operations.
- Aberrations/anomalous bank activity (i.e. sudden, or unexplained changes to cash flows) or corporate revenues of company operating in natural resource supply chains (e.g. timber processing, harvesting).
- Frequent buying and selling of shares in companies holding agricultural, mining or logging permits, especially transactions involving shareholders in third party jurisdictions.
- Companies such as refineries or timber processing facilities that pay their employees exclusively in cash and/or on a commission basis, creating the potential of a direct incentive for investment into illicit activities.
- Client is a recently activated dormant company which undertakes resource extraction with income inconsistent with the activity being undertaken, where the primary customer or beneficiary is a related corporate entity.