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Currency Based Money Laundering

Introduction

Currency exchange is the process of purchasing or selling currencies to reach the desired currency(Belgrade, 2015, p.3), like exchanging AUD to USD for travel in the United States.  Money laundering through foreign currency exchange (FX) is a means of disguising the origin of illegal proceeds and their integration into the legal financial flows (FATF, 2010, p.8).  FX is part of the placement stage of money laundering and help place funds into the financial system(Belgrade, 2015, p.3). This assignment analyses the methods used to layer funds into the financial system. Criminals use methods such as digital currencies, smurfing, the use of mules among other methods. An explanation into how governments, legislators, regulators and the industry are combating these methods. The case study in the assignment shows how investigations are contacted. I will explore strategies deployed internationally and how they relate to in Australia. I will make an explanation to why convicted criminals should help combat future methods of money laundering in FX.

FX-based money laundering commonly affects private and public business such as clearinghouses, FX bureau, banks and digital exchanges(FATF, 2010, p.9). The way criminals place funds are by exchanging currencies and so receiving washed money that can be deposit into a bank. This process also means that criminals are being provided with documents that show FX based source of funds(Belgrade, 2015, p.6). Exchanges can also be for travel checks and bullion.

The Methods used

The most used method is smurfing/structuring.  Criminals will exchange large funds via several small cash transactions(Force, 2016, p.21). Smurfing is if on a regular occasion a criminal goes to an FX bureau to exchange $4500AUD at a time, but in total they have exchanged $100,000. A person can also target multiple exchanges to reduce the possibility of being detected as the aim is to launder as many funds as possible. Criminals can use smurfing with money mules. They hire money mules who will launder funds for criminals resulting an extra layer of protection from the law(FATF, 2010, p.24). Another method used to avoid detection is by converting large amounts into different currencies(Belgrade,2015, p.8). This with mules and smurfing, can help reduce suspicion caused by the point of exchanges reporting large amount of a single transaction occurring. Criminals use false documentation such as false ID documents to avoid detection(Belgrade, 2015, p.8).  Exchanges can ease the use of false documentation as syndicates approach them to profit from the proceeds of crime. Crooks will approach a business and offer to pay a beneficial spot rate in exchange to launder funds for the syndicate(FATF, 2010, p.27).

Offenders can exchange fake currency notes for real currencies(FATF, 2010, p.21).  Some currencies are easier to counterfeit or forge, criminals try to launder these bills by also exploit poorly managed exchanges. They can also exploit brokers by converting marked banknotes for unmarked notes(Belgrade, 2015, p.9).  The reason to exchange marketed notes is to avoid having their activities tracked by authorities. Laundering these funds can reduce the pressure they attached with having the funds tracked.

Regulator and Industry Response

2011 AUSTRAC report set to complete three tasks: enchaining understanding, educating and regulating, and engaging the industry.

AUSTRAC supports government agencies, police and industry by providing transaction reports that can aid in the protection and upending of criminals and their syndicates(AUSTRAC, 2011). AUSTRAC provides agencies with a picture to how money laundering is occurring and helps investigators disrupt money laundering syndicates(AUSTRAC, 2011). Enhancing and understanding have led to the improvement to how we regulate the industry. Understanding structuring, has led to implementing KYC requirements, suspicious transaction reporting, and the report of transactions over $10,000 to AUSTRAC(Commission, 2011, p.47).

By educating legislators that about 10-15 billions are laundered every year(AUSTRAC, 2011), legislators made the required changes to how the industries report transactions. The changes resulted in the need for transactions of $10,000 AUD or more to report to AUSTRC for investigate(AUSTRAC, 2011). KYC requirements under the 2017 amendment of the AML/CTF act mean that personals need to give documentation when making an exchange(“Anti‑Money Laundering and Counter‑Terrorism Financing Amendment Act 2017,” 2017). Introducing suction lists where persons of interest are on a listed to make sure that if a transaction made by them occurs(AUSTRAC, 2015b), the business pass the information onto the regulator.

Regulators approach the industry by setting out a need to reduce ML trough these services. While there is a reporting required for transactions over $10,000. It is up to the business to distinguish if a client who exchanges funds under $9500 should have a transaction report with AUSTRAC.

