(25) an_analysis_of_money_laundering_and_terroris (1).pdf

Journal of Money Laundering Control/2012/Volume 15/Issue 1, 1 January/Articles/An analysis of moneylaundering and terrorism financing typologies - (2012) JMLC 15(1), 85-111

Journal of Money Laundering Control

(2012) JMLC 15(1), 85-111

1 January 2012

An analysis of money laundering and terrorism financing typologies

Angela Samantha Maitland Irwin

is currently a PhD candidate of Professor Jill Slay at the University of South Australia. Her PhD is on thetopic of Money Laundering and Terrorism Financing in Virtual Environments. Angela Samantha Maitland

Irwin is the corresponding author and can be contacted at: [email protected]

Kim-Kwang Raymond Choo

is a Senior Lecturer at the University of South Australia, and has (co-)authored a number of publications ininformation security, cyber crime and anti-money laundering including a book published in Springer's

Advances in Information Security book series, three Australian Government Australian Institute ofCriminology (AIC) refereed monographs, and several book chapters.

Information Assurance Group & Forensic Computing Lab, University of South Australia, Mawson Lakes,Australia

Lin Liu

School of Computer and Information Science, University of South Australia, Mawson Lakes, Australia

received the B.Eng and M.Eng degrees in Electronic Engineering from Xidian University, China in 1991 and1994, respectively, and a PhD degree in Computer Systems Engineering from the University of South

Australia (UniSA) in 2006. Currently she is a Lecturer at the School of Computer and Information Science,UniSA. Her research interests include Petri nets and their applications to protocol verification and networksecurity analysis, as well as data mining and its applications to biological data analysis. She has published

more than 20 refereed journal and conference papers in the aforementioned research fields.© Emerald Insight 2012

Abstract

Purpose -- The purpose of this paper is to measure the size of the money laundering and terrorism financingproblem, identify threats and trends, the techniques employed and the amount of funds involved to determinewhether the information obtained about money laundering and terrorism financing in real-world environmentscan be transferred to virtual environments such as Second Life and World of Warcraft.

Design/methodology/approach -- Analysis of 184 Typologies obtained from a number of anti-moneylaundering and counter-terrorism financing (AML/CTF) bodies to: determine whether trends and/or patterns

can be identified in the different phases of money laundering or terrorism financing, namely, the placement,layering and integration phases; and to establish whether trends and/or behaviours are ubiquitous to aparticular money laundering or terrorism financing Type.

Findings -- Money launderers and terrorism financers appeared to have slightly different preferences for theplacement, layering and integration techniques. The more techniques that are used, the more cash can besuccessfully laundered or concealed. Although terrorism financers use similar channels to money launderers,they do not utilise as many of the placement, layering and integration techniques. Rather, they prefer to usea few techniques which maintain high levels of anonymity and appear innocuous. The sums of moniesinvolved in money laundering and terrorism financing vary significantly. For example, the average maximumsum involved in money laundering cases was AUD 68.5M, as compared to AUD 4.8 for terrorism financingcases.

Originality/value -- This paper provides some insight into the relationship between predicate offence, thepredominant techniques utilised in carrying out that offence and the sums of money involved.

Keywords Money laundering, Terrorism, Financing, Typologies, Anti-money laundering/counter terrorismfinancing, Virtual environments

Paper type Research paper

Money Laundering

1. Introduction

Considerable progress has been made in fighting money laundering and terrorism financing in real-worldfinancial environments, particularly with the introduction of stronger anti-money laundering/counter-terrorismfinancing (AML/CTF) regimes and increased levels of inter-agency co-operation and support. However,money laundering and terrorism financing in virtual environments is an area that is currently underresearched and not as well understood as its real-world counterpart.

(2012) JMLC 15(1), 85-111 at 86

In recent years there has been much debate about the risks posed by virtual environments. Concern isgrowing about the ease in which massively multiplayer online games (MMOGs) such as Second Life andWorld of Warcraft can be used for economic crimes such as money laundering, fraud and terrorism financing(Tefft, 2007; Rijock, 2007; Sullivan, 2008; Sanders, 2009) and the potential and opportunity they offer forallowing large sums of money to be moved across national borders without restriction and with little risk ofbeing detected (Lee, 2005; Leapman, 2007; BBC, 2008; Heeks, 2008).

The overall aim of our three-year research project is to determine whether money laundering and/or terrorismfinancing can be carried out inside virtual environments such as Second Life and World of Warcraft and, ifso, how can it be done? However, to answer these fundamental questions, one must know what moneylaundering and terrorism financing might look like inside these environments. Since this information does notcurrently exist, we must look to existing sources of data to inform our research, namely real-world moneylaundering and terrorism financing data. It is believed that knowledge gained from real-world environmentswill provide valuable insight into how money may be laundered and funds may be raised in virtualenvironments to assist criminals to produce clean funds and further the political cause of terroristorganisations. Therefore, this paper focuses on the first phase of our research which attempts to measurethe size of the real-world money laundering and terrorism financing problem, identify potential threats andtrends, the techniques employed and the amount of funds involved.

Over the years, a number of attempts have been made to determine the magnitude and scope of the moneylaundering and terrorism financing problem (Schott, 2006; Biagioli, 2008; Zdanowicz, 2009; Walker andUnger, 2009) and investigate how money is being laundered (Unger et al., 2006; Unger, 2007) and terrorismis being financed (Roth et al., 2004). However, the inherently secretive nature of money laundering andterrorism financing make these very difficult tasks to achieve. Many of the attempts to measure the size ofthe problem have produced a number of largely varied estimates, none of which can be irrefutably proven(Biagioli, 2008). Attempts to define how money laundering and terrorism financing can be carried out havebeen low level and superficial and generally do not discuss in detail the actors, financial flows andbehaviours involved in carrying out these activities.

On the other hand, various international organisations produce excellent reference works on moneylaundering methods and techniques in the form of annual reports and annual typology reports. Thesereports, which contain details of sanitised, successfully detected money laundering and terrorism financingcases, provide a wealth of information on current threats and trends, techniques employed and, in manycases, the amount of funds involved.

By mining annual and typology reports published by international intelligence units and AML/CTForganisations, this research aims to determine whether trends and/or patterns can be identified in thedifferent phases of money laundering or terrorism financing, namely, the placement, layering and integrationphases[1] and establish whether trends and/or behaviours are ubiquitous to a particular money laundering orterrorism financing type.

This paper provides some insight into the relationship between predicate offence, the predominanttechniques utilised in carrying out that offence and the sums of money involved.

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The rest of the paper is structured as follows: Section 2 introduces money laundering and terrorismfinancing; Section 3 examines the various methodological approaches available for analysing moneylaundering and terrorism financing data, considering the strengths and weaknesses of each. It thendiscusses the approach selected for analysing the typologies[2] used in this project and provides anoverview of data quality; Section 4 provides the results of statistical analysis performed on the real-worldmoney laundering and terrorism financing typologies and a discussion that elaborates on the most importantissues presented in the paper; Section 5 concludes the paper and looks at future work related to theresearch project.

2. Background

Although there are many definitions for money laundering, depending on whether you are looking at it from alegal, economic or social perspective, the definition applied to this project is the one used by the AustralianInstitute of Criminology which states that:

[...] money laundering is the process by which the proceeds of crime are put through a series oftransactions, which disguise their illicit origins, and make them appear to have come from a legitimatesource (Graycar and Grabosky, 1996).

