Money Laundering and Terrorism
Money laundering is the process of concealing the origins of money obtained illegally by passing it through a complex sequence of banking transfers or commercial transactions. One problem of criminal activities is accounting for the proceeds without raising the suspicion of law enforcement agencies. Considerable time and effort may be put into strategies which enable the safe use of those proceeds without raising unwanted suspicion. Implementing such strategies is generally called money laundering. After money has been laundered, it can be used for legitimate purposes. Law enforcement agencies of many jurisdictions have set up sophisticated systems in an effort to detect suspicious transactions or activities, and many have set up international cooperative arrangements to assist each other in these endeavours.
In a number of legal and regulatory systems, the term "money laundering" has become conflated with other forms of financial and business crime, and is sometimes used more generally to include misuse of the financial system (involving things such as securities, digital currencies, credit cards, and traditional currency), including terrorism financing and evasion of international sanctions. Most anti-money laundering laws openly conflate money laundering (which is concerned with source of funds) with terrorism financing (which is concerned with destination of funds) when regulating the financial system.
Some countries treat obfuscation of sources of money as also constituting money laundering, whether it is intentional or by merely using financial systems or services that do not identify or track sources or destinations. Other countries define money laundering in such a way as to include money from activity that would have been a crime in that country, even if the activity was legal where the actual conduct occurred.
According to the United States Treasury Department:
Money laundering is the process of making illegally-gained proceeds (i.e., "dirty money") appear legal (i.e., "clean"). Typically, it involves three steps: placement, layering, and integration. First, the illegitimate funds are furtively introduced into the legitimate financial system. Then, the money is moved around to create confusion, sometimes by wiring or transferring through numerous accounts. Finally, it is integrated into the financial system through additional transactions until the "dirty money" appears "clean".
Reverse Money Laundering
Reverse money laundering is a process that disguises a legitimate source of funds that are to be used for illegal purposes. It is usually perpetrated for the purpose of financing terrorism but can be also used by criminal organizations that have invested in legal businesses and would like to withdraw legitimate funds from official circulation. Unaccounted cash received via disguising financial transactions is not included in official financial reporting and could be used to evade taxes, hand in bribes and pay "under-the-table" salaries. The problem of such fraudulent encashment practices (obnalichka in Russian) has become acute in Russia and other countries of the former Soviet Union. The Eurasian Group on Combating Money Laundering and Financing of Terrorism (EAG) reported that the Russian Federation, Ukraine, Turkey, Serbia, Kyrgyzstan, Uzbekistan, Armenia and Kazakhstan have encountered a substantial shrinkage of tax base and shifting money supply balance in favour of cash. These processes have complicated planning and management of the economy and contributed to the growth of the shadow economy.
Money Laundering Weaknesses
This article was published prior to news that the Government was planning to 'shake up' the ease with which potential money launderers could infiltrate the current system. Although maybe somewhat prophetic, and pleased that action has finally been taken, the writer will review the actual changes as they come into effect to consider their likely impact.
This particular section focusses on some clearly identifiable flaws or weaknesses in the current system which allows potential money launderers, terrorist networks and criminals to operate relatively easily. Is intended solely for the benefit of those with a desire to see these processes tightened. Whether or not these weaknesses and recommendations for improvement are taken on board or not, is entirely at the discretion of the justice system.
Organisations such as the National Cyber Security Centre (NCSC, part of GCHQ) and the National Crime Agency (NCA) as well as several other divisions within Law Enforcement and Government, work tirelessly together to combine intelligence and information to tackle all areas of the Money Laundering network. It is safe to say however, that certain areas attract more funding and resources. As with any governmental, or 'quasi-governmental' body there is an element of bureaucracy that unfortunately their targets do not have to contend with themselves, despite being 'organised'.
The upshot is that cogs will inevitably move slower sometimes due to their structure and the democratic need for increased accountability and transparency. Therefore some issues will tend to slip through the net. Clearly, these agencies are aware of some of the weaknesses as they are public knowledge. It is not rocket science. However, in practise if some of these simple issues are addressed by the agencies mentioned above, the results could be exponential and worthwhile, given some modest tweaks. Not all the weaknesses are highlighted here for obvious reasons, and listing them would simply be counter-productive. That said, the battle against the launderers or any entity that manipulates our financial or legal systems to finance illegal or terrorist activities which may eventually harm the security of the UK, should always be highlighted and remedies made where possible. Even if this process starts with increased vigilance in some of the areas described here. Certainly with exponential technological growth in mind, AI system will inevitably increase the speed of targeted data gathering.