Case studies on AUSTRAC’s website show they discover ML activities when a suspicious report occurs. That means that potentially they are only investigating transactions over $10,000. The case studies show AUSTRAC has a focus on disrespecting syndicates that try to launder large amount of funds.

Regulators engage with larger organisations such as banks. Yet in 2011 they were 7,000 mostly small FX businesses in Australia(AUSTRAC, 2011). In, the year ending 2011 they exchanged 8.2 billion in funds and 1.4 billion was over 10,000(AUSTRAC, 2011). With 7,000 businesses, it’s difficult to consult each individual business to discover the issues they face within the current regulations.

The government can look to replace exchange business cameras with cameras that plug into a database. Should the cameras recognise a nonpersonal, the system should let authorities know. This technology is already available and is being tested(Zeng & Kang, 2016, p.520). Regulators should have a sample repressive that they can consult with small businesses about ML issues, and how the industry can move forward.

Technologies has assisted the industry to meet compliance requirements set out by the regulator.  Some companies use products that scan photo ID documents and can tell if the ID documents are valid. They are services that notify if the person is on sanction lists, which allows the business to pass the information to the regulators. Overall, the exchange industry is compliant, most businesses will comply requirements to make sure they do not lose their license.

Doing what I required does not mean that businesses are actively trying to stop ML activities. The lack of accountability placed on the industry means that businesses are not suffering the same reputation damage as banks when a laundering issue arises. Authorities have been fantastic at notifying the public about errors made by banks and casinos, yet exchanges have not been under the same public figure.

The industry should create a transaction monitoring standard that goes further than regulations expect what. This would include creating a centralised database where all transactions are stored so that expert can check and sort the 7+ billion of transactions not reported to AUSTRAC. Governments can help this indicative by offering tax incentives for businesses to take up this inactive. Authorities can name and shame businesses that have poor AML standards and increase the monitoring for these businesses until they reach acceptable standards. Industry groups, regulators and governments can agree with technology and program providers offer small firms in getting higher quality programs that can identify and watch ML activities.

How the Legislative and Government has reacted to Digital Based Money Laundering

The invention of decentralised currencies has attracted criminal to use this method to avoid detection as these currencies are unregulated. Criminals have been able to transfer funds around the world and withdraw funds into their bank accounts without detection by treating the transaction as investments(Rohret & Vella, 2018, p.647). Block chains on these currencies are unknown which help criminals hide the origin of funds(Rohret & Vella, 2018, p.647). Apart from the difficultly/ impossibility to know information regarding funds(Rohret & Vella, 2018,p.647), digital currencies fluctuate in value and it’s difficult to figure what was the original value of the exchange.

Digital currencies cross borders with no notice because the funds are a line of code which can on a hard drive or USB and transferred from one jurisdiction to another. The inability to detect the code means that criminals have a safe method of exchanging funds.

Australia’s Parliament passed a bill to regulate digital currencies in 2017 which comes into effect in October 2018. The bill means they require digital exchanges compile with the same KYC and CDD as other exchange companies(“Anti‑Money Laundering and Counter‑Terrorism Financing Amendment Act 2017,” 2017). It also requires exchanges to provide transaction reports for funds over $10,000 bringing them in line with other industry(“Anti‑Money Laundering and Counter‑Terrorism Financing Amendment Act 2017,” 2017). Digital exchanges will need to register for licenses and under that license they will set up AML/CTF programs(“Anti‑Money Laundering and Counter‑Terrorism Financing Amendment Act 2017,” 2017).

By the time they passed the bill in 2017 the price of digital currencies was soaring. In October 2017 the price was of Bitcoin hit US$6,149(Higgins, 2017), compared with US$630 in October 2016((Higgins, 2017) . AUSTAC in 2010 reported that digital currencies were an area of concern. Although it took over 8 years before it created a policy. Once Bitcoin became a household name, they educated the public to how the dark web used this currency the government reacted to protect the community.

