TECHNOLOGY IN THE FIGHT AGAINST MONEY LAUNDERING IN THE NEW DIGITAL CURRENCY AGE
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TECHNOLOGY IN THE FIGHT AGAINST MONEY LAUNDERING IN THE NEW DIGITAL CURRENCY AGE Statement of intent Drugs, prostitution, illegal gaming, fraud, extortion – where there’s money tied to a criminal activity, there’s a crook who wants to “clean” it or legitimize the money so it can be moved throughout the world’s financial system, no questions asked. Like many illegal activities, money laundering is undergoing a revolution of sorts. That’s because technology, from online casinos and social media websites to the introduction of digital currencies, is offering alternative pathways for criminals to launder illegal profits. In spite of significant regulations designed to deter money laundering in the U.S. financial systems, instituted shortly after the tragic events of Sept. 11, 2001, law enforcement agencies and financial institutions remain in a race to keep ahead of criminals. This white paper, brought to you by Thomson Reuters, explores the changes occurring in illegal money-laundering activities, and what financial institutions and law enforcement agencies are doing to combat this growing threat to the stability of the world’s financial system through the use of new strategies, regulations and technology.
CONTRIBUTING WRITERS
Cindy Williamson
CFE, CAMS, Enforcement Analyst III, National White Collar Crime Center (nw3c.org)
Jason Vazquez
Senior Vice President and BSA/AML Compliance Officer, Provident Bank (providentbanking.com)
Jason Thomas
Senior Strategic Analyst, Thomson Reuters
Katherine Sagona-Stophel
Government Analyst, Thomson Reuters
2 TECHNOLOGY IN THE FIGHT AGAINST MONEY LAUNDERING IN THE NEW DIGITAL CURRENCY AGE JULY 2013CONTENTS
DEFINING THE PROBLEM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
MONEY LAUNDERING IN THE DIGITAL AGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
MONEY LAUNDERING AND COMPLIANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
IDENTIFYING AND INVESTIGATING MONEY LAUNDERING . . . . . . . . . . . . . . . . . . . . . . . . . . 10
CHALLENGES AND OPPORTUNITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
MILESTONES IN THE FIGHT ON MONEY LAUNDERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SOURCES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3 TECHNOLOGY IN THE FIGHT AGAINST MONEY LAUNDERING IN THE NEW DIGITAL CURRENCY AGE JULY 2013DEFINING THE PROBLEM no way to estimate how much money is actually
On May 28, 2013, U.S. prosecutors indicted laundered through the world’s legal and illegal
seven people in a cyber-crime operation financial systems.
involving an online bank that allegedly handled “Money laundering and the financing of
more than $6 billion for drug dealers, child terrorism are financial crimes with economic
pornographers, identity thieves, hackers and effects,” said Min Zhu, deputy managing director
other criminals, all connected through the of the International Monetary Fund (IMF) in a
anonymous exchange of digital currency. 2013 IMF Alert. “They [money launderers] can
According to U.S. officials, it was the largest threaten the stability of a country’s financial
money-laundering bust in U.S. history. sector or its external stability more generally.
At the center of the alleged cyber-money Effective anti-money laundering and combating
laundering operation is Liberty Reserve, the financing of terrorism regimes are essential
a Costa Rica-based currency transfer and to protect the integrity of markets and of the
payment processing company. According to global financial framework as they help mitigate
Reuters, Liberty Reserve processed around 12 the factors that facilitate financial abuse. Action
million transactions per year since 2006. The to prevent and combat money laundering and
company allowed account holders to set up the financing of terrorism thus responds not only
anonymous accounts and convert real money to a moral imperative, but also to an economic
into anonymous, untraceable digital currency need.”
called LR. The fight against money laundering took on
The Liberty Reserve case represents a sea greater urgency following the tragic events
change in the fight against money laundering, in the United States on September 11, 2001
which is the practice of processing money (9/11). The U.S. government, the IMF and other
and assets gained through illegal means government bodies around the world intensified
into legal (clean) status. Money laundering is their anti-money laundering efforts after it
often a secondary process – preceded by an became clear that the terrorist organization
illegal activity, such as drug trafficking or an al-Qaida used money-laundering techniques
online scam. In some cases, money laundering to successfully fund the 9/11 attacks. It appears,
may be used by terrorist organizations to based on a 2005 PBS Frontline investigation,
threaten and/or carry out attacks based upon that money raised through Islamic charities in
a philosophical agenda. A key element of the Europe and the United States was laundered
process is maintaining anonymity and avoiding through the European banking system to
transparency throughout the process. Where support the planning of 9/11 and other terrorist
money launderers were once limited to physical operations.
currency, the advent of digital currency has
compounded the complexity of the global fight “Effective anti-money laundering and
against this activity. combating the financing of terrorism
regimes are essential to protect the
The Financial Action Task Force (FATF), an integrity of markets and of the global
inter-governmental organization comprising 36 financial framework.”