When a criminal activity generates substantial profits, the individual or group involved must find a way tocontrol the funds without attracting attention to the underlying activity or the persons involved. Criminals dothis by disguising the sources, changing the form, or moving the funds to a place where they are less likely to

attract attention (FSC, 2009).

There are three phases to money laundering: placement, layering and integration (Buchanan, 2004). In theplacement stage, the cash generated from crime is brought into the financial system. At this point theproceeds of crime are most apparent and at highest risk of detection. Money launderers "place" the illegalfunds using a variety of techniques, which include the deposit of cash into bank accounts and the use ofcash to purchase high value assets such as land, property and luxury items. Once the proceeds of crimehave been placed into the financial system, there is an attempt to conceal or disguise the source orownership of the funds by creating complex layers of financial transactions. The purpose of this is todisassociate the illegal monies from the source of the crime by purposefully creating a complex web offinancial transactions aimed at concealing any audit it trail and the source and ownership of funds.Integration of the cleaned money into the economy is the final stage of the process, and is accomplished bythe launderer making it appear to have been legally earned. It is extremely difficult to discern between legaland illegal wealth at the integration stage.

Terrorism financing, on the other hand, occurs when the primary motivation is not financial gain but, rather,the use of funds to "encourage, plan, assist or engage in" acts of terrorism (The WorldBank.org, 2003).Funds are often transferred using tactics that are progressively more complex. Terrorist financing networksoperate globally and are able to gain access to the financial systems of both developing and developedcountries.

There are three terrorism financing models: the traditional terrorism financing model (FINTRAC, 2009), thereverse terrorism financing model (AUSTRAC, 2009) and the alternative terrorism financing model(FINTRAC, 2009). They differ from the money laundering model in that terrorism financing funds can be fromlegitimate sources, not just criminal acts.

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Although there can be a number of different motivators and drivers for money laundering and terrorismfinancing activity, they are inextricably linked. Terrorist groups usually have non-financial goals: publicity,dissemination of an ideology, the destruction of a society or regime and simply spreading terror andintimidation. However, in practice, terrorists need finances and are often profit-oriented groups in addition totheir ideological motivations (Hardouin, 2009).

Financial crime is a category which can generically encompass many others, like money laundering orterrorism financing or corruption or fraud. Clear links exist between terrorism financing, money laundering,cybercrime and traditional criminal activity (Nardo, 2006). The lines between fraud, money laundering andterrorist financing are blurred, and they should not be treated as separate events (Palmer, 2005). However, itis important to note that not all terrorism financing comes from illegal means; significant funds can be raisedthrough legitimate businesses, fund raising efforts and donations. Equally, it must also be noted that moneylaundering and terrorism financing do not necessarily go hand-in-hand as a great deal of money launderingactivity is for private profiteering only and not for political purpose[3] (Choo and Smith, 2008). There hasbeen a noted convergence between terrorism and organised crime since 9/11 (Choo, 2008). The FBI, forexample, noted that "international organised criminals provide logistical and other support to terrorists,foreign intelligence services, and foreign governments, all with interests acutely adverse to those of U.S.national security" (FBI, 2008).

3. Review of existing methodological approaches for measuring oranalysing money laundering and terrorism financing

This section examines the various methodological approaches available for measuring money launderingand terrorism financing. It considers the strengths and weaknesses of each approach and discusses theapproach selected for analysing the typologies in this project.

Existing methods to measure money laundering and terrorism financing can be categorised under micro- and

macro-economic approaches. Micro-economic approaches include: multi-source/multi-method approachesdrawing on administrative crime data and probability sample crime victimisation surveys, probability andnon-probability sample expert opinion perception surveys and analysis of suspicious activity reports (SARs)to suggest volumes/values of money laundering and analysis of samples of offenders or of law enforcementcase information. Macro-economic approaches include: models based on country-by-country estimations,import/export pricing anomalies and use of proxy variables and currency demand. The following paragraphsprovide a brief outline of some works which utilise these approaches.

The multi-source/multi-method approach used by (Unger et al., 2006; Walker, 1997; Walker, 1999; Stampand Walker, 2007) utilised crime data and data from victimisation surveys to determine the proceeds of crimedependent upon crime type. Unger et al. (2006) used the "attractiveness model" and "distance deterrencemodel", developed by Walker (1997), to estimate the percentage and amounts of criminal proceeds that werelaundered within a specific jurisdiction or sent elsewhere. Both of these models were then used together toestimate the proportion of money flowing from one jurisdiction to another (Unger et al., 2006).

Expert opinion perception surveys were used by Stamp and Walker (2007) to investigate the perception ofAustralian law enforcement agencies, Australian

(2012) JMLC 15(1), 85-111 at 89

Transaction Reports and Analysis Centre (AUSTRAC), worldwide financial intelligence units (FIUs) andcriminologists (Stamp and Walker, 2007). Participants in the survey completed a questionnaire which aimedto determine: what the main crime types were and how big they were, how much proceeds/profit of crimewas generated from these crimes, how were and what percentage of the proceeds were laundered, wherewere the funds laundered, what impact did this have on society and the financing of terrorism.

Analysis of SARs, also known as suspicious transaction reports are used by Stamp and Walker (2007) todetermine trends by filing sector, values of transactions and the nature of behaviour as assessed by FIUanalysts.

A number of authors measured terrorist organisation membership (Kane and Wall, 2005) and terrorismfinancing (Roth et al., 2004) using law enforcement case information. Kane and Wall (2005) used informationgathered from convicted offenders/law enforcement case data to study the modus operandi of suspectedterrorists and members of a terrorist organisation. Roth et al. (2004) used a number of sources to provide ahigh-level summary of al Qaeda-related terrorism financing; these used raw and finished intelligence, as wellas law enforcement and other sources of data.

The main aim of research carried out by Schneider and Enste (2000) was to provide a comprehensivesummary of available micro and macro data on the size of the shadow economy. They provided estimates ofthe underground economy for 21 Organisation for Economic Cooperation and Development countries basedon the currency-demand approach.

TABLE I explores the advantages and disadvantages of each approach.

The methods discussed in Table I are classified under the micro- or macro-economic approach. TABLE IIprovides details of the advantages and disadvantages of using these approaches for measuring moneylaundering and terrorism financing.

Both of these approaches have produced a number of largely varied estimates; none of which can beirrefutably proven. Also, the quantitative issues that have been raised by AML and the fight against terrorismfinancing have yet to be definitively answered (Biagioli, 2008) and no broadly approved measurementmethodology has yet been developed (Fleming, 2009).

Unger et al. (2006) investigated how money was being laundered from a Netherlands perspective. Data wereobtained from a number of sources in the form of interviews with experts from the Dutch National Bank andthe Department on Trust Offices. Each participant was presented with a list of potential forms of moneylaundering and asked which were specific to The Netherlands. From this investigation, a taxonomy ofmethods and techniques employed by Dutch money launderers was produced. A modified version of this

taxonomy has been used in this project (Table IV).

3.1 Methodological approach used in this research

The following paragraphs discuss the methodological approach used to gain an understanding of the scopeof money laundering and terrorism financing, learn how money laundering and terrorism financing might becarried out and discover the behaviours that may be exhibited when carrying out these activities. Thisresearch draws on the work of Unger et al. (2006), Unger (2007) and Stamp and Walker (2007) to answerthese questions.