The FATF report onto AML/CTF measures in Australia showed “that although able to contain current ML threats, there was a lack of focus on what could happen next”(A. FATF, 2015, p.41). This shows the reactiveness of legislators, governments and regulators in regulating ML. This was the case for digital based currencies. Although created in 2009 it wasn’t until 2017 till parliament passed a law that to regulate digital exchanges.

Governments and legislative are not experts in the areas of AML, this means they will be reactive in creating policy. The aim is to provide regulators with the ability to attract the experts. However, these personals will never have the same thinking process as criminals. Regulators could employee or consult criminals who have laundered funds via exchanges. These personals are experts in the field and although caught they can consult on which areas are they would target, and should regulations change, how they would react. These personals can assist police on how syndicates are laundering funds in undiscovered methods.

Casinos

In 2016 A judge ladled crown Casino a “blot on the community” due to the haven it is for money laundering activates(Chris Vedelago, 2016). This was due to findings that in the 10 years leading to 2012 Peter Tan Hoang aid criminal groups by laundering about $1 billion gambling through the casino(Welch, 2014). The ABC’s 7:30 report into the Peter showed that Crown neglected to lodge transaction reports to regulators(Welch, 2014), notifying them that known criminal high roller was gambling up to $100,000. It wasn’t until he withdrew funds from one of his crown signature cards was a suspicious transaction report logged firing an investigation. In 2005/6 the ACC conducted Operation Gordian, which had Peter implicated in drug trafficking(Welch, 2014).

Casinos and gaming centres are attractive for criminals due to the chips and the lower standards of compliance. Criminal launder funds by transferring cash into chips, then exchanging the chips to cash, claiming this as winnings(Force, 2016). Unlike FX based money laundering, they are no fee for transferring funds into chips, and viscera. Due to habits of some gamblers, casinos are notaries for being a great place to approach mules to lander funds(Chris Vedelago, 2016). They approach gambles with loan funds so that the client can continue their gambling activities(Chris Vedelago, 2016).

Authorities have known of the laundering that occurs within Casinos. The implementation of the AML/CTF act means Casino’s and gambling companies must develop and support an AML/CTF program (AUSTRAC, 2011). Find and verify customer identity where the services involve AUD10,000 or more (AUSTRAC, 2011). Requiring companies to report to the regulator regarding suspicious transaction matters (AUSTRAC, 2011). The companies are also subject to regular license reviews to make sure they follow the law.

Crown is Australia’s largest gambling company, yet they behaved like the NAB and AMP in disregarding the regulator and the expectations(Williams, 2018). Neglecting to tell regulators about $100,000 bet shows that the regulator is unable to monitor casinos as they should. It took over 10 years for until he withdrew funds from one of his crown signature cards. This caused it to log a suspicious transaction report which notified authorities that a known drug trafficking was a regular gambling.

Gambling companies might be more than willing to bend the laws for high rolling clients due to the loss of revenue caused by government indicatives. Governments have been trying to reduce the amount people gamble via restricting advertisement, high taxes and having a banned registry of personals who may not gamble (best clients)(Jackson, 2001). This loss of revenue leads to companies looking for other methods to replace this revenue and this can lead to cases where they do anything to get high rollers in.

The Australian government can pass legislation that could have the following consequences for gambling companies as a solution to enforce compliance.

Loss of license, every few years gambling originations have to renew their licenses to continue operating. If found that over an acceptable amount of the revenue raised was due to launder funds, then a company should lose their gaming license. They can punish business via the shutdown of their operation for a period. Should a company breach AML/CTF standards, they should be fined via percentage-based revenue. These measures should be taken together, which will force companies to think twice regarding how they behave with these clients.

To ensure that they increase KYC standards, all clients should have their ID documents scanned when gambling. This would mean that no matter how little that a client gambles, regulators can find patterns and behaviours that assist in the detection of ML activates.

Authorities should be able to place personals within large gambling operations. These people will monitor transactions, compliance and reporting from within the organisation to increase the level of compliance.

Globalisation and the International community

Globalisation has meant the increase of currency-based money laundering. An investigative case study shows how criminals from European-based nation, were trying to launder funds through an Australian-based FX bureau(AUSTRAC, 2011).  This occurring shows how much of a global issue point of exchange money laundering is. The impact of globalisation means that there has been a global response to this issue.

