By Stuart Ridley

Money laundering is the process of cleaning ‘dirty’ money gained through illegal activities. Criminals launder money because the money trail is evidence of crime, or the money itself is vulnerable to seizure. The United Nations Office on Drugs and Crime estimates the scale of annual international money laundering at between US$800 billion and US$2 trillion. That’s 2% to 5% of global GDP. 

The money laundering cycle

The money laundering cycle has three stages:

1. Placement

Dirty money (the proceeds of crime) is placed into the financial system to hide its association with the crime.

2. Layering

Dirty money is washed through several transactions to disguise the source, such as:

• Wire transfer to offshore bank account of one company
• Loan to a second company
• Second company pays false invoice to first company.
  
  

3. Integration

The criminal accesses the clean money and spends it on apparently legitimate investments such as luxury assets, real estate, ‘front’ businesses and investments with financial institutions.

Alarm bells for accountants

Businesses in Australia and New Zealand must report cash transactions above prescribed thresholds plus any other suspicious activities that may be related to crime or funding terrorism.

In Australia, the reporting threshold is A$10,000 in cash or the foreign currency equivalent. In New Zealand, the threshold is NZ$10,000 (domestic cash transactions) or NZ$1000 via international fund transfer.

In New Zealand, all accounting practices are subject to anti-money laundering legislation and must submit a Prescribed Transaction Report to the Police Financial Intelligence Unit (FIU).

In Australia, not all accountants have obligations as reporting entities under current legislation, although new rules are expected in 2019. Threshold transaction reports and suspicious matter reports go to the Australian Transaction Reports and Analysis Centre (AUSTRAC). 

How do criminals launder dirty money?

Following are some of the common ways that criminals clean dirty money.

Dodgy property deals: AUSTRAC reports multiple money laundering methods in real estate, such as cash payments on loans, rent and mortgages, where each cash payment is below the reporting threshold. Transacting real estate deals at inflated prices between criminal parties is also common.

Front businesses: Criminals set up shops that typically transact a lot of cash, such as tattoo parlours or restaurants, which are then used as fronts for drug dealing and to launder money from other criminal activities. The ‘earnings’ can then be deposited into legitimate accounts every day. The front business might also pay inflated prices for supplies and services, including rent, to hide kickbacks.

“Criminals set up shops that typically transact a lot of cash, which are then used as fronts for drug dealing and to launder money from other criminal activities.”

Computer game virtual currencies: Hackers have used stolen credit cards to buy V-Bucks in massive multiplayer online game Fortnite, acquired virtual items, then resold them in other channels for real money.

Cryptocurrencies: Criminals run constant small transactions and even set up Ponzi schemes inside cryptoexchanges targeting inexperienced traders.

Crowdfunding: Criminals hide illegal transactions by investing (or receiving payments for equity) in sham companies. The actual trades are in illegal goods or cash, while the crowdfunding exchange is for worthless equity.

Online gambling during big sports events: Criminals use multiple apps to cycle thousands of bets and then ‘wallet’ the payouts quickly, hoping to hide transactions during high betting periods, such as the US Super Bowl.

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