countries, estimates money laundering at 2 to
5 percent of global annual GDP or gross world
product, which amounts to an estimated $1.38 Today, more than 10 years after 9/11, money
trillion to $3.45 trillion. But because the problem laundering in the digital age has taken on even
is so widespread, the FATF notes that there is greater urgency because of the potential it may
4 TECHNOLOGY IN THE FIGHT AGAINST MONEY LAUNDERING IN THE NEW DIGITAL CURRENCY AGE JULY 2013have in destabilizing the financial health of (Bitcoin) exchange, citing the fact that Mt.
countries. Money laundering has flourished in Gox and its subsidiary, Mutum Sigillum LLC,
countries with ineffective or intentionally loose a Delaware corporation, were not licensed to
financial controls, allowing organized crime transmit money.
and/or terrorist groups to easily move funds • Gambling News (April 10, 2013) reported the
without being detected. The concern, as some indictment of 34 individuals and 23 com-
governments such as Germany have publicly panies connected to Legendz Sports (a.k.a.
expressed about the financial stability of Cyprus Legands Sports), an online sports betting
(in the context of the financial struggles of the operator accused of “racketeering, money
European Union), is the cancer-like impact laundering and illegal gambling.”
money laundering can have on broader financial
• On Aug. 1, 2012, the FBI’s Los Angeles Divi-
systems.
sion announced that U.S. and Australian
The growing problem of money laundering officials secured court orders to recover more
prompted the announcement by the U.S. than $24 million in assets from e-Bullion.
Treasury Department in November 2012 of the com, which federal prosecutors accused of
formation of a new anti-money-laundering task operating as an illegal money-transmitting
force, according to a Reuters news report by business. “Through the e-Bullion.com web-
Brett Wolff (Nov. 12, 2012). David Cohen, the site, individuals opened accounts with real
U.S. Treasury’s Under Secretary for Terrorism money, which they used to purchase virtual
and Financial Intelligence, said the primary e-currency. The FBI contends that e-Bullion
reason behind the formation of the task force allowed individuals engaging in fraud to
is the “remarkable change” occurring in the move money around the world while remain-
financial industry, driven by technological and ing virtually anonymous and avoiding many
financial innovation. global banking reporting requirements.”
• On Aug. 26, 2011, Joy Edison, a resident of
“Money-laundering schemes themselves are
Elkton, Md., was sentenced to 70 months in
also becoming increasingly sophisticated and
prison for conspiring to launder more than
international in nature,” Cohen said in the
$400,000 in drug proceeds. Over seven
Reuters report. “The same hugely beneficial
years Edison and a group of co-conspirators
technological and financial advancements have
laundered the proceeds of heroin sales
had the unfortunate side effect of amplifying
through Las Vegas casinos, Maryland lottery
potential AML [anti-money-laundering] risk.”
tickets, a used-car business, and properties
According to a sampling of documented, purchased by Edison through a front com-
prosecuted investigations compiled by the pany, J. Edison Properties.
Internal Revenue Service (IRS) for 2010-11, • In July 2006, Arthur Budovsky and Vladimir
money laundering occurs regularly every day Kats were indicted by the state of New York
throughout the United States, from major on charges of operating an illegal money
metropolitan areas to small towns in middle transmittal business, GoldAge, Inc., from
America. Examples of money laundering their Brooklyn apartments. The defendants
include: transmitted at least $30 million to digital
• On May 14, 2013, the U.S. Department of currency accounts worldwide. Source: Na-
Homeland Security served a court order to tional Drug Intelligence Center, June 2008.
Dwolla, a popular mobile payment service, • Hector Dominguez-Gabriel, an international
requiring it to cease all account activities with narcotics trafficker and money launderer
the Mt. Gox (mtgox.com) digital currency based in Mexico, was sentenced to 240
5 TECHNOLOGY IN THE FIGHT AGAINST MONEY LAUNDERING IN THE NEW DIGITAL CURRENCY AGE JULY 2013months in prison on Aug. 12, 2011, on nar- • Parallel or underground banking sys-
cotics importation and money-laundering tems, which exist in countries such as India,
charges. Dominguez-Gabriel laundered Pakistan, China and other parts of Asia, and
millions of dollars in narcotics proceeds back are typically enforced by organized criminal
to Mexico through a systematic process of groups or gang alliances.
small, structured deposits into bank ac- • Trade-based money laundering (TBML),
counts throughout the United States. which involves the laundering of funds
• Reuters reported that the FBI was investigat- through the trade of goods and services. In
ing Second Life’s virtual casinos in April 2007 2006, the FATF noted the growing use of
for potential illegal activity related to the TBML by criminal organizations and terrorist
1970 Illegal Gambling Business Act or the groups as various governments throughout
Unlawful Internet Gambling Enforcement the world tighten anti-money-laundering
Act. In its 2011 National Gang Threat Assess- rules and regulations. However, TBML
ment: Emerging Trends, the National Gang remains an overlooked aspect of money
Intelligence Center noted the viability of Sec- laundering to this day.
ond Life as a source for criminals to commit a • Prepaid cards, often referred to as gift cards,
wide range of illegal activities. and readily available throughout the coun-
• According to the FBI Intelligence Assessment try at gas stations, drug store chains and
(April 24, 2012), “organized criminal groups discount retailers, have become so popular
(as of June 2011) were using an online role- among money launderers that the Financial
playing game to facilitate money launder- Crimes Enforcement Network (FinCEN) with-
ing by purchasing virtual game currency in the U.S. Treasury Department is exploring
with the proceeds of criminal activity. The new rules that would require travelers to
virtual game currency was used to purchase declare prepaid cards in excess of $10,000
in-game virtual items that were then sold to to customs officials, according to Personal
other players for clean money.” Finance Digest magazine (April 4, 2013).