Most developed nations have the same measures to combating ML activates. This is as the FAFT is the lead body on the regulations of ML activities. They recommend polices such as the 2006 AML act in Australia(FATF, 2010, p.34). By, creating the same standards there is less of an ability for criminals to exploit one country rule over the other(FATF, 2010, p.35). Regulators and investigators work together to take down syndicates, by sharing information regarding potential syndicates(FATF, 2010, p.39).

The issue is, not all nationals work together under the FAFT recommended regulations. Developing nations have poor systems due to underfunding and lack of education to these risks(FATF, 2010, p.35).

Educating developing nations to the dangers of exchange ML is the best method to bring them to the standard of the international community. By educating that community regarding what activates that look like ML, they can persuade personals to pressure governments and businesses to improve the standard and regulation of exchange businesses.

 

 

 

Investigative approaches

Regulators and authorities work together to build cases that involve exchanges. AUSTRAC provides online access to its transaction reports database and posting liaison officers in partner agencies to assist in investigations(AUSTRAC, 2011). The following is an example.

 

 ‘’Authorities dismantled a multi-million-dollar syndicate following a 12-month joint agency investigation. The investigation uncovered a currency exchange business being used to launder the proceeds of crime for a European drug syndicate. Law enforcement officers suspected that the exchange business had laundered more than AUD2 million for the drug syndicate.

The currency exchange accepted US dollars and instructed an agent, on their behalf, to deposit the cash into third-party bank accounts in structured amounts worth less than AUD10,000. Agent undertook hundreds of cash deposits, often depositing cash into the same account and on the same day, but at different bank branches. Deposits of US dollars were all in amounts worth less than AUD10,000 to avoid triggering threshold transaction reporting requirements.

 Activities of the currency exchange business came to AUSTRAC’s attention after it was the subject of several suspect transaction reports submitted by industry. SUSTRs detailed the suspicious transactions undertaken by the operators of the currency exchange, including structuring of foreign currency exchange transactions and travellers’ cheques. 

Two currencies where always exchanged: United States Dollar and Hong Kong Dollar(AUSTRAC, 2015a).

They created ELIGO National Task Force to investigate and regulate ML(Force, 2016). The task force comprises the Australian Crime Commission, the Australian Federal Police, AUSTRAC, key Commonwealth agencies and State and Territory law enforcement. The aim of the task force is to target areas of concerns in the exchange sector(Force, 2016).

Authorities working together is an effective method to combating the issues of ML. Agencies would have greater reach, reduce the chances of doubling up on cases when they work together. By combining the resources, authorities can take down syndicate and improve regulations as more information is available for decision making.

The investigative approach focus is to on large money laundering syndicates. It seems to be when a suspicious transaction report is logged, investigators can close the syndicate. In the example of Peter, it was over 10 years before a report occurred and authorities reacted. The reactiveness means plenty of ML activity might occur, however without the right resources it can take time before discovered.

Focusing on large syndicates means it removes large players however smaller players are sneaking under the reader. The best way to reduce the ML activities is by focusing methods most used to launder funds. I believe they can use using convicted money launders to get this information.

Government initiatives

The government takes its action based on what the international community has determined to be best practice. They base regulation regarding ML activities from what FATF has deemed to be the best approach(FATF, 2010, p.34). While the idea was to give regulators more powers over digital currencies and enhancing the powers and increasing the budgets to deal with ML was a positive step. The increase of the budgets of regulators was a reaction to the budget cut measures by past budgets. This caused an under-funded regulator to deal with the issues of ML.

Governments can fund agencies with the taxes paid by exchange businesses. If a business profit from ML activities, the fines and penalties can include paying more taxes to greater fund these agencies to ensure that they can better monitor ML.

Exchange ML is a battle that will never end as long as crime exists. When regulators and investigators shut one syndicate, others are already thinking about the next method they will use. While business have implemented monitoring and deterrent methods, complying with regulations, this might not be enough to stop ML activities. I believe the best way to combat this issue is by changing from being reactive to proactive in disrupting ML in this industry. Being proactive might not stop ML. It will reduce it from the current levels, which will place pressure on the criminal community, and changing how they think about laundering their funds.

