• There has been an exponential growth regarding increasing usage of mobile money by both retailers and financial institutions (Scobey-Thal 2015)
• In 2015, the GSMA https://www.gsmaintelligence.com/ confirmed that there are more than 411m mobile money accounts globally. These types of mobile money accounts are present in 85% of countries
• In the above countries most of the population have no access to the formal banking system (GSMA 2015)
• Cisco Systems Inc. (2017) research suggests that by 2021, more people will have access to mobile phones than running water
• Due to this exponential growth in the mobile money market there is a consensus within the International community that this penetration should be embraced via a form of financial inclusion
• An inherent danger lies within this system: Emerging financial services opens doors and creates new opportunities by allowing criminals to manipulate financial vulnerabilities within this emerging system.
• There is an inherent danger of allowing these new technologies to facilitate money laundering
• Technological advances are changing the established infrastructure due to their metamorphosing into complex value chain networks
• According to (Braithwaite 2013) There is an urgent need to implement more fluid and adaptive regulation.
• “To identify, address and mitigate threats as they arise.” (Lokanen, 2017)
• Mobile money is a terminology that used to describe mobile money, mobile wallets, mobile money remittance and e-money. We all have so called “mobile wallets” on our smartphones. This permits a digital repository of e-money facilitating peer-to-peer (P2P) financial transactions enabled via mobile-to-mobile (M2M) no matter which handset is used (De Albuquerque, Diniz, & Cernev, 2016).
• Mobile devices connect customers to payment systems that operate under financial regulation. Because of this, mobile money is rapidly being chosen as a go to option instead of credit cards, cash, cheques or even store cards enabling consumers to purchase a wide variety of goods and services. Mobile money can be differentiated with other forms of e-payments including debit and credit cards allowing the replication of traditional money (cash), liquidity, acceptability and anonymity (De Albuquerque et al., 2016)
• The scale of global mobile ownership correlates to increasing use of mobile payment usage. Which in turn forces consideration to the avenues that open for the criminal to exploit money laundering activities and create systematic risks.
• This vulnerability of mobile money are the structure of global information and communication networks and their method of operating.
• The networks allow opportunities for cyber-launderers to exploit the anonymity, rapidity, user-friendly handsets allowing an ability to operate internationally and transnationally within those jurisdictions without being physically present. “This approach reduces the risks of being detected…prosecuted and increases elusiveness, all enabled via m-payment transfer systems.” (Filipkowski, 2008; Tropina, 2014)
• This enables the bypassing of established ML, “…vulnerabilities of transporting large sums of cash, which could be detected through algorithmic mechanisms especially across jurisdictions,” (Williams, 2013)
• This is because when money is loaded to a mobile device there is no initial investigation. Unless the device is red flagged.
This operates on the same concept and system of using “mules” in drug-trafficking networks, e.g. an unknown number of third parties, anywhere between the hundreds or thousands, are directly controlled by Organised Crime Gangs (OCG) and professional money launderers. They transfer funds from crime that have been divided into smaller numbers to evade detection; by conforming to legal reporting limits.
“The aim is to avoid AML reporting requirements and thus reducing fraud detection creating the risk of elusiveness while adding complexity to the money trail.” (Zhadanova, Repp, Ricke, Gaber & Hemery, 2014)
Digital smurfing has other advantages primarily converting cash to digital (electronic) value which is in widespread use throughout the USA (Cassara, 2016)
• Cross border fraudulent activities:
• Crimes committed in one country and funds transmitted to multiple countries would require multiple jurisdictions approving an investigation.
• Illicit funds can be transferred to regional jurisdictions which OCG’s are aware that lack the ability, capacity and intelligence of tracking OCG; this is common in developing countries.
• The lack of evidence, if either criminal party destroys the mobile device (laptop, handset tablet etc) it will be almost impossible to reveal an audit trail making law enforcement problematic
Pre-paid (pay as you go) phones, also known as “burners” are a common handset provided by mobile network operators (MNO). These require no ID or verification for network access and creates an anonymity advantage for the criminal. The use of false ID is equally advantageous for the criminal by allowing criminals and OCG’s by facilitating a mobile money service account (Cassara, 2012). Because there is no due diligence or Know Your Customer (KYC) checks and especially if no face-to-face (FTF) contact it is impossible to detect (Walker 2017).
Traditional ML is when the funds/illicit gains are placed within the banking system and meant that physical movement (cash in suitcases) would be deposited with crooked bankers or bureaux de changes to “create a distance between illicit funds of origin and avoid confiscation (Dumitrache & Modiga, 2011)
• The virtual world overcomes this because the loaded value already exists within an electronic format ( Filipkowski, 2008; Dumitrache & Modiga 2011 ). The OCG seeks a weak MNO or a jurisdiction with weak oversight over its financial institutions creating an oversight (Suarez, 2016) “ as they are subject to less stringent identification screening measures.”