While the taxonomy of Unger (2007) is a great starting point for our research; it offers a superficialrepresentation of how money laundering and terrorism financing

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Table I. Methods used to measure money laundering and terrorism financingMethodological approach Advantages DisadvantagesAnalysis of SARs (Stamp and Hold some promise as they Only high-level statistics may beWalker, 2007) resemble and represent presented(Micro-economic approach) underlying trends Data need to be manipulated

Can contribute to an prior to analysis to take intounderstanding of the scale and account multiple individuals ornature of predicate offence one individual/multiple events/Owing to standardised reporting one event)instruments, data are easilyaggregated and allow for carefulcomparison between and withinregulated sectors

Multi-source/multi-method Data are plentiful May experience data qualitydrawing on crime data and Closely represents population issuesprobability sample crime No conscious or unconscious Method requires vast amountsvictimisation surveys (Walker, selection of data, the quality of which may1997, 1999; Unger et al., 2006; Results are more reliable not meet requisite standardsStamp and Walker, 2007)(Micro-economic approach)Samples of offenders or of law Allows for an understanding of It is challenging to generaliseenforcement case information the criminal behaviour and from this data to the larger(Roth et al., 2004; Kane and laundering activity of a sample population of offendersWall, 2005) of prosecuted/convicted(Micro-economic approach) offenders

Activity of convicted launderersmay be little different to thosethat have not been caught sofindings may not be biasedIn situations where there is alack of data, thesemeasurements may providevalue -- particularly thosederiving quantitative trendsfrom an otherwise qualitativebase of information

Calculations based on Precise enough to provide a Currency-demand approach"sensitive" factors such as reasonable upper-bound assumes that the undergroundcurrency demand (Tanzi, 1996; estimate of total money economy consists of only cash

Schneider and Enste, 2000) laundered transactions(Micro- and macro-economicapproach)Probability and non-probability Informative Data may be skewed due toexpert opinion perception In some cases represent the only personal bias rather thansurveys (Stamp and Walker, information available responses being founded2007) in fact(Micro-economic approach) Low response rates may affect

data accuracyLevels of understanding of thecurrent situation may varywidelyCannot offer figures with anylevel of precision

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Table II. Advantages and disadvantages of micro- and macro-economic approaches for measuringmoney laundering and terrorism financing

Methodological approach Advantages DisadvantagesMicro-economic estimates/ Such figures are useful to Do not include the informalanalysis (focuses on different confirm that the phenomenon of economy or activities that,types of crimes and on money laundering is of sufficient though legal, are not reported inestimating incomes from each) scale to warrant public policy order to evade taxes

attention Produces estimates of theComplement the macroeconomic volume of laundered money thatapproach can be considered nothing more

than an indicative order ofmagnitudeAvailability and reliability ofdata are poorThe quality of information is notgood enough to provideguidance for policyAvailable estimates lackcredible empirical foundationsWhen measurements are basedon predicate crimes, theestimates are crude

Macro-economic estimates Such figures are useful to Expected to produce a rough(based on a broad definition that confirm that the phenomenon of upper bound of how muchassumes that any revenue on money laundering is of sufficient money is laundered because it iswhich no tax is paid -- be it from scale to warrant public policy impossible to make finelegal or illegal activity -- must attention distinctions in these studiesbe laundered in some way) Produces estimates of theUnderground, shadow or hidden volume of laundered money thateconomy can be considered nothing more

than an indicative order ofmagnitudeQuality of information is notgood enough to provideguidance for policyEstimates are methodologicallyflawedWhen measurements are based

on predicate crimes, theestimates are crude

might occur. Therefore, an analysis of SARs was carried out in this research. Even though there are anumber of disadvantages associated with using this approach (Table I), these have no impact on ourresearch as only benchmark figures are required in order to test the viability of conducting money launderingand terrorism financing activities inside Second Life and World of Warcraft. In addition, the data collectedfrom the SARs need to go through a series of manipulations prior to use to make them suitable for modellingand this research does not need to take into account the frequency of events as we are more interested inthe fine detail of how money laundering and terrorism financing is carried out, rather than obtain an overalltotal of how much is laundered or concealed for terrorism financing.

As discussed in Table I, SARs offer the advantages that they resemble and represent underlying trends; theycontribute to an understanding of the scale and

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nature of predicate offences and, due to standardised reporting procedures, relevant, time-specific data caneasily be collected.

About 300 typologies, with dates ranging from 1996 to 2009, were obtained from a number of AML/CTFbodies, namely, AUSTRAC, the Egmont Group, Financial Action Task Force (FATF), the Belgian FinancialIntelligence Unit (CTIF CFI) and Moneyval. Experts in these AML/CTF bodies have a thoroughunderstanding of the pertinent issues and concerns related to money laundering and terrorism financing intheir own jurisdiction and the wider international community. Typologies were collected from a number ofinternational jurisdictions in order to gain a wide spread of money laundering and terrorism financingmethods and behaviours.

Since one of the objectives of this research is to discover whether it is practical to use Second Life or Worldof Warcraft to carry out money laundering or terrorism financing over other more traditional methods, it isbelieved that a major factor in this decision may be the sums of money which are capable of being launderedor distributed to terrorism organisations using these mediums. As the funds required to carry out these twoactivities are significantly different, the money laundering and terrorism financing typologies were analysedseparately.

The typologies were grouped into types to ease analysis and determine the common patterns and themespresent in the cases involved. Typologies that had commonality in the type(s) of predicate offence[4] weregrouped together. For the purpose of this research, the Australian definition of predicate offence is adoptedand all of the offences discussed in this paper are considered predicate offences. Money laundering offencesare criminalised at a commonwealth level in Division 400 of the Criminal Code Act 1995 (Cth). The definitionof money laundering in the Criminal Code Act 1995 (Cth) is broad and the predicate offences are those witha minimum sentence of at least one year's imprisonment. Some difficulty was experienced in classifying theterrorism financing typologies as a predicate offence was not always present or reported. However, it isimportant to note that in its Second Special Recommendation on Terrorist Financing (FATF-GAFI.org, 2004),FATF recommended that terrorism financing be listed as one of the predicate offences to money laundering.Nevertheless, using this approach would add little value to the analysis process, therefore, where a specificpredicate offence was not indicated, the technique used to conceal the funds was used to classify thetypology. Table III shows how the typologies were classified and the number of money laundering andterrorism financing typologies that were collected and subsequently utilised in the research.

Although 300 typologies were collected, 116 of them were considered unsuitable for analysis andsubsequent modelling as they contained a large degree of ambiguity or did not contain enough informationon financial flows, transactions or interactions between entities to provide value to the research. This numberalso included the typologies that were not considered unique, for example, if five typologies in a type had alarge degree of correlation, the typology was analysed only once. In addition, some of the typologies couldbe classified under more than one category as they incorporated a number of predicate crimes. When this

occurred, the typology was classified under the primary predicate offence that took place.