In its most simple form, money laundering is From a law enforcement perspective, Cindy
a process, according to a Rand Corporation Williamson, a certified anti-money-laundering
monograph, Cyber Payments and Money specialist with the National White Collar Crime
Laundering, that exists simply because money Center (NW3C), believes the key to building a
– paper bills and coins – is bulky and heavy to solid case is linking money laundering to a
transport in large quantities, making it difficult specific illegal act, such as mortgage fraud,
to move around from one person or organization drug trafficking or mail fraud. While federal
to another, or from state to state, or from laws regarding money laundering are extensive,
country to country. money-laundering laws from state to state are
inconsistent, explained Williamson.
Besides U.S. financial institutions, other financial
structures that are typically used by money “Because criminal groups are so much more
launderers include sophisticated in their use of technology to
commit their crimes and hide the proceeds
• Overseas and offshore bank accounts located
of their activities, law enforcement has to
in countries that have secrecy laws protect-
work more strategically to identify criminal
ing the identity of the individuals or corpora-
activities and collect intelligence and evidence,”
tions that open accounts in their countries.
Williamson said.
• Shell corporations, which are used to funnel
money through “legitimate” businesses.
6 TECHNOLOGY IN THE FIGHT AGAINST MONEY LAUNDERING IN THE NEW DIGITAL CURRENCY AGE JULY 2013“Many within the law enforcement money, there money laundering can also exist.
community are concerned about the Some virtual currencies are completely
frightening levels of technology that anonymous, unlike credit card transactions or
criminals have at their fingertips.” personal checks, which can be tied to a specific
person or entity. Virtual currencies are not
“Many within the law enforcement community like dollars, yen or euros because there is no
are concerned about the frightening levels government or central regulatory agency that
of technology that criminals have at their regulates their value or use. They are exchanged
fingertips,” she added. freely and anonymously on peer-to-peer
networks worldwide.
One reason Williamson believes that
technology-based crimes are growing is that it’s Because some virtual currencies can be freely
safer for criminals. exchanged without being traced, they can be
useful in the underbelly of the Internet, also
“Why risk getting killed or enduring a long known as the Deep Web, which organized
prison sentence for drug trafficking when you crime groups, terrorist cells and other shadowy
can make money faster with less risk (convictions figures, from child pornography enthusiasts to
for white-collar crimes tend to receive less human traffickers, call home. In a nutshell, the
prison time) by participating in activities Deep Web is that invisible portion of the Web
such as mortgage fraud or healthcare fraud?” that “cannot be indexed by search engines – a
Williamson said. “Along these lines, investments place where Google does not go,” note writers
in technology allow criminal groups to launder Pablo Albarracin and Christopher Holloway in
money faster and more safely.” their Dec. 17, 2012, story about the Deep Web for
The bottom line: Criminals are investing Worldcrunch.com. “Offering anonymity and
in technology to launder money; financial freedom, the Deep Web has transformed over
institutions and law enforcement agencies need the years into a deep (some say it represents 90
to invest in technology as well. percent of the content available on the Internet),
almost inhospitable, little-explored repository
MONEY LAUNDERING IN THE DIGITAL AGE that can host anything from the most innocent
One of the latest trends in money laundering to the most ruthless and unthinkable.”
involves digital currency. Many people are only
beginning to learn about the growing use of While the anonymous nature of the Deep Web
independent virtual cryptocurrency, such as has been critical to people fighting against
Bitcoins, Litecoins, Zen and Namecoins. But repressive regimes around the world and to
the reality is, online and alternative currencies hacktivist movements such as Anonymous, the
exist in many places, from Linden Dollars used Deep Web is more closely associated with drug
in the online game Second Life, and Justice trafficking, arms trafficking, terrorism and child
Points in World of Warcraft, to Berkshares, an pornography. For example, some websites have
alternative currency created by five banks to become online retailers for illegal transactions
promote local business in the Berkshire region of drugs, illegal weapons or child pornography,
of western Massachusetts. And where there are allowing criminals to use digital currency as their
opportunities to exchange real money for online preferred source of payment.