Other sections of this site will provide a wider insight into the sheers scale of the problem and what many of our organisations are here to stamp out.
They say that if a snake comes into your kitchen you don't feed it, you chop its head off. Somewhat simplistic and pandering to the Hollywood treadmill maybe? To some extent yes, but the argument holds true. For many years it has been considered vital to cut off financial fluidity to those individuals and organisations that feed the terrorists threats. The subject of terrorist financing is huge and one which has been tackled by many of the finest academics, specialists and investigative organisations in the world. It is the sheer size and weight of the topic that is the very problem itself because the time and resources required to monitor and assess the activities of terrorist financiers means that ultimately something has to give. Refinement and efficient targeting is therefore of paramount importance and that, inevitably, means that some activities will slip through the net. It is simply impossible to cover all areas of the network, especially when our enemies continue to develop branches of that network that are nothing more than 'noise' and fabricated to create a diversion of our time and resources. The one saving grace is that at least in this type of battlefield the boundaries are known and we are able to focus on well known, tried and tested means of laundering funds and transferring those funds throughout the network. For example, financial institutions are subject to increasing levels of scrutiny as part of the financial and legal framework within the UK to ensure that as many participants are aware of the significant consequences of not adhering to Anti Money Laundering procedures as possible. In that respect we can use the public and professionals within the banking system to operate within a strict framework, and that can surely only be beneficial in assisting the fight against funding terror.
The intricate and increasingly sophisticated means with which the criminals (not just terrorists) by pass our security measures requires constant supervision. Here we outline some of the more recent methods and assets used to facilitate this activity and offer some suggestions as to which route the financing road might take from here on in.
The UK has the most robust Anti Money Laundering systems right?
NO. One would think so, but some significant weaknesses still exist which actually makes the UK an attractive target for channeling laundered funds and creating a 'noisy network' of elaborate distractions. Probably at the core of the reason for this is the codependent relationship between the City and our Politicians. If our systems are too robust we run the risk of alienating genuine foreign investment and therefore in turn we frustrate those market participants in search of growth. The policy makers on the other hand have to cater for both groups namely the financiers and investment houses as well as the public and politicians wanting action against, what is probably the greater threat out of the two, namely terrorist money laundering. As always they balance tentatively between the two and this, unfortunately, means loopholes will remain un-filled. A recent example would be the laws and regulations concerning company formations in the UK and their relationship with the offshore businesses. To understand why this is of particular relevance, it would be useful to provide some perspective as to the scale of the problem as it exists now.
Please note: This information is solely for the benefit of those seeking to improve current systems and is not meant to be used to solicit, or in any way advocate its use for, or engage in, any activities which could result in 'illegal' activity as defined under current UK legislation. This information is being publicised for these reasons and for educational purposes only. The owners and operators of this site do not gain financially or otherwise, or result in any losses as a result of honest representations (B 2 Fraud Act 2006 (c. 35) made in this site. Nor are they untrue or misleading. Please refer to our website terms before proceeding
CURRENT SYSTEM OF IDENTIFICATION
Knowing the information or knowing how to bend the rules themselves is not the crime. It's what is then done with that information that creates the problem. That said, as with our galaxy of stars (the celestial type), we don't need to see them to know they're there, we can look for what they've left behind as evidence of their existence and in turn establish some clue as to where they might be going.
IDENTITY DOCUMENTS CURRENTLY AVAILABLE
Obtaining a new bank account, passport, drivers license, utility bill, credit history and company, is a relatively easy proposition nowadays, although some recent cases of fraud have exposed areas of weakness in the current system. It is public knowledge that the Government is looking at ways of tightening the rules concerning name changes and the use of online Deed Poll services to stamp out fraud. There is a strong argument however, that despite changing the rules the players will remain active and just look for another 'game' to play. For the secret intelligence services, leaving the snare active and guiding the rodent down a particular route, has its obvious benefits. So, here is the information. Do with it what you will.
The first stage is they will change their name. Let's say you are John Smith now and you want to change to Joseph Ward. This is simple. Go on line and buy a pre-printed deed poll certificate with a legitimate company changing your name to Joseph Ward. Keep this on hold for the time being, because there are other changes you will need to make next in order to assist you later, notably the address. But for the time being, you can assume that the person Joe Ward is soon to exist.