References

Anti‑Money Laundering and Counter‑Terrorism Financing Amendment Act 2017, 130, Federal Register of Legislation (2017).

AUSTRAC. (2011). Money laundering in Australia 2011.  Retrieved from australia-2011">http://www.austrac.gov.au/publications/corporate-publications-and-reports/money-laundering-australia-2011.

AUSTRAC. (2015a). Money exchange business laundered millions for drug syndicate

.   Retrieved from http://www.austrac.gov.au/case-studies/money-exchange-business-laundered-millions-drug-syndicate

AUSTRAC. (2015b). Part B of an AML/CTF program (customer due diligence procedures).  Retrieved from http://www.austrac.gov.au/part-b-amlctf-program-customer-due-diligence-procedures.

Belgrade. (2015). FOREIGN CURRENCY OPERATIONS AND MONEY LAUNDERING.  Retrieved from https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=2ahUKEwi8y9Wv2qzdAhXVM94KHYUGBhEQFjAAegQIAhAC&url=http%3A%2F%2Fwww.apml.gov.rs%2FREPOSITORY%2F1448_exchange-business-strategic-analysis.doc&usg=AOvVaw1Tzl4E-d-ksQORLiipPxop.

Chris Vedelago, Cameron Houston. (2016). Crown Casino haven for drug traffickers, ‘a blot on the community’. The Sydney Morning Herald. Retrieved from https://www.smh.com.au/business/crown-casino-haven-for-drug-traffickers-a-blot-on-the-community-20160206-gmnce7.html

Commission, Australian Crime. (2011). ORGANISED CRIME IN AUSTRALIA

2011. Retrieved from australia-2011.pdf">https://ssaa.org.au/assets/news-resources/research/2011-11_acc-organised-crime-in-australia-2011.pdf

FATF. (2010). Money Laundering through Money Remittance and Currency Exchange Providers. Retrieved from https://rm.coe.int/fatf-report-money-laundering-through-money-remittance-and-currency-exc/16807150ad:

FATF, APG. (2015). National AML/CFT Policies and Coordination” in Anti-money laundering and counter-terrorist financing measures – Australia, Fourth Round Mutual Evaluation Report, FATF, Paris and APG, Sydney. Retrieved from australia-2015.html">www.fatf-gafi.org/topics/mutualevaluations/documents/mer-australia-2015.html

Force, The Eligo National Task. (2016). Money laundering. Retrieved from http://www.austrac.gov.au/sites/default/files/documents/eligo_ml_fact_sheet.pdf

Higgins, Stan. (2017). From $900 to $20,000: Bitcoin’s Historic 2017 Price Run Revisited. Coinsesk. Retrieved from https://www.coindesk.com/900-20000-bitcoins-historic-2017-price-run-revisited/

Jackson, Dr Kim. (2001). Gambling Policy and Regulation

 

.  Retrieved from https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/Publications_Archive/archive/gamblingebrief.

Rohret, David, & Vella, Michael. (2018, 2018). Crypto Currency: Expanding the Underground Cyber Economy, Reading.

Welch, Dylan. (2014). Drug trafficker and high roller Pete Tan Hoang laundered up to $1 billion through Melbourne’s Crown Casino before being shot in the face

7:30, ABC news.

Williams, Pamela. (2018). Banking royal commission: NAB, CBA, ANZ, AMP count the cost

. The Australian. Retrieved from australian.com.au/news/inquirer/banking-royal-commission-nab-cba-anz-amp-count-the-cost/news-story/c407af72757049059788311d2de68406">https://www.theaustralian.com.au/news/inquirer/banking-royal-commission-nab-cba-anz-amp-count-the-cost/news-story/c407af72757049059788311d2de68406

Zeng, Hui, & Kang, Xiangui. (2016). Fast Source Camera Identification Using Content Adaptive Guided Image Filter. Journal of Forensic Sciences, 61(2), 520-526. doi:http://dx.doi.org/10.1111/1556-4029.13017



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