7 TECHNOLOGY IN THE FIGHT AGAINST MONEY LAUNDERING IN THE NEW DIGITAL CURRENCY AGE JULY 2013Fraud Examiners Concerned About While the relationship between digital currencies
Digital Currency and money laundering may just be emerging,
it’s appearing on the radar screen of law
Percent of certified fraud examiners who have enforcement and financial institutions.
worked on a fraud case involving digital currencies:
10%
In an April 2013 Thomson Reuters-Association
Percent of certified fraud examiners who feel digital of Certified Fraud Examiners (ACFE) survey of
currencies will change the way they conduct future
fraud investigations: more than 800 certified fraud examiners, 10
61% percent report working on a fraud case involving
Source: Thomson Reuters-ACFE Survey, April 2013 digital currency, with 61 percent forecasting that
And yet, you don’t have to go into the under the growing prevalence of digital currencies
world of the Deep Web to load up on virtual will change the way they conduct future fraud
currency. Anyone, from a curious soccer mom investigations.
to a seasoned drug dealer, can buy virtual
“Another factor is that some in the law
currencies through eBay or Craigslist. And that’s
enforcement community are very cautious to act
what worries law enforcement officials.
in the presence of new technology with the fear
Because of the growing interest in them, FinCEN that they may become involved in a precedent-
announced new money-laundering rules on setting case,” Thomas added.
virtual currencies in March 2013. According to MONEY LAUNDERING AND COMPLIANCE
a Wall Street Journal report by Jeffrey Sparshott
While you might expect money laundering to
(March 21, 2013), “firms that issue or exchange
occur in the shadows of our world, like the Deep
the increasingly popular online cash will now
Web, in many cases, it can occur in plain sight,
be regulated in a similar manner as traditional
within the mainstream of the financial system.
money-order providers such as Western
On Dec. 11, 2012, HSBC Holdings Plc (HSBC),
Union Co. They would have new bookkeeping
one of the world’s largest financial institutions,
requirements and mandatory reporting for
agreed to pay a record $1.92 billion fine to the
transactions of more than $10,000. However,
U.S. Justice Department, based on its role in
the new rules don’t apply to individuals who
allowing the laundering of millions of dollars by
simply use virtual currencies to purchase real or
Mexico’s Sinaloa and Colombia’s Norte del Valle
virtual goods.”
drug cartels through the bank’s Mexican and
That leaves room for virtual worlds that use or U.S. banking units, according to Reuters (Dec. 11,
offer online currency, allowing multiplayer online 2012).
games to serve as unregulated channels for The settlement, according to Reuters,
money launderers, according to Jason Thomas, a represented the third time in 10 years that HSBC
Senior Strategic Analyst with Thomson Reuters. has been penalized for lax controls. “Compliance
[at HSBC] was ‘woefully inadequate,’” noted
“Money laundering through these massive
Loretta Lynch, the U.S. attorney in Brooklyn.
multiplayer online games has largely gone
ignored by law enforcement for a long time Thomas said the big challenge for financial
because it was perceived as being too complex,” institutions is knowing your customer and red-
Thomas noted. “These online games, and the flagging transactions that appear suspicious.
Deep Web in general, can be very intimidating.
‘The technology exists through providers such as
It’s not only the strange subcultures, but the
CLEAR and World-Check to identify known bad
size of it all can feel overwhelming. With trillions
guys,” Thomas said. “And with additional data-
of transactions, many in the law enforcement
mining technology, we can take that information
community can’t imagine even where to start.”
8 TECHNOLOGY IN THE FIGHT AGAINST MONEY LAUNDERING IN THE NEW DIGITAL CURRENCY AGE JULY 2013and link a person of suspicion to other people state or federal regulators.
who may be supporting related criminal activity.”
But 9/11, and subsequently the USA Patriot Act,
In addition, noted Thomas, “the technology changed the landscape significantly, imposing
exists for financial institutions to identify other stiffer rules and regulations on U.S. financial
money-laundering techniques, such as opening institutions in monitoring financial transactions
up an account in a deceased person’s name.” and money-laundering activities that may offer
The key to monitoring money-laundering activity links to the funding of terrorist activities.
is to identify unusual patterns within the transfer
and flow of illegal money into the legal money “The Patriot Act raised the bar and put everyone,
supply. Often the tip-off is the change in velocity including non-depository financial institutions,
of the particular incoming and outgoing flow of on the same page,” said Vazquez. “But at the
funds. same time, it imposed new challenges. In many
areas, the Patriot Act doesn’t tell you explicitly
“The best money launderers understand the what to do. So we, like many banks, not only
system. They’re patient. They move money have to keep up with the growing sophistication
through the world’s financial systems slowly of money-launderers and terrorists but also
and in smaller, less suspicious amounts,” said the growing expectations of regulators, and
Thomas. “Money launderers who get caught are have dramatically increased our investments in
impatient – they want to move large amounts of technology and people.”
funds through the system fast.”
More than violating the law, most banks don’t
The key to monitoring money-laundering want to be known as the next bank that missed
activity is to identify unusual patterns the banking activities of a terrorist group. “The
within the transfer and flow of illegal bad PR would be devastating to the reputation
money into the legal money supply. Often and trust of a financial institution – and aside
the tip-off is the change in velocity of the from complying with regulations, it is a key driver
particular incoming and outgoing flow of behind our money-laundering investments – to
funds. protect a reputation that Provident Bank has
built over 120 years,” Vazquez said.