In the money laundering types, only types that contained more than six typologies were included in thestatistical analysis phase of research. However, the sample sizes for most of the terrorism financingtypologies were small, with a number of the types

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Table III. Classification of typologies collected and modelledMoney laundering Terrorism financing

Primary predicate typologies Primary predicate offence or typologiesoffence in ML cases Collected Utilised techniquea employed in TF cases Collected UtilisedCorruption 9 4 Collection of donations 5 4Fraudb 91 56 Use of unlicensed money

transmitters/remittance agentsc 5 3Gambling 4 2 Purchase of high value assetsd 3 3Sex trade 3 1 Intimidation and extortion 2 1Trafficking Trafficking

Commoditye 31 14 Human 1 1Human 12 8 Diamond 1 1Drug 62 40 Counterfeit goods 1 1

Tax evasion 25 13 Tax evasion 4 2Theft 15 7 Use of NPOs 12 12

Purchase of cheques or money 2 2ordersUse of front companies 4 2Early cancellation of insurance 2 2policiesConcealment within business 6 4structures

Total 252 146 48 38

Notes: aA predicate offence was not always reported in the terrorism financing typologies collected,therefore, in such cases, the technique used to conceal the funds was used to classify the typology; bfraudincludes corporate, investment scheme and bankruptcy fraud; cthis includes the predicate offence of abusiness or individual operating as unlicensed money transmitters/remittance agents to facilitate themovement of funds to terrorist organisations; it also includes individuals who use unlicensed moneytransmitters/remittance agents to send funds to a terrorist organisation; dthis refers to the purchase of highvalue assets, such as property, to conceal funds raised for terrorism financing; these funds may be fromlegal (such as fund raising) or illegal (such as the proceeds of criminal activity) means; ecommoditytrafficking includes arms, gold, counterfeit cheques and designer items, illegal hormones, diamonds, stolenvehicles and cigarettes and alcohol smuggling

containing only one typology each, therefore, to make the results more meaningful, all terrorism financingtypes were combined and analysed together.

Using the money laundering techniques taxonomy, shown in TABLE IV as a guide, a matrix was createdwhich was used as the starting point to extract information from each of the typologies. Any observations thatwere made which were not covered by the matrix were recorded separately. In order to determine whetherany relationship could be drawn between the types of crime committed, the techniques employed by moneylaunderers and terrorism financers, and the sum of monies involved, the figures disclosed in each typologywere recorded and minimum, maximum and mean figures were calculated.

A statistical analysis was performed on the typologies collected to determine whether any additional

information could be learned that could inform the next phases of research.

It is important to note that the results of the statistical analysis are merely a representation of the datacollected and thus may not accurately represent the money

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Table IV. Money laundering techniques in placement, layering and integration phasesPlacement Layering IntegrationSmurfing and Correspondent banking Capital market investmentsstructuring Bank cheques/bank drafts DerivativesCamouflage Collective accounts Real estate acquisitionCurrency smuggling Payable-through accounts The catering industryTravellers' cheques Loan low/no interest rate The gold marketGambling or casinos Back-to-back loans The diamond market

Money exchange offices Buying jewelsMoney transfer offices Purchase consumer goods for exportInsurance market Acquisition of luxury goodsFictitious sales/purchases Cash-intensive businessFake invoicing Using currency to supplement an appar-

entlyShell/front companies legitimate transactionTrust offices Export/import businessSPEs Acquisition and smuggling of armsUnderground bankingBlack market of foreigncurrency

Source: Unger (2007)

laundering and terrorism financing population as a whole or represent all of the techniques that may beemployed by money launderers or terrorism financers to conceal their funds or activity. Rather, the authorsacknowledge that there are potentially many more ways in which a particular typology may be carried outthat have not been discussed in this paper.

4. Analysis of money laundering and terrorism financing typologies

This section discusses the main findings to emerge from statistical analysis of the money laundering andterrorism financing typologies.

4.1 Money laundering typologies

Placement phase. The first set of results look at the techniques used by money launderers to initially placeillegal funds into financial system

As shown in TABLE V, smurfing and structuring techniques were the most popular method of placing fundsinto the financial system. Smurfing and structuring techniques were used by all money laundering types,apart from thieves. Of the 146 money laundering typologies, 22 per cent examined used this method ofplacement.

Table V. Laundering techniques present in the placement phaseDrug Human Commodity

Fraud trafficking Tax evasion trafficking trafficking Theft Overall (%)n 56 % 40 % 13 % 8 % 14 % 7 % 1Smurfing andstructuring 6 11 20 50 2 15 1 13 2 14 0 - 22Camouflage 14 25 6 15 0 - 0 - 0 - 1 14 15Currency smuggling 0 - 6 15 1 8 0 - 2 14 0 - 7Gambling and casinos 6 11 1 3 1 8 0 - 0 - 0 - 6

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Three types used camouflage[5], currency smuggling and gambling or casinos represent 15, 7 and 6 percent of all money laundering typologies examined, respectively.

Currency smuggling experienced low levels of utilisation among money launderers in our sample. This maybe due to the difficulty in smuggling large sums of money between jurisdictions as large sums of money canbe very heavy and, therefore, restrictive. This may also be due to the difficulty in detecting currencysmuggling activity as some jurisdictions, such as Hong Kong, do not require incoming visitors to declare theamount of cash they are bringing into the jurisdiction.

In addition, the low levels of use of gambling and casinos to launder money fit in with the findings of Unger etal. (2006) which state that casinos are too tightly controlled and regulated to be fully utilised.

The purchase of travellers' cheques was not favoured as a placement technique by any of the moneylaunderers in the sample. This may be due to individuals requiring some form of identification to purchaseand cash out travellers' cheques. In many countries, including Australia, money service businesses such asremittance providers and issuers of travellers' cheques are considered as financial services and hence,subject to exacting AML/CTF requirements.

When examining the preferred placement technique by type; drug traffickers were most likely to use smurfingand structuring techniques (50 per cent), fraudsters were most likely to use camouflage (25 per cent), taxevaders favoured smurfing and structuring (15 per cent), human traffickers used smurfing and structuring astheir only placement technique (13 per cent), whereas equal numbers of commodity traffickers preferredsmurfing and structuring (14 per cent) and currency smuggling (14 per cent). Camouflage was the onlymethod of placement used by thieves, used by only 14 per cent.

It is apparent from Table V that either other placements techniques were used by some of the moneylaunderers in the sample that may not have been uncovered during the original investigation, or the fundswere not placed into the financial system in preference for other concealment techniques such as using thefunds to finance other crimes.

Layering phase. The favoured layering technique, employed by 22 per cent of the money launderers in oursample, was the use of a shell or front company (TABLE VI). This method was used by all money launderingtypes. This was followed by the use of fake invoices, used in 10 per cent of typologies; fictitious sales andpurchases, used in 9 per cent of typologies; the use of money transfer offices and money exchange offices,both used in 8 per cent of typologies and the use of bank cheques and bank drafts, used in 7 per cent oftypologies in the sample.

The least preferred methods employed by money launderers were back-to-back loans, used by 5 per centoverall; underground banking, used by 4 per cent overall; loans at low or no interest rates and use of theinsurance market, used by 2 per cent of typologies each and the use of collective accounts, used by only 1per cent of the total sample.

The use of shell/front companies was the preferred layering technique employed by thieves (57 per cent),commodity traffickers (36 per cent), tax evaders (31 per cent) and fraudsters (21 per cent). Tax evaders alsofavoured fake invoicing (31 per cent) as a layering technique. The use of bank cheques and bank drafts were

the preferred layering techniques of drug traffickers (15 per cent each). Human traffickers preferred to usemoney transfer offices (38 per cent).