This stage is quite straightforward. The funds are transferred from one location to another to confuse the money trail and point of origin. The funds are transferred between accounts, credited to another mobile money account and then continue onward to a money service business (MSB) or a traditional financial institution. A worse case scenario is the funds being transferred to an offshore account (Cassara, 2016). Using multiple money trails is the common denominator amongst money launderers and OCG. It is a relatively simple technique that encompasses several jurisdictions and the combination complicates law enforcement measures (Filipkowski, 2008).
“Due to the speed, volume and ability to perform international remittances, it is unlikely that law enforcement will investigate at this stage.” Dumitrage and Modiga (2011).
This last stage is essentially, smoke and mirrors. The purpose is to create the illusion that illicit funds appear legitimate. It is a simple technique that functions through the integration of illicit funds into the financial economy of a jurisdiction via the purchase of goods and/or services in that jurisdiction. This can be a “layering” stage to integrate illicit funds into the financial system by the purchase of goods.
“The rapidity of remitted funds combined with anonymity at the initial loading stage to further fund criminal activity is considered a serious threat to AML and financial integrity.” (Solin & Zerzan, 2010)
The main risk factors toward AML are anonymity; rapidity and a lack of oversight.
The three money laundering stages are, loading, transferring and withdrawing.
• A stored value (SV) card is the value stored on a card not external account. A pre-paid (PP) card money is funds deposited with an issuer, like a debit card.
• PP card (pre-paid) debit card is in the name of the individual account holder(s) and SV cards (stored value) are anonymous.
• Two types of PP cards: Open system (open loop) or closed system (closed loop ). Closed system PP cards are usually merchant gift cards and are of a fixed amount and redeemable only at the merchant issuer stores or online websites. They require no ID and cannot be used for cash.
• Semi-closed system PP cards are like closed-system PP cards with the proviso that cardholders can use them at multiple locations within a regional area. These are issued by third-parties such as shopping malls and universities
• Open system PP cards are the gold standard for money launderers and are on the main credit card networks and can be used anywhere globally and on any ATM (cashpoint). They normally have the cardholders name. Semi-open PP cards are similar to open-system PP cards but cannot be used to withdraw cash from ATM’s.
• Open-system PP cards act as cash and are a means of transporting funds. Funds can be added at one location, withdrawn from another location via ATM’s in more than one country. Very popular with money launderers and OCG.
• Closed system cards have lower limits, cannot act as cash, not so popular with ML or OCG
• Stored value PP cards (SV/PP Cards) allow for the loading of money anonymously on them at multiple channel and entry points; such as web, mobiles and agents including point of sale (POS). These channels are independent of one another and in ignorance of transactional activities on other channels. Currently no effective enforcement exists in the US or other countries; where the combined value of multiple transactions can add up to in excess of the $10,000 flag. These cards can and are carried across borders.
• Stored value/Pre-paid cards (SV/PP Cards) facilitate multiple channels for disbursement and exit points such as physical POS locations e.g. online, ATM and mobile handsets. ML evade detection via loading numerous smaller value stored value/pre-paid cards simultaneously on different channels for entry into the banking system. This practice, as mentioned earlier is also known as structuring or smurfing.
• Funds transfer from a corrupted entry source to a SV/PP Card and then reverse engineered to cash or equivalent is extremely rapid and convenient. Funds transfer between countries is equally rapid and easy. This makes the confiscation of laundered funds more difficult and complicated due to the numerous different legislation and jurisdictions.
• Therefore, the complexity which arises from PP Cards is there is no aggregated information available for the movement of these funds that travel back and forth; similar to repetitive re-loading of the same card(s); purchase of multiple cards; multiple transactions on the cards facilitating multi-layering and multi-withdrawals of funds from the banking system using several channels.
• Put simply, best practice would be to implement a state-of-art cutting edge system for identifying e-payment systems that allow for money laundering. This should be complemented by forcing card issuers to KYC (Know-Your-Customer) and be legally obliged to demand authentic ID.
- Anti-Money Laundering (AML) and dismantling terror financing networks by exclusion from the mobile banking system
- The Alleged Threat of Mobile Money
- An important factor within money is micro-structuring also known as “smurfing”
- Further challenges for law enforcement
- The threats of mobile money
The algorithm example used in this report is also called an exemplary embodiment which is simply put, the preferred example. It is just another terminology for “example” but specifically used when referring to a patent. This Anti Money Laundering, AML, system has been chosen to represent how an AML monitoring system should function.
• This can enable and lead to increasing corruption
• Which in turn can enable money laundering through illicit cash flows
• Which then divert and starve funds of developing economies that are already cash poor and suffer from capital-starvation.
The amount of money that is laundered annually is of truly colossal proportions. ML poses an existential threat to all countries. It warrants and demands thorough oversight and a transnational prevention strategy. The UK’s National Crime Agency (NCA) calculated recently, “hundreds of billions of pounds are laundered through UK banks each year.”
Examples of case research into various topics and alerts from the Ultrascan group and associates
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