“The problem is that as we build better Advanced technology is allowing financial
mouse traps, the mice keep getting smarter,” institutions, such as Provident Bank, to be
commented Jason Vazquez, senior vice president more consistent in screening the identity of
and BSA/AML compliance officer for Provident a customer and monitoring for potentially
Bank, a 120-year-old bank based in Montebello, suspicious customer banking activities. In
N.Y., with more than $3.7 billion in assets under addition, sophisticated behavioral analytics
management. allow banks to create risk profiles for customers
and employees, which can be useful in the
Before 9/11, Vazquez explains, most banks
monitoring process. To complement his internal
throughout the U.S. followed a general
efforts, Vazquez looks to the best practices
list of activities to comply with the Bank
established by organizations such as the ACFE
Secrecy Act (BSA), a bill signed into law in
for information and ongoing training.
1970 that launched a reporting system for
financial transactions exceeding $10,000 – One tool that Vazquez uses is a powerful
a significant step in monitoring the flow of data-mining software suite that allows
criminally obtained proceeds. While important, his organization to explore public records
maintaining a BSA program wasn’t a focal point associated with a customer whose transactions
for many banks or examinations conducted by raise red flags. This software also allows
9 TECHNOLOGY IN THE FIGHT AGAINST MONEY LAUNDERING IN THE NEW DIGITAL CURRENCY AGE JULY 2013the bank to identify associations with other IDENTIFYING AND INVESTIGATING
individuals who may be supporting a money- MONEY LAUNDERING
laundering ring. As local, county, state and federal law
enforcement officials fight the seemingly uphill
“Before this technology, an internal investigation
battle against money laundering, images may
would involve the analysis of hundreds or
come to mind of who is actually involved in these
thousands of pieces of paper,” said Vazquez.
types of criminal activities. You may think of the
“Now, data-mining tools allow us to explore a
lone drug dealer, the pimp, or even the geeky
hypothesis within hours or even minutes, giving
kid who got in over his head by moving money
us a clearer picture of the people linked to
around in an online game.
transaction anomalies.
The truth is, money laundering today is as
“Because of 9/11, the goal posts are always
organized and disciplined as the operations
moving,” he added. “Regulators increase their
of a major company. And often it’s linked to a
expectations from year to year. They’re expecting
growing number of sophisticated cybercrime
you to become more effective, efficient and
operations that avoid the dirty and bloody world
more sophisticated. And the truth is, we have to
of the streets.
because the money launderers and terrorists are
continuously pushing the edges as well.” According to Keith Mularski, an FBI special
agent who works from offices of the National
Determining the ROI on technology investments
Cyber-Forensics and Training Alliance, organized
is difficult for any organization. While preparing
crime groups around the world are engineering
for a board meeting in the past, Vazquez
widespread cybercrime rings using some of the
faced that exact question: “What is the value
most sophisticated technology imaginable. In
of investing in technology to track money-
a 2011 Guardian profile about Mularski, author
laundering activities based on the best practices
Dominic Rushe wrote: “And it is serious criminals
in the industry versus the cost of complying at
who are doing it. Traditional organized-crime
the minimal level based on BSA and Patriot Act
activities such as racketeering or prostitution
rules?”
are not going away, Mularski [said], but the new
With just hours before the start of the board generation of criminals are as excited about
meeting at which Vazquez needed to address online growth as their legitimate business
that question, a news report broke that listed rivals.”
the names of several regional banks that were
In other words, if you’re thinking of a young
being investigated by federal authorities for not
Matthew Broderick hacking into a government
catching the money-laundering activities of an
website in the movie War Games, you would be
organized crime ring linked to terrorism.
seriously mistaken.
“Our bank was not in the article because our
To combat the problem, financial institutions
systems caught it,” said Vazquez. “To me,
and law enforcement agencies across the
that’s the best kind of ROI – maintaining your
country, at all levels, recognize the need to invest
company’s reputation.”
in technology that allows these organizations
10 TECHNOLOGY IN THE FIGHT AGAINST MONEY LAUNDERING IN THE NEW DIGITAL CURRENCY AGE JULY 2013to more quickly identify suspicious transactions using general profiling technology to improve
and more efficiently gather information about their understanding of money launderers, and
persons of interest. As noted in the FinCEN’s the approaches to stopping them, in his 2012
Money Services Guide to Money Laundering white paper “The Practice of Profiling,” for
Prevention, “Federal action to curtail money- Thomson Reuters Accelus™ group.
laundering activities once focused heavily
on identification and documentation of large “Some law enforcement agencies have analyzed
currency transactions. More recently, anti- the use of money launderers in closed cases
money-laundering efforts have focused on the in order to identify common profiles, such as
use of money transfers, through both the bank criminal associates; ethnic, familial, geographic
and non-bank money transfer systems, and roots; preferences in methods; and so on. The
other means of moving funds. Today, as money results are used to populate general intelligence
launderers become more sophisticated, all databases, sometimes to generate fresh
types of financial transactions are facing greater investigations to use in court cases as evidence
scrutiny.” of association.”