Payable through accounts, correspondent banking, the use of special purpose entities (SPEs)[6]. and theuse of black market of foreign currency were not utilised at all by

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Table VI. Laundering techniques present in the layering phaseDrug Tax Human Commodity

Fraud trafficking evasion trafficking trafficking Theftn 56 % 40 % 13 % 8 % 14 % 7 % Overall (%)Bank chequesand bank drafts 2 4 6 15 1 8 0 - 0 - 0 - 7Collective accounts 0 - 0 - 0 - 0 - 1 7 0 - 1Loan with low or nointerest rates 2 4 1 3 0 - 0 - 0 - 0 - 2Back-to-back loans 3 5 2 5 1 7 0 - 0 - 1 14 5Money exchange offices 4 7 4 10 0 - 1 13 2 14 0 - 8Money transfer offices 2 4 6 15 0 - 3 38 0 - 0 - 8Insurance market 1 2 0 - 0 - 1 13 1 7 0 - 2Fictitious sales andpurchases 7 13 1 3 2 15 0 - 3 21 0 - 9Fake invoicing 7 13 1 3 4 31 0 - 2 14 0 - 10Shell/front companies 12 21 4 10 4 31 1 13 5 36 4 57 22Underground bankinga 2 4 1 3 1 8 0 - 1 7 0 - 4

Note: aUnlicensed money transmitters, Hawala, Hundi

money launderers in our sample. SPEs are off-balance sheet, bankruptcy remote and private and, therefore,can easily be used for both legitimate and illegitimate means. They lend themselves very well to moneylaundering as loans can be disguised as revenue to misstate earnings, losses can be concealed and otheraccounting improprieties can be exploited (Unger et al., 2006). Despite this, they are not utilised by any ofthe money launderers in our sample.

Integration phase. The favoured integration technique, employed by 17 per cent of the money launderers inour sample, was real estate acquisition (TABLE VII).This method

Table VII. Laundering techniques present in the integration phaseDrug Tax Human Commod-

ityFraud trafficking evasion trafficking trafficking Theft

n 56 % 40 % 13 % 8 % 14 % 7 % Overall (%)Capital marketinvestments 10 18 3 8 2 15 0 - 3 21 1 14 14Derivatives 1 2 1 3 0 - 0 - 0 - 0 - 1Real estate acquisition 11 20 7 18 3 23 0 - 1 36 1 14 17Precious metals and stonesa 0 - 1 3 0 - 0 - 5 21 0 - 4Purchase consumer goodsfor export 0 - 1 3 0 - 0 - 0 - 0 - 1Acquisition of luxury goods 3 5 2 5 0 - 0 - 0 - 1 14 4Cash-intensive business 2 4 3 8 0 - 2 25 0 - 1 14 6

Using currency to supple-mentapparently legitimatetransactions 3 5 6 15 0 - 0 - 2 14 0 - 8Import/export business 2 4 7 18 3 23 0 - 5 36 0 - 12Acquisition and smugglingof arms 0 - 0 - 0 - 0 - 0 - 1 14 1

Note: aGold, diamonds and jewels(2012) JMLC 15(1), 85-111 at 97

was employed by all types except by human traffickers. This was followed by investments in capital markets(14 per cent), the establishment of an import/export business (12 per cent), using currency to supplementapparently legitimate transactions (8 per cent) and the establishment or use of a cash-intensive business (6per cent). Of money launderers, 4 per cent used the acquisition of luxury goods and 4 per cent dealt inprecious metals and stones to integrate funds into the legitimate economic and financial system. Of themoney laundering sample, 1 per cent or less (rounding used) utilised investments in derivatives, thepurchase of consumer goods for export and acquisition and smuggling of arms as integration techniques.The catering industry was utilised by none of the money launderers in the sample.

Real estate acquisition was the preferred integration technique for tax evaders (23 per cent), fraudsters (20per cent) and drug traffickers (18 per cent). The establishment of an import/export business (23 per cent) and(18 per cent) were equally preferred by tax evaders and drug traffickers, respectively. Of commoditytraffickers, 36 per cent also preferred to use import/export business to integrate funds. However, largeamounts also utilised the gold market (29 per cent) and capital market investments (21 per cent). Thieveshad no clear preference of integration method, equal numbers (14 per cent) used capital market investments,real estate acquisition, acquisition of luxury goods, purchase of cash-intensive business and acquisition andsmuggling of arms. On the other hand, human traffickers preferred to use only one method of integration, thepurchase or use of cash-intensive businesses (25 per cent).

4.1.2 General observations. During the analysis of the money laundering typologies, a number of interestinggeneral observations were recorded (TABLE VIII). The suspicions of reporting entities were raised by all typesbecause transactions were inconsistent with the customer profile, representing 21 per cent of all typologiesanalysed. Inconsistent transactions were most frequently detected in the drug trafficking type (30 per cent),closely followed by those involved in theft (28 per cent), human trafficking (25 per cent), tax evasion (23 percent) and commodity trafficking (21 per cent).

The suspicions of reporting entities were also raised for most types when the reporting entities believed thatthere was no justification for transactions to occur in their

Table VIII. General observations across money laundering typologiesDrug Tax Human Commod-

ityFraud trafficking evasion trafficking trafficking Theft

n 56 % 40 % 13 % 8 % 14 % 7 % Overall (%)Transactions inconsistentwith customer profile 7 13 12 30 3 23 2 25 3 21 2 28 21No justification for transactionto occur in reportingjurisdiction 7 13 1 3 1 8 1 13 2 14 0 - 9Transactions economicallyunjustifiable 7 13 3 8 1 8 2 25 0 - 1 14 10Atypical or uneconomical

fundstransfers to or from a foreignjurisdiction 6 11 4 10 0 - 1 13 2 14 4 57 12Use of transit accounts 7 13 0 - 4 31 2 25 1 7 2 28 12Ties to terrorist organisation 0 - 0 - 0 - 1 13 1 7 0 - 1

(2012) JMLC 15(1), 85-111 at 98

jurisdiction (9 per cent), transactions were economically unjustifiable (10 per cent) and funds transfers to orfrom a foreign jurisdiction were seen as atypical for the customer or uneconomical (12 per cent). Humantraffickers (13 per cent) and fraudsters (13 per cent) were most likely to perform transactions that had nojustification to occur in the reporting jurisdiction. Human traffickers were most likely to perform transactionsthat were economically unjustifiable (25 per cent) and thieves were most likely to perform transactions to orfrom a foreign jurisdiction that were atypical or uneconomical (57 per cent).

All but one of the types made use of transit accounts. However, transit accounts were used by only 12 percent of the typologies analysed. Those most likely to use transit accounts to confuse the audit it trail were taxevaders (31 per cent), thieves (28 per cent) and human traffickers (25 per cent). Interestingly, only 1 per centof the money laundering typologies investigated was found to have connections to terrorist organisations;one commodity trafficker (13 per cent) and one human trafficker (13 per cent).

4.1.3 Value of funds entered into the legitimate economy by type. Each typology was examined in detail todetermine the value of illegal funds entered into the legitimate economy. These figures were then allocatedto their relevant type and used to calculate a minimum, average and maximum figure[7] for that type.Unfortunately, a sufficient number of typologies did not disclose the figures involved in the case to makethem truly representative of the typologies analysed or for the money laundering population as a whole.TABLE IX shows the minimum, maximum and average sums laundered for each type.