This is slightly more complicated but nonetheless still relatively easy to do.
There are numerous online company's specialising in mail forwarding (an area Law and Government could also focus on tightening up) and they provide seemingly legitimate residential addresses for a monthly fee. According to the law, these organisations simply have to carry identity checks to satisfy AML (anti money-laundering) regulations so that the addressees can receive official government documents such as passports, drivers licenses etc.
Approach "Post Company 1" and open an account under the name John Smith and provide them with your Drivers License. You will obtain an online account which will allow the mail to be forwarded to your actual address for the time being. You can pay for all sorts of fancy additions such as SMS alerts, have the post company scan a document and email you etc etc. These are legitimate services often offered to individuals or families moving abroad for a prolonged period of time and require a UK postal address cheaply.
It is general knowledge that a typical fraudster, criminal or launderer of funds creates 'layers' during the development of their processes. It is a classic technique designed to cause confusion. There are those who argue that that the 'layering' approach is not actually that practical in reality because at the end of the day it only takes some relatively focussed geeks to follow a trail, and the idea of 'layers' is simply building on the notion of laziness. In reality this should not happen.
So, let say you (he), John Smith lives at:
1 Money Road,
You have created a 'residential' address now at:
1 Clean Road
But, they have used the name Mr Joesph Ward to set up as the account name. For really clean flow, they might consider setting up an account with companies such as Pockitt or equivalent beforehand. In the shuffle and chaos to populate a new and growing market, some of these firms exposed weaknesses in their KYC (Know Your Client) AML rules and allowed customers to set up accounts to obtain pre-paid cards in any name of their choosing. The apparent check and balance was to limit the account sizes to £200 cash. This means a person can walk into a shop, pay £200 cash into the card over the counter. You can then use the card to pay for small transactions such as the Postal delivery set up. Repeatedly funding £200 into a card will provide sufficient funds to facilitate the process of setting up a new person and eventually, a new company. So, we should note how easy it was and still is to get a pre-paid mastercard in a new name. Now, legally, if one decides on a change of name and this is done after sending a simple email off to the deed poll company, and it is done so in the name of Joseph Ward, then there is no issue. You're not fraudulently doing so. The honest member of the public often has legitimate reasons for wanting a name change, for either religious, personal or formal reasons. Having a pre-paid mastercard in that name is simply the next logical, legitimate step.
PS. It is also possible to consider a new mobile phone at this stage too. Also, it is possible to use the latest services with Bitcoin which in our view serves little purpose other than being a bastardised, poor persons, bearer bond facility for the money launderer. Trading benefits aside of course, it is clearly an area of weakness and something we believe is currently being 'looked into'.
So an account, "pending" document approval, with the post company in the name Joe Ward. Everything has been aid for in the name Joe Ward so far with them. All they now require is ID.
At this stage, again it is public knowledge that one can apply to the DVLA for a change of name and address on a Drivers License. To do this, all that is needed is the completion of the Deed Poll form application using the name Joe Ward and new email address. If an address is asked for then in this example it would be Moneytown. The applicant can then receive a sealed copy which is followed by a visit to a local GP, professional or other signatory to get the document signature witnessed. They are witnessing a signature NOT the authenticity of the information contained within it.
Once an application of this sort is complete it would normally then be sent off to the DVLA who will respond within two weeks. So, the post company receives the DL in the name of Joseph Ward with the address in Cleantown. In this example, if the post company do want ID verification beforehand in order to open the account, the applicant can ask the DVLA to send it to Moneytown. Then send the ID to the post company. Then fill in another form with the DVLA for a change of address to Cleantown.
The applicant will now have a new license, in a new name, with a new address. The postal company will still have details and address to Moneytown though. This is a surmountable problem, however we do not wish to divulge too much information, other than to say it can be done legally.
POST OFFICE VERIFICATION
This section also further highlights a weakness in the system. Using the above example, if the applicant now goes to "Post Company 2" and opens a new account in the name of Joe Ward, they can set up the account with a post office as a collection point. For ID the company will require a drivers license copy sent by email.
This is a normal procedure and one which is currently used legitimately by members of the public throughout the UK. Following on from the example above, this is particularly user friendly and easy to administer and an online residential address would now be at:
1 Final House Rd
BUT, the post will now be set up for forwarding to a post office so there would be limited (if any) links to the original Moneytown address of Mr John Smith. The change of name to Mr Joe Ward of Completown is now complete and, doesn't live in Completown or Moneytown, but instead only collects mail from post office.