“The biggest barrier in the fight against money While smaller local and county agencies may
laundering is the data,” added Thomas. “It’s a have the technology they need to identify and
Big Data problem. There are literally trillions of investigate money laundering and related
transactions going through the world’s financial cybercrimes, they do not always have the
systems. That’s where technology will help in training required to make full use of that
this fight.” technology, noted Williamson. This lack of
training is due to several reasons.
Searches through county courthouses for public
records have been replaced with powerful “One of the issues is the cost associated with
data-mining tools that allow law enforcement specialized training,” Williamson said. “It often
agencies to drill down deeper and more costs between $3,000 and $5,000 for a week
broadly to obtain information about suspicious of technology training, and then additional
criminal activities and persons of interest. funds are needed to purchase the software and
This is critical because sophisticated money tools required to successfully carry out ongoing
launderers understand how to move many investigations.”
small transactions through the world’s financial
To assist law enforcement agencies that
systems in their effort to avoid detection. Lots
struggle with finding the funds for anti-money-
of small transactions, however, add up to a
laundering training, the NW3C offers free
mountain of data through which to sort.
training to member agencies across the country.
“As a financial analyst with the National White Last year, NW3C provided training to more than
Collar Crime Center, and formerly with the 6,500 sworn personnel (and more than 50,000
Henrico County [Virginia] Police Department, sworn personnel since 1996). In addition, NW3C
it would take me months to obtain and sift assists law enforcement agencies by offering
through paper records” said Williamson. “Today, no-cost investigative tools such as Microsoft®
with tools like CLEAR, we have the means to COFEE (Computer Online Forensic Evidence
obtain volumes of data within minutes or hours. Extractor); PerpHound™ (a forensic tool that
And, we have the power to sort through it to get enables investigators to analyze call detail
to the information that really matters.” records from cell phone companies); and NW3C
TUX4N6™ (a bootable CD that allows law
David Thomas (no relation to Jason Thomas) enforcement to preview a hard drive without
recommends that financial institutions consider writing to or altering data on the system).
11 TECHNOLOGY IN THE FIGHT AGAINST MONEY LAUNDERING IN THE NEW DIGITAL CURRENCY AGE JULY 2013CHALLENGES AND OPPORTUNITIES Processing cash with online games or with
In the world of money laundering, the battle digital currency may offer alternatives at this
between criminals and financial institutions and time, but they come with risks. In the 2007 case
law enforcement agencies looks like a chess of E-Gold Ltd., a digital currency provider that
game. A move is met by a countermove. One offered an anonymous-based payment system
side attempts to sidestep the other. As traps backed by gold and silver reserves, the U.S.
are laid and sprung, the opponent learns and government demonstrated its willingness to
develops new skills and strategies. move against a digital-currency issuer that it
suspected, and proved in court, was being used
Through regulation and the desire to avoid as a worldwide vehicle of money launderers.
losing the trust of its customers, banks are The E-Gold case demonstrated that criminals
investing heavily in technology to monitor are constantly looking for sources to store and
transactions and gain knowledge about move money, but in the end, they still want their
customers. Likewise, federal law enforcement money in a trusted, widely used, sovereign-
agencies and, to some extent, state and local based currency like U.S. dollars or euros.
law enforcement agencies, are complementing
those investments with predictive policing and If currency is the critical point in the back–
legal investigation technology that enable and-forth battle between criminal elements
them to see beyond individuals to entire and law enforcement, it would seem that
networks and businesses that may be involved in criminal elements would swarm to safer digital
money laundering and other criminal activity. currencies as they’re introduced in the years to
come. Sweden, the first country to introduce
If financial systems continue to increase the paper banknotes in 1661, is moving toward a
controls on their transaction systems, criminal cashless society. And last year (August 2012), the
organizations will, in a reaction equal to or Royal Bank of Canada introduced the MintChip,
greater than those tighter controls, seek the digital equivalent of its paper currency.
alternative systems to launder their cash.
It stands to reason that if sovereign governments
However, it seems that many of these alternative
move toward issuing digital currency, then
systems don’t offer the efficiency in processing
competition may overwhelm private currency
large amounts of cash as traditional or online
such as Bitcoin or future currencies. However, if
banks offer.
sovereign currencies could potentially be traced
And those that come close to offering the for anti-money laundering or even tax purposes,
efficiency of banks, such as casinos, are evolving the reality is, based on history, the market for
in their anti-money-laundering controls. In private cryptocurrencies will continue to exist
late January 2013, the Las Vegas Sands Corp. and grow.
announced that it had ceased international
The shift within these private cryptocurrencies
money transfers and was overhauling its
then moves to maintaining anonymity between
compliance procedures, according to the Wall
individuals and organizations. For example,
Street Journal (Kate O’Keefe, Jan. 24, 2013), as
if drug dealers are open to accepting digital
part of its negotiations with federal authorities
currency in payment for a bag of heroin through
to resolve allegations of money laundering.
a cellphone or via a website, both parties, the
The FATF has called for additional anti-money-
dealer and the buyer, would like to ensure their
laundering controls for casinos, especially in
online anonymity, even if digital currency could
known money-laundering hotspots such as the
potentially be tracked based on encrypted
Philippines and Macau (which has become an
coding.
offshore haven for Chinese money launderers).