The figures collected for the fraud and drug trafficking types fell into two categories those that involved only asmall to medium amount of funds (low level) and those that involved a very large amount of funds (highlevel). It is likely that the typologies that involved smaller amounts (AUD 85,000 to 17.5Mand AUD 90,000 to2.8M, respectively) were related to small operations or individuals working on their own, compared to thelarger amounts (AUD 58M to 541M and AUD 4.5M to 93M, respectively) that were more likely related toorganised crime.

Theft (AUD 36,000), followed by gambling (AUD 49,000), fraud (AUD 85,000) and low-level drug trafficking(AUD 90,000) had the lowest sums laundered. High-level fraud (AUD 541M) and high-level drugtrafficking(AUD 93M) had the highest sums laundered, this is in line with the findings of the 2006 surveycarried out by Unger et al. (2006) who found that most money generated for laundering comes from drugsand fraud.

Table IX. Sums laundered in money laundering operationsMoney laundering type Minimum (AUD) Average (AUD) Maximum (AUD)Corruption 1.2M 3.4M 5MGeneral fraud -- low level 85,000 3M 17.5MGeneral fraud -- high level 58M 204.5M 541MGambling 49,000 287,000 525,000Sex trade No figures provided in typologyCommodity trafficking 500,000 6.3M 15MHuman trafficking 176,000 418,000 711,000Drug trafficking -- low level 90,000 750,000 2.8MDrug trafficking -- high level 4.5M 23.5M 93MTax evasion 176,000 2M 7.8MTheft 36,000 474,000 1.5M

(2012) JMLC 15(1), 85-111 at 99

FIGURE 1 shows the distribution of monies laundered for all types. To take into account the large sumslaundered in some cases, the chart has two Y-axis, the primary axis, on the left-hand vertical of the chart,deals with amounts laundered from AUD 0 to 50 (millions) the secondary Y-axis, on the right-hand vertical ofthe chart, deals with the amounts laundered up to AUD 600 millions. The values highlighted with arrowsbelong to the secondary axis. As can be seen from Figure 1, most of the amounts laundered areconcentrated at the lower end of the spectrum, that is, below AUD 5M.

To determine if there was any relationship between the number of placement techniques employed by eachof the money laundering types and the sums of money that they laundered, a cross-comparison wasconducted on the data. No clear relationship could be found. However, there was a high degree ofcorrelation between the number of layering techniques utilised and the sums of money that were laundered.Only those involved in human trafficking and theft challenged this trend. Data analysis of the samplesindicated a significant correlation between the number of layering techniques employed and the averageamount laundered (Spearman's r test for correlation between these two variables produced an Rs value of0.943, which is indicative of a strong positive correlation at the 0.01 level).

The types were ranked in order of the number of techniques utilised and the average amount of moneylaundered, 1 being the highest rank and 6 being the lowest rank. As shown in TABLE X, fraudsters used themost layering techniques (ten out of a potential 15) and laundered the most amount of money (average ofAUD 204.5M), followed by drug traffickers (nine out of 15 and AUD 23.5M, respectively). By using a broadselection of layering techniques, these launderers are spreading their risk and/or reducing their chances ofdetection.

Figure 1. Distribution of amounts laundered by type (AUD)

Click here to view image(2012) JMLC 15(1), 85-111 at 100

4.1.4 Characteristics of techniques utilised by money launderers. In an attempt to understand why moneylaunderers might choose the layering techniques they utilise; each technique was examined in detail todetermine its predominant characteristics that might make it attractive to a money launderer.

TABLE XI outlines the findings of this exercise. The techniques are split into three environments: technology,which denotes the transfer of funds using electronic payment systems such as virtual currencies used inMMOGs, prepaid/stored value cards and mobile remittance; the domestic regulatory framework, which refersto how local criminal groups may exploit the lack of AML/CTF regulation in a particular industry sector withina country and the international environment, which refers to the lack of harmonisation or consistency inAML/CTF regimes between different jurisdictions and/or law enforcement agencies.

Fraudsters, drug traffickers and tax evaders exploited all three environments, whilst human traffickerspreferred to exploit the international environment.

The same exercise was conducted for the integration techniques employed. TABLE XII outlines the findings.

Table X. Ranking by number of layering techniques employed and sums of money launderedNumber of layering

Type techniques employed Ranking Average amount laundered RankingFraud 10 1 204.5M 1Drug trafficking 9 2 23.5M 2Commodity trafficking 7 3 6.3M 3Tax evasion 6 4 2M 4Human trafficking 4 5 418,000 6Theft 2 6 474,000 5

Table XI. Layering technique characteristics and main predicate offences that exploit themTop three predicate offences/

Environment Technique Characteristics types that exploit techniqueTechnology Use of electronic Ease of using/transferring Fraud

funds transfers money across borders Drug traffickingMoney transfer Anonymity Tax evasionoffices

Domestic Correspondent Lack of/easily circumvented Fraudregulatory banking know your customer (KYC) Drug traffickingframework Collective accounts and customer due diligence Tax evasion

Use of shell/front procedurescompaniesPayable throughaccounts

International Bank cheques and Transfers between Fraudenvironment bank drafts jurisdictions not reportable Drug trafficking

Underground No need to submit to foreign Human traffickingbankinga countries banking Tax evasion

regulationsSelf-regulating

Note: Alternative remittance systems, informal value transfer systems such as Hawala and Hundi(2012) JMLC 15(1), 85-111 at 101

Table XII. Integration technique characteristics and main predicate offences that exploit themTop three predicate offences/

Environment Technique Characteristics types that exploit techniqueDomestic Real estate acquisition Low risk Fraudregulatory Using currency to High liquidity Drug traffickingframework supplement apparently Non-depreciating Commodity trafficking

legitimate transactions Co-mingling of FraudCapital market investments funds Drug trafficking

Create tax liability Commodity traffickingMove liability Fraudonto someone else Drug traffickingLow risk Commodity traffickingHigh liquidity Fraud

International Purchase of precious metals Low risk Drug traffickingenvironment and stones High liquidity Commodity trafficking

Non-depreciatingHigh intrinsicvalueCompact formEasily tradedinternationallyEasily transported

Trade-based money laundering (TBML)Purchase of consumer goods Easily transported Drug traffickingfor export Easily traded Commodity traffickingCash-intensive business internationally FraudEstablishment or use of Co-mingling of Drug trafficking

Import/export business funds Commodity traffickingCo-mingling of Human traffickingfunds FraudComplex and hard Drug traffickingto detect Commodity traffickingUtilise normalbanking services

The techniques are split into two environments: the domestic regulatory framework, which refers to how localcriminal groups may exploit the lack of AML/CTF regulation in a particular industry sector within a country;the international environment, which refers to the lack of harmonisation or consistency in AML/CTF regimesbetween different jurisdictions. TBML is one money laundering activity that typically exploits the internationalenvironment. TBML involves an exchange of goods between exporter and importer and a correspondingfinancial transaction. However, trade in intangibles, such as information and services, is emerging as asignificant new TBML frontier -- also known as service-based money laundering (Lormel, 2009).

