Banks, insurance companies, asset managers and other companies in the financial sector are required by law to identify and verify their customers and to establish the purpose of the relationship KYC and to monitor their transactions because that may indicate money laundering or terrorist financing AML (Anti Money Laundering). In recent years, the number of unusual or suspicious cases to be investigated by Financial Institutions and the time required to do so have increased sharply. This is partly because the pressure on financial institutions from the authorities has been on the increase because of ever more extensive audit regulations. On the other hand, criminal methods are becoming increasingly sophisticated. Here is an overview of the most common fraud schemes and the signs that indicate an individual case review.
Identity theft and the use of false identities
It is common for fraudsters to use stolen identities to pretend to be someone other than they are. The idea behind it: If they can impersonate a customer who is already known to the financial institution, they can bypass some KYC processes for new customers, for example.
It also happens that fraudsters appear under a completely fake identity. Names, addresses and other personal information do not match a real person.
When to watch out:
- Suspicious signals that may indicate identity theft include
- Inconsistent information: When a customer provides personal information that does not match what they already know, such as an address that is unknown to be associated with their name.
- Falsified documents: When a customer presents documents with unusual features. This could be an indication that they may be counterfeit.
- Difficult identity verification: If a customer has difficulty confirming their identity, e.g. they delay confirmation noticeably.
- Unusual transactions: e.g. if a customer suddenly transfers sums far more than what they would normally transfer or a transfer to unknown accounts or new country.
Smurfing
“Smurfing” or “structuring” refers to depositing or moving plenty of small amounts of money below the AML threshold. Fraudsters may use several small transactions as a means of evading detection and conducting illicit activities.
To identify this type of fraud, there are several signs to look out for, including:
- Unusual transaction patterns: A customer who engages in numerous small transactions that are unrelated or are below the reporting threshold may be attempting to evade detection.
- Rapid succession of transactions: A customer who conducts a high volume of small transactions in quick succession may also be attempting to evade detection or conceal their true purpose.
- Transactions with high-risk countries or individuals: small transactions with high-risk countries or individuals may also be a red flag, as these transactions may be attempts to move money across borders or to conceal the true source or destination of funds.
Layering
Layering is a money laundering technique that involves many complex transactions to disconnect illicit funds from their source. In this process, money travels through many countries, banks, and financial instruments – until its origin can hardly be traced. Indicators of layering can include:
- Use of complex financial instruments: When a customer uses complex financial instruments, e.g., derivatives.
- Transactions with high-risk countries: When a customer makes transfers from or to countries that are considered high-risk countries like tax havens for money laundering.
- Transactions with high-risk companies: When a customer conducts transactions with companies that have unusual business models or operate in industries that are frequently associated with money laundering.
- Transactions with High-Risk Persons: When a customer has business relationships with individuals who are on international sanctions lists or associated with criminal activity.
- Transactions with a branch that is usually not connected to their own branch. For instance, a car company that purchases bananas in South America.
The use of cryptocurrencies
Cryptocurrencies offer anonymity and can be used to transfer funds across borders with minimal regulation, making them attractive to fraudsters.
However, MiCa regulations, which are expected to come into force in 2024, will regulate the exchange of crypto assets for fiat currencies. Accordingly, information about the sender and recipient will have to be requested at all trading venues in the future, regardless of the amount involved.
To identify this type of fraud, there are several signs to look out for, including:
- Unusual transaction patterns: when a customer exchanges sums below AML limits into a cryptocurrency in rapid succession or vice versa.
- Unclear origin: When a customer cannot satisfactorily explain where a higher cryptocurrency amount came from or how it was generated.
- Suspicious behavior: A customer who demonstrates a lack of knowledge about the cryptocurrency they are using.
- Dubious crypto exchanges: when a customer trades through cryptocurrency exchanges that are unregulated or operate in countries that are considered high-risk for money laundering.
What can companies do?
For the financial industry to be successful in combating money laundering, there needs to be widespread awareness of the problem. Regular training and education of employees on the latest fraud tactics can go a long way.
Another important building block is the widespread implementation of automated solutions such as cleversoft’s KYC/AML suite. As a result, the efficiency and internal audit processes are improved, while the time required is significantly reduced.
If you would like to find out more about cleversoft’s AML/KYC solution, please contact us.