12 TECHNOLOGY IN THE FIGHT AGAINST MONEY LAUNDERING IN THE NEW DIGITAL CURRENCY AGE JULY 2013From that viewpoint, the biggest hurdle FBI, if digital currencies continue to grow in
regulators and law enforcement may face is popularity, they will attract more elements of
the growing body of privacy laws created to the criminal underground that want to avoid
meet the demands of a digital world. If a drug traditional financial systems to transfer money.
trafficker chooses to go around controlled As long as some virtual currencies can continue
environments such as banks, which are to maintain anonymity, while at the same time
obligated to “know your customer,” according becoming more mainstream (easy to acquire
to David W. Blass, chief counsel at the Division through simple, real-money transfers), law
of Trading and Markets of the Securities and enforcement will find it increasingly difficult to
Exchange Commission (SEC) in his March 2012 trace these exchanges.
Securities Technology Monitor article, “Past and Unpredictable role of hacktivists – The
Future of Fighting Money Laundering,” at what activities of Anonymous and other hacktivist
point can state or federal governments intervene movements within the Deep Web represent a
to discover the online identities of individuals? wild card in money-laundering monitoring and
As financial institutions, government agencies investigation, based on other incidents and
and law enforcement grapple with how to fight issues in which Anonymous has inserted itself. At
money laundering effectively and efficiently, some point, will these groups intervene to assist
other related issues may emerge in the years law enforcement in identifying criminal groups,
ahead as organized crime groups grow more or based on their belief systems, will they thwart
sophisticated in moving money in a digital law enforcement agencies in the name of privacy
world. These issues include: freedom?
Education – NW3C’s Williamson believes that Sharing information – To fight the ongoing
many law enforcement agencies are unprepared threat of money laundering and terrorism
to deal with the new reality of cybercrime and financing, it’s critical for federal, state and
the sophisticated methods organized-crime local law enforcement agencies and financial
groups use for money laundering. Extensive institutions to partner and work closely together.
training and education at all levels are needed, Sharing information quickly and efficiently is the
including small-town and rural county police key to stopping the rise in money laundering.
departments. Training can help overcome Government agencies will need to continue to
apprehensions of confronting new technology invest in information technology to increase
and the overwhelming amounts of data that are access. FinCEN Query, which launched in
typical in money-laundering cases. September 2012, is a step in the right direction,
Red-flagging – Along similar lines, banks and according to Calvery. This technology gives law
enforcement access to BSA data for the past
other financial institutions need to continue
11 years. To close the loop, law enforcement
to invest in Red Flags training for front-line
agencies must invest in investigative
personnel who handle funds or open accounts
technology that allows them to drill deep
to recognize the signs of money laundering on
and broadly into this data to optimize their
a day-to-day basis. As noted by Jennifer Shasky
investigative systems.
Calvery, director of FinCEN, in her Feb. 27, 2013,
remarks to the Securities Industry and Financial Privacy rights – Law enforcement agencies and
Markets Association (SIFMA), “while FinCEN elected officials can expect to receive significant
may be designing the defense, it is the financial challenges from privacy-rights advocates who
institutions that must build and execute it on a are concerned about how far law enforcement
daily basis.” can go in online surveillance and in demanding
data from Internet providers in their pursuit of
Alternative currencies – According to the
criminal organizations and money launderers.
13 TECHNOLOGY IN THE FIGHT AGAINST MONEY LAUNDERING IN THE NEW DIGITAL CURRENCY AGE JULY 2013Adequately budgeting for technology and standard for anti-money laundering and
people – To fight money laundering effectively, combating the financing of terrorism (CFT).
it’s critical that law enforcement and corporate
1992 – The Annunzio-Wylie Anti-Money
risk officers have the firepower to monitor and
Laundering Act strengthens the BSA, requiring
investigate suspicious activity. However, when
verification and recordkeeping of wire transfers.
many law enforcement agencies face mounting
Source: Westlaw.
pressure to maintain or cut existing budgets,
agencies may be forced to compromise on 1994 – The Money Laundering Suppression
investments in technology and personnel who Act requires banks to develop anti-money-
are specifically trained to use technology to laundering examination procedures and requires
investigate money-laundering incidents. the registration of money services businesses
Avoid denial – SEC’s Blass noted in a recent (MSBs). The act makes it a federal crime to
Security Technology Monitor article that it’s operate an unregistered MSB.
not enough for financial institutions to put 1998 – The Money Laundering and Financial
anti-money-laundering programs in place. Crimes Strategy Act requires the Secretary of
Individuals must be trained to come forward the Treasury to implement a national plan to
when they suspect suspicious behavior, even address money laundering. Source: Westlaw.