TBML is a significant concern for countries such as Australia that rely heavily on trade and foreigninvestment. A 2010 report by FATF, for example, indicated that:

[...] [t]he volume of trade not only has the potential to hide individual transactions, but makes oversightand enforcement difficult. The complexity of international trade also makes it difficult to matchpayments to value. The various means used to physically move goods -- for example by boat, plane,road and rail -- enable criminals to diversify their delivery channels and thus evade detection (FATF,2010).

(2012) JMLC 15(1), 85-111 at 102

Commodity traffickers exploited all three environments, they choose integration techniques that are low risk,provide a high degree of liquidity and are non-depreciating. This is evident in their significant use of capitalmarket investments, derivatives, acquisition of real estate and investments in precious metals and stones.Drug traffickers and fraudsters also exploited all three environments; they choose integration techniques thatprovide high degrees of liquidity, and to a lesser extent, are low risk. These findings are consistent with thefindings of the FATF report on money laundering typologies 2002-2003 which states that most moneylaundering activities involving precious metals (e.g. gold) are linked to illegal narcotics trafficking, organisedcrime activities and the illegal trade in goods and merchandise (FATF, 2003).

Although drug traffickers and fraudsters utilise integration techniques that afford them high degrees ofliquidity and are low risk, they predominantly utilise integration techniques that allow them the ability toco-mingle funds, this is apparent due to their extensive use of cash-intensive businesses, use of currency tosupplement apparently legitimate transactions, purchase of consumer goods for export and the use orestablishment of import/export businesses. Drug traffickers may favour these techniques as they arefrequently used to conceal and develop their drug operations.

Human traffickers only exploited TBML by utilising cash-intensive businesses. Unlike the other typesinvestigated, they exclusively use techniques that offer this capability. It is likely that human traffickers utilisecash-intensive businesses because they already have contact with these businesses in the capacity ofproviding them with illegal labour.

4.2 Terrorism financing typologies

As shown in TABLE III, the sample sizes for most of the terrorism financing typologies were small, with anumber of the types containing only one typology each. Therefore, to make the results more meaningful, allterrorism financing types were combined and analysed together.

Placement phase. The preferred method of placing funds into the financial system was using smurfingtechniques and structuring of deposits, used by 11 per cent, followed by camouflage (5 per cent) andcurrency smuggling (3 per cent). The purchase of travellers' cheques and the use of gambling or casinoswere not used by terrorism financers in the sample population.

Layering phase. Correspondent banking, collective accounts, payable through accounts, loans at low or nointerest rates, fictitious sales and purchases, fake invoicing, the use of SPEs, underground banking andblack market of foreign currency were not utilised at all by any of the terrorism financers in the samplepopulation.

The preferred method of layering funds was the use of money transfer offices, used by 16 per cent ofterrorism financers, followed by the use of shell or front companies, used in 8 per cent of cases. Thepurchase and early cancellation of insurance policies and the use of money exchange offices were used in 5per cent of cases each. Back-to-back loans and the purchase of bank cheques and bank drafts were theleast preferred methods of layering funds, used 3 per cent of terrorism financers (TABLE XIII).

Integration phase. The purchase of derivatives, the use of the catering industry, investment in the goldmarket, purchasing of jewels, purchasing consumer goods for export, the acquisition of luxury goods,investment or purchase of a cash-intensive business and acquisition and smuggling of arms were not utilisedat all by terrorism financers in the sample population. Real estate acquisition was the preferred method of

(2012) JMLC 15(1), 85-111 at 103

integration of funds, which was used by 13 per cent of typologies. Investments in capital markets, investmentin the gold market, using currency to supplement apparently legitimate transactions and investment orpurchase of an import/export business were used in one (3 per cent) typology each (TABLE XIV).

4.2.1 General observations. A large number of suspects that drew the suspicions of their financial institutionhad known ties to terrorist organisations (76 per cent). Just over half of this amount being a national of acountry associated with terrorist activity (39 per cent) (TABLE XV).

Of cases, 34 per cent reviewed, used not-for-profit organisations (NPOs) to raise and/or forward funds toterrorist organisations. Suspicion was raised at a number of financial institutions because they believed thattransactions were inconsistent with their customer's profile (24 per cent). In most of these cases, lots oftransactions were being performed through these customers' accounts, some of them for large sums, eventhough the customer claimed to have no profession or were in receipt of social benefits. In three cases, therewere clear links to organised crime gangs.

One of the aims of the analysis was to provide a direct comparison between types when the same typesexisted in both money laundering and terrorism financing categories, however, it was difficult to make anyreal comparisons due to the very small number of human trafficking (1) and tax evasion (2) typologies in theterrorism financing type.

Table XIII. Layering techniques used by terrorism financersBank cheques and bank drafts 1 (3%)Back-to-back loans 1 (3%)Money exchange offices 2 (5%)Money transfer offices 6 (16%)Insurance market 2 (5%)Shell/front companies 3 (8%)

Note: n = 38

Table XIV. Integration techniques used by terrorism financersCapital market investments 1 (3%)Real estate acquisition 5 (13%)The diamond market 1 (3%)Using currency to supplement apparently legitimate transactions 1 (3%)Import/export business 1 (3%)

Note: n = 38

Table XV. General observations recorded from terrorism financing typologiesTies to designated terrorist organisation 29 (76%)Nationals of countries associated with terrorist activity 15 (39%)Use of NPO 13 (34%)Transactions inconsistent with customer profile 9 (24%)Links to organised crime 3 (8%)

(2012) JMLC 15(1), 85-111 at 104

4.2.2 Value of funds concealed by type. The sums of money concealed in each of the terrorism financingtypologies were collected. Table XVI shows the minimum, maximum and average sums concealed for eachtype.

A number of the typologies did not disclose the sums involved in the case, therefore, the figures detailedabove may not be truly representative for the typologies analysed or for the terrorism financing population asa whole. It should also be noted that the figures discussed in this section are representative only of thetypologies examined in the sample and they, again, may not be representative of the terrorism financingpopulation as a whole. For example, in 1998 the Colombian Government estimated that the revenue ofColumbia's guerrilla and parliamentary organisations totalled USD 311M from extortion (Fleming, 2009), fargreater than the sums shown in this study. In addition, results may be skewed towards typologies thatinvolve a significant amount of funds as these are the cases that reporting entities are most likely to includein their annual typological reports.

As shown in TABLE XVI, only the details of the amount raised and concealed could be obtained from oneeach of the use of unlicensed money transmitters/remittance agents, purchase of high value assets and useof front companies typologies so only an average figure could be calculated. No figures were provided forany of the trafficking typologies, the tax evasion typologies or the early cancellation of insurance policytypologies. Figures were provided for only two typologies that used the purchase of cheques or moneyorders to fund terrorism, therefore, no average could be calculated as doing so would have artificially inflatedthe potential sums involved in this type.

The fact that no figures could be reported for any of the trafficking typologies related to terrorism financingmay be indicative of the use of cash couriers by terrorist organisations to transport funds to variousjurisdictions, thereby, obfuscating the tracing of funds.

