Money Laundering is Hot!

Wherever you look these days, financial crime and corruption is in the public eye. The entertainment world has latched on to public interest fuelled by high-profile exposés, including the Panama Papers and stories of money laundering and drug trafficking by the likes of Joaquín “El Chapo” Guzmán, who was sentenced to life in prison in July 2018.

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A stream of movies and shows have rolled off the production line and on to big and small screens across the world. Netflix is one of the principal purveyors with the likes of Steven Soderberg’s The Laundromat seeking to bring the Panama Papers to life and Ozark featuring Jason Bateman’s sleight-of-hand cartel bookkeeper, not to mention Breaking Bad and Narcos. The BBC got in on the act with McMafia, based on the book McMafia: A Journey Through the Global Criminal Underworld by journalist Micha Glenny. This led to McMafia Law’ being adopted as a nickname for Unexplained Wealth Orders (UWOs) introduced under the Criminal Finances Act in 2017. No stranger to topical drama, Sky’s productions of Riviera and Billions are also based on corruption, suspicious transactions and secrecy.

The watching public are being consistently entertained and educated about how financial crime underworld works.  

Banks and other institutions should consider if their policies, procedures and systems are up to the task of detecting and preventing the type of criminal activity detailed in these movies and shows. Albeit that a certain degree of artistic licence has been applied, the principles of money laundering depicted are sound, and with growing public awareness, the risk of reputational damage as a result of a breach has never been higher. 

In a trailer for Ozark we hear the principal character, Marty Byrde, provide a ‘Money Laundering 101’ introduction to what happens in the show “you need a cash business,…..with books which are easily manipulated, no credit card receipts, etc”

To keep himself and his family alive, Marty promises to build a major money laundering operation to process hundreds of millions of dollars for a major drug cartel.  In the small town of Ozark, Missouri, Marty grows his business empire starting with a rickety motel,  expanding to include a strip club and a construction business. These businesses afford him the opportunity of mixing the cartel’s dirty dollars into legitimate cashflows. How does he do this? Well, he employs a number of illicit but not uncommon techniques:

  • The motel and strip club are predominantly cash businesses making it easier to feed in large volumes of dirty cash, making it look like business is booming.   
  • Later in the story Marty helps to build a new church. Churches rely on cash donations which offers another way to filter in the Cartel’s money and in a way that would be less susceptible to review by the authorities than with regulated businesses.
  • He overstates genuine transactions. For example, he purchases 16,000 square feet of carpeting at $0.69 per square foot, but logs it in the motel’s books as 32,000 square feet $8.75 per square foot. The difference equates to nearly $270k of cartel money slipped into the business that, on the face of it, looks legit. Similarly he ‘buys’ 25 air conditioners for the motel but he only takes delivery of four.
  • Of course, with high outgoings matching big revenues, profits are low. Marty pays (minimal) taxes to the IRS adding a layer of respectability to his operations.

So now Marty has got the dirty cash into his businesses and blurred its source. But how does he get it out? 

The Cartel will be beating the door down, and much worse, to get hold of their money.

In one of the less well explained aspects of Ozark’s plot, Marty uses Cartel-owned businesses – no doubt with complex, off-shore ownership structures – to supply building materials for his construction projects. With another layer of invoice exaggeration and overpricing, the Cartel gets its now freshly laundered cash via what looks like a vanilla transaction from one legitimate enterprise to another.

Banks have invested millions in recent years in transaction monitoring (TM) systems which they hope will highlight the type of activities portrayed in Ozark. But detecting money laundering and corruption takes much more than just a fancy system.

An end to end framework is critical to understand your risk and put together the right mix of people processes and systems. As a minimum, there needs to be:

  • Business-wide and customer-level risk assessments so you understand your exposure to products and customers with higher risk.
  • Strong customer due diligence so you know who you are dealing with, including periodic and trigger-based reviews so that information is refreshed when circumstances change.
  • An effective and efficient transaction monitoring system tuned and calibrated with appropriate thresholds to flag up suspicious transactions.
  • Case management and escalation processes with well-trained investigators to sift out the illicit from the genuine.
  • Governance and reporting in place with insightful metrics so that you know how well you are doing.

Ongoing review and enhancement have been called out by many regulators over the last number of years as both good practice and expected behavior in relation to managing your TM framework.​ At SQA Consulting we can not only provide you with hints and tips for automated monitoring but can support you right through your TM lifecycle from implementation through to regular ongoing review.

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