This is a surprising area of weakness in the UK system and one which needs to be tightened up considerably. It exposes an area that should have been addressed many many years ago and yet still remains stuck in an AML time warp. The basis of KYC or AML is built on the provision of identity documentation being 100% accurate. The two main sources of which are, photo ID in the form of a Drivers License, Passport or European equivalent, AND generally a Utility Bill. So, in reality one cannot be used, or is worthless, without the other and therefore a utility bill is just as important as a passport or drivers license. So why on earth does the current system make it so easy to obtain proof of residential address from utility company's, which in the day, were only a handful of firms? Now, there are numerous utility providers and whereas BT was once the only fixed line telephone operator, we now have many other firms in the market who specialise in all sorts of services, the core of which would not fall under the category of a utility firm. As an example, SKY. The company once provided broadband and internet which, according to official sources, was not recognised as a fixed utility provider. Now, the firm offers a fixed land line and the ability (as others) to change details online. It really is far too easy and if any government were serious about combatting fraud, this relatively low cost loophole could easily be fixed.
So, using the above example, the person starts with SKY and British Gas bills under the name of John Smith at the original address in Moneytown. Access their account online. They have the choice of adding an additional service such as a fixed land line package. Speaking to Sky online and asking them to change the account name and address to Joe Ward at Completown but send out a hard copy to Cleantown is a fairly standard, well known and active request. It is normally relatively simple to explain why should they ask. If there are any issues then the applicant would simply have them change it and send it to Cleantown and do the process again, or go online. The quickest way is to ask the online help team to email a copy. This is done quickly in normal circumstances and a copy is received of a landline utility bill in the name of Joe Ward with the Completown address. The same is as simple, if not simpler, with British Gas. These company's are all too quick to use online help and outsource operations to countries such as India, but the reality is the staff are not trained to the same degree as staff within Financial Services in the UK when it comes to AML. Again, another systemic failing which could be cleaned up very easily and cheaply.
At this point an applicant is able to print off a post office certification form and go to a local post office with the original SKY or BG bill. One can have three certified for a fee of £7.
At this stage the applicant now has a new address, traceable to a post office, under their new name of of Joe Ward and a drivers license and certified utility bills. This is all fairly standard in terms of current procedures and provides sufficient documentation for a person to open a company account for example.
SUMMARY - Opinion
All of the above can easily be completed within three weeks. So all the potential money launderer has to do is decide what entity to have the bank account named under. If this is done twice by two separate people, then the process is insanely undetectable by then creating an LLP company registered in the UK. An offshore bank account can easily be set up using new ID's and in the normal course of events, this is where traditional 'layering' kicks in as the firms create a network of accounts, individuals and firms spread across countries ranging from Hong Kong, Columbia and the Cayman Islands. In theory it is easy to trace and logically one would have expected Artificial Intelligence systems to have already found their way into this process of detection. If we assume that the money laundering professionals don't have similar access to exponential technology then the vast majority will be running the above 'layering' process as a full time job with hundreds or thousands of people working to create more and more layers of deception. As the end is, in theory, easy to establish, then the issue for intelligence networks and criminal justice systems is TIME. This is where AI comes in and by now we would expect that the intelligence services are well underway with exponential digital technological development to already have this within their sights. By far the biggest barrier to identifying and controlling criminal money laundering activity (apart from greed) is time and number. The sheer scale of these operations means the intelligence services have to rely on highly accurate zoning of resources to counter act the effects. This is bound to lead to leaks and escapes and of course, it only takes one well constructed and highly 'padded' network, to become responsible for a huge atrocity or attack on our nation or allies. This is not rocket science. They refer to organised crime. Well that's really all it takes...organisation. A government body has its advantages certainly in terms of resources and funding. In reality, a government body is slow, cumbersome and bureaucratic. With transparency comes delay. Compared to the terrorist or criminal body, it cannot react as quickly, certainly not in the current guise. For this reason there will always be conspiracy theories and talk of people working in the 'shadows', non-accountable but effective. The reality is that this is where the 'territorial army' versions of SIS kick in and the experienced professional or agent (self-employed) is able to act alongside their official SIS counterparts but with the benefit of plausible deniability and independence. Without these operations at our disposal, the battle would be un-winnable. Combined with the resources, financial and operationally, it is an efficient counteraction.