Table XVI. Funds involved in terrorism financing operationsAverage Maximum

Terrorism financing type Minimum (AUD) (AUD) (AUD)Use of unlicensed money transmitters/ - 17.4Ma -remittance agents

Purchase of high value assets - 354,000 -Intimidation and extortion 650,000pa 760,000pa 870,000paHuman trafficking No figures provided in typologiesDiamond trafficking No figures provided in typologiesTrafficking of counterfeit goods No figures provided in typologiesTax evasion No figures provided in typologiesUse of NPOs 1.6Mb 6.5M 9MPurchase of cheques or money ordersc 92,000 7MUse of front companies - 5M -Early cancellation of insurance No figures provided in typologiespoliciesConcealment with business structures 911,000 2.1M 3.3MCollection of donations 285 1,900 3,500

Notes: aFigures recorded in only one typology; ba number of typologies claimed that small amounts of fundswere collected daily from donors but no overall figures of the total amounts laundered were provided;cfigures recorded for only two typologies, no average could be calculated

(2012) JMLC 15(1), 85-111 at 105

Analysis of the amounts concealed in the terrorism financing typologies was made difficult due to the lack ofproper description provided by reporting entities. In many typologies, especially those connected to the useof NPOs and the collection of donations, descriptions such as "small amounts" were used rather than actualfigures.

Typologies that used the collection of donations to fund terrorism activities were found to involve the lowestsums; the minimum amount was AUD 285 and the maximum amount was AUD 3,500. Typologies thatutilised organisational structures such as concealment within business structures, the use of NPOs and useof front companies were able to raise and conceal a lot more funds: AUD 911,000 to 3.3M, 1.6M to 9M and5M, respectively.

In the terrorism financing typologies investigated, the most money was raised and concealed usingunlicensed money transmitters/remittance agents (AUD 17.4M), NPOs (AUD 9M) and purchase of chequesand money orders (AUD 7M). Figure 2 shows the distribution of monies used for terrorism financing for alltypes. As can be seen from Figure 2 most of the values fall below AUD 3M. A comparison of the sumsinvolved in human trafficking and tax evasion, which are present in both money laundering and terrorismfinancing, might have provided interesting results; however, this was not possible as no figures wereprovided for human trafficking or tax evasion in the terrorism financing types.

When comparing the sums involved in terrorism financing against those involved in money laundering, thesums involved in terrorism financing are significantly lower. This is consistent with the belief that only smallsums of money are required to fund terrorist acts. Case in point being the 7 July 2005 attacks on the Londontransport system which is estimated to have had an overall cost of less than £8,000 (approximately AUD12,500) (Fleming, 2009). It is evident that terrorism financing detection rates are lower than moneylaundering detection rates; this is supported by the small number of terrorism financing cases found for thisstudy. This may be due to the relatively small amount of funds involved in terrorism financing operations andschemes as larger sums would undoubtedly attract more attention and suspicion from financial institutions.

Terrorism financers use similar channels and exploit the same weaknesses in the financial system as moneylaunderers to disguise their activity. However, they do not utilise as many of the placement, layering andintegration techniques as money launderers.

5. Conclusions

The results of this statistical analysis show that money launderers and terrorism financers have preference

for the placement, layering and integration techniques that they employ. However, our research also showsthat the more techniques that are used, the more cash can be successfully laundered or concealed. Althoughterrorism financers use similar channels as money launderers, they do not utilise as many of the placement,layering and placement techniques. Rather, they prefer to use a few techniques which maintain high levels ofanonymity and appear innocuous. Although money launderers and terrorism financers both liked to usestructuring and smurfing to enter cash into the financial system, their choice of individuals to carry out thisactivity usually contributed to the detection of their illegal activity, as suspicions were raised in many casesdue to the financial activity being inconsistent with the profile of the customer. However, since amounts arenormally

(2012) JMLC 15(1), 85-111 at 106

Figure 2. Distribution of terrorism financing amounts by type (AUD)

Click here to view image

under the reporting limit of AUD 10,000, this is an amount that the intended recipients are willing to risk inorder to distance themselves from the transactions.

The sums of monies involved in money laundering and terrorism financing vary significantly. The average,maximum sum laundered or concealed by money launderers was AUD 68.5M, compared to AUD 4.8 forterrorism financers. Could this be due to the number of placement, layering and integration techniquesemployed by each group?

The results obtained from this statistical analysis will prove valuable as we move into the next phases ofresearch.

6. Future work

Our three-year research project is split into six distinct phases (FIGURE 3). This paper discusses phase 1 ofresearch which details the results of statistical analysis performed

(2012) JMLC 15(1), 85-111 at 107

Figure 3. Phases of research

Click here to view image

on (real-world) money laundering and terrorism financing typologies. During the analysis phase, eachtypology was examined in fine detail in order to extract the following information:

· The individuals and/or entities involved in the ML/TF scheme.· The type of transaction(s) involved in the ML/TF scheme. For example, cash, cheque orelectronic funds transfer.· The interactions, financial and otherwise, that took place between the individuals andentities involved in the ML/TF scheme.· The suspicious behaviours and red flag indicators detected by the reporting Entity

During phase 2, this information will be modelled to provide an easy to follow, visual representation of theimportant aspects of each money laundering and terrorism financing type, which will be used as a startingpoint for determining whether that type can be carried out inside Second Life or World of Warcraft in phase 3.During phase 3, it will also be established whether there are any additional money laundering and terrorismfinancing types that have not been uncovered during analysis of the real-world money laundering and

terrorism financing typologies because they are unique to Second Life and World of Warcraft. During phase4, the in-world participation phase, there will be an attempt to replicate the types deemed as possible invirtual environments. This will be done by creating the conditions necessary to carry out the behaviours andpatterns identified for each type. Phase 5, model analysis and verification, will be conducted to provide ascientific and measurable approach to the research. All of the money laundering

(2012) JMLC 15(1), 85-111 at 108

and terrorism financing types that are successfully replicated inside Second Life and World of Warcraft willbe modelled and analysed using formal methods, such as coloured petri nets (University of Aarhus, 2011),which have been used successfully to verify human behavioural patterns in virtual environments (Ko¨hler etal., 2001; Piccard, 2008; Chang et al., 2009) and script the complex behavioural sequences of virtual actorswithin virtual environments (Blackwell et al., 2001). The final phase of research investigates the legalenvironment for the detection and prosecution of money laundering and terrorism financing in virtualenvironments, such as Second Life and World of Warcraft, and discusses the implications this might have ongovernment policy.

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Notes

1 The alternative terrorism financing model has five stages: acquisition, aggregation, transmission to terrorist organisation,transmission to terrorist cell and conversion.

2 The various techniques used to launder money or finance terrorism are generally referred to as methods or typologies.

3 Although many organised crime groups now aim at making money, several traditional ones (e.g. Japanese Yakuza, andItalian and Italian American Mafia) may still aim at exercising political power as well.

4 There are a number of predicate offences that were not present in the random sample for this survey; however, it isbelieved that the information obtained is sufficient for this project.

5 Camouflage is the use of stolen identity documents to open accounts and/or place funds into the financial system.

6 An SPE is a legal entity (usually a limited company or limited partnership) created to fulfill narrow, specific or temporaryobjectives. SPEs are typically used by companies to isolate the firm from financial risk. A company will transfer assets to theSPE for management or use the SPE to finance a large project thereby achieving a narrow set of goals without putting theentire firm at risk. SPEs are also commonly used in complex financings to separate different layers of equity infusion.

7 Figures converted from USD, GBP, BEF and EUR to AUD.

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