if that means the potential loss of a profitable
account. 2001 – The USA Patriot Act establishes new
rules to prevent, detect and prosecute terrorism
MILESTONES IN THE FIGHT ON
and international money laundering through
MONEY LAUNDERING
businesses and financial institutions. The Act
1970 – The Bank Secrecy Act (BSA) becomes law requires banks to monitor transactions and
and leads to the creation of a reporting system increases both civil and criminal penalties for
for financial transactions exceeding $10,000 money laundering. Source: Westlaw.
as a step in monitoring the flow of criminally
obtained proceeds. Source: Westlaw. 2002 – U.S. Department of Treasury issues the
National Money Laundering Strategy focused on
1970 – The Racketeer Influenced and Corrupt addressing the role of money laundering in the
Organizations (RICO) Act identifies money war on terrorism.
laundering as a predicate offense that
represents racketeering activity. Source: 2004 – The Bank Secrecy Act (BSA) was
Westlaw. amended with the passage of the Intelligence
Reform and Terrorism Prevention Act of 2004,
1986 – The Money Laundering Control which establishes regulations requiring certain
Act amends the BSA , and identifies money- financial institutions to report cross-border
laundering as a federal felony. Source: Westlaw. electronic transmittals of funds. Source:
Westlaw.
1988 – The Anti-Drug Abuse Act raises penalties
and sanctions for money laundering crimes, 2005 – The Drug Enforcement Agency (DEA)
amending money laundering provisions tied completes Operation Mallorca, a milestone
to attempted tax evasion and filing false tax money-laundering investigation of the
returns. Source: Westlaw. Colombian Black Market Peso Exchange. The
operation led to the arrests of 36 individuals, the
1989 – The International Monetary Fund
seizure of $7.2 million, more than 21,500 pounds
(IMF ) forms the Financial Action Task Force
of marijuana, 947 kilograms of cocaine and 7
on Money Laundering (FATF ), a 36-member
kilograms of heroin. Source: NW3C.
international governmental body established by
the G-7 Summit in Paris to develop a worldwide
14 TECHNOLOGY IN THE FIGHT AGAINST MONEY LAUNDERING IN THE NEW DIGITAL CURRENCY AGE JULY 2013Sources
Interview, Williamson, Cindy, CFE, CAMS, enforcement analyst III, National White Collar Crime Center (NW3C), April 2013.
“Fitch: More Banks Facing U.S. Anti-Money Laundering Scrutiny,” Fitch (news release), April 5, 2013.
“The IMF and the Fight Against Money Laundering and the Financing of Terrorism,” International Monetary Fund, March 31, 2013.
Interview, Vazquez, Jason, senior vice president and BSA/ AML compliance officer, Provident Bank, March 2013.
Interview, Thomas, Jason, senior strategic analyst, Thomson Reuters, March 2013.
Interview, Sagona-Stophel, Katherine, government analyst, Thomson Reuters, March 2013.
“Web Money Gets Laundering Rule,” Sparshott, Jeffrey, Wall Street Journal, March 21, 2013.
“Eye on Digital Currency: Amazon Sellers Get Bitcoin Option; Hackers Steal Bitcoins,” Digital Transactions, March 11, 2013.
“History of Anti-Money Laundering Laws,” Financial Crimes Enforcement Network, United States Department of Treasury, 2013.
“Bitcoin Looks Primed for Money Laundering,” Sanati, Cyrus, Fortune.com/CNNMoney.com, Dec. 18, 2012.
“HSBC to pay $1.9 billion U.S. fine in money-laundering case,” Wiswanatha, Aruna and Wolf, Brett, Reuters.com, Dec. 11, 2012.
“Welcome to the Deep Web: The Internet’s Dark and Scary Underbelly,” Albarracin, Pablo and Holloway, Christopher, Worldcrunch.com,
Nov. 17, 2012.
“U.S. Treasury to Lead Review of Anti-Money Laundering Rules,” Wolf, Brett, Reuters, Nov. 12, 2012.
“Minting the Digital Currency of the Future,” Wolman, David, Wired.com, May 7, 2012.
“Bitcoin Virtual Currency: Unique Features Present Distinct Challenges for Deterring Illicit Activity,” Intelligence Assessment, Federal
Bureau of Investigation, April 24, 2012.
“Money Laundering and Asset Forfeiture: Taking the Profit Out of Crime,” Leff, Douglas, J.D., FBI Law Enforcement Bulletin, April 2012.
“New Payment Methods and Financial Crimes Risk,” Thomas, David, Thomson Reuters Accelus, Jan. 2012.
“General Questions: What Is Money Laundering?” Financial Action Task Force (FATF), 2012.
“The Practice of Profiling, Part 3,” Thomas, David, Thomson Reuters Accelus, 2012.
“Examples of Money Laundering Investigations, Fiscal Year 2011,” Internal Revenue Service (IRS), 2011.
“Alternative Currencies Grow in Popularity,” Schwartz, Judith D., TIME Magazine, Dec. 14, 2008.
“Money Laundering,” National White Collar Crime Center, May 2006.
15 TECHNOLOGY IN THE FIGHT AGAINST MONEY LAUNDERING IN THE NEW DIGITAL CURRENCY AGE JULY 2013THOMSON REUTERS ACCELUS™
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