Summary
The present report discusses different typologies employed by criminals to layer the profits obtained illegally and thus requiring to go through money laundering. The paper begins by introducing stages commonly needed to legitimize illicit capital and explains the concept of layering. In the subsequent section, the examination focuses on smurfing, also known as structuring, and presents a real-life scenario involving the technique.
The discussion then explores how lawbreakers utilize shell companies to conceal the origin of illegal funds. In addition, some cases of using the method are explored. The third section assesses how cryptocurrency is operated for layering and provides examples of recent crimes regarding the approach. Each typology is studied to explain why delinquents may select a certain technique. The final section offers some concluding statements on the findings of the report. Accordingly, the current paper presents an examination of layering approaches that criminals may utilize for money obtained through unlawful means.
Introduction
Money laundering (ML) is among the most intricate crimes committed across the globe. ML is typically conducted through three stages, which are placement, layering, and integration. In the first phase, the profits of the offense are put into the financial system. During the second step, which is also known as stratification, the obtained funds are transferred to conceal their origin. In the final stage, the money receives apparent legitimacy and is spent by the lawbreaker for their personal use.
Accordingly, cases involving ML can be challenging to solve since the process comprises complex steps that may confuse investigators. Out of the phases of ML, one that deserves closer attention is layering. Such a stage commonly contains a series of financial transactions to conceal the history of the illicit funds, with some transfers being across borders. Among the typologies employed by criminals to layer the proceeds of crime are structuring, the use of shell companies, and the utilization of cryptocurrency.
Smurfing/Structuring
The first method of layering in ML is called smurfing, but is also known as structuring. Such an approach is among the most recognized typologies due to making it difficult to trace funds. Smurfing refers to a large sum of money being separated into smaller amounts that are repositioned separately. Therefore, structuring is used by lawbreakers to ensure that the returns of their offenses cannot be detected.
For example, if smurfing is done physically, members of a criminal group may take certain portions of the capital and travel abroad as strangers with amounts that would not be taxed. Upon reaching their designated locations, each person would deposit their share into a foreign bank. Consequentially, by dividing funds and moving them separately, offenders can disorient law enforcement. Smurfing can be considered a practical layering technique in ML.
One real-life scenario in which layering was used to launder proceeds of crime is the case of Wachovia Bank. The organization was involved in numerous currency exchanges related to funds from drug sales. The financial operations were conducted through currency exchange offices (CEOs) located in Mexico, and Wachovia Bank was able to legitimize over $378 billion. Smurfing appears to have played a role in layering the illicit capital.
The rationale for the criminals to have resorted to structuring is associated with the nature of CEOs. Such establishments are suitable for layering due to being anonymous and flexible. It appears that the offenders sought to conceal the profits through smurfing by trading relatively small amounts of money in Mexican CEOs and transferring them via Wachovia Bank. As a result, the large drug-related funds became more complex to trace. Accordingly, the Wachovia Bank case demonstrates how criminals can apply smurfing through CEOs.
The Use of Shell Companies
Another typology of layering utilized in ML concerns shell companies (SCs). Such organizations typically have no significant assets and are used by lawbreakers to move substantial sums of money in secrecy by hiding the delinquents’ identities as beneficial owners. The physical presence of SCs commonly comprises a mailing address that is likely to be shared by several similar firms. Moreover, SCs usually have no employees and produce little to no economic value.
Accordingly, SCs are entities that are meant for layering illicit funds. SCs reduce their participants’ liabilities and include such establishments as limited partnerships, protection trusts, company foundations, and limited liability companies (LLCs). SCs can be found across the globe, although some countries are more suitable for such businesses’ operations. Consequentially, the types and locations of SCs that can be utilized for illegal purposes vary. Therefore, money launderers can use different SCs to layer unlawfully obtained capital.
There are several real-life scenarios of SCs being operated to layer the proceeds of crime. For instance, beginning in 1999, the director of one of the departments of the Office of the Chief Medical Examiner in the United States (US) conspired with other individuals to embezzle funds from their employer. The criminals sought to conceal the profits of their deeds through SCs by creating several such organizations. The rationale for the lawbreakers to use SCs is that such a method allows anonymous transfer of large amounts of money, with the delinquents being interested in millions of dollars. Accordingly, SCs can be utilized by criminals to steal substantial capital secretly.
Furthermore, it is meaningful to note that more cases of utilizing SCs for money laundering happen in the US compared to other countries. For instance, such a method was operated by a wealthy entrepreneur, Harold Rosbottom, and his girlfriend, Ashley Kisla. Rosbottom has opened multiple LLCs registered in the US for Kisla and for himself. The rationale for the criminals’ resorting to using SCs is that Rosbottom filed for bankruptcy but wished to obtain additional capital without the government’s knowledge.
The US appears quite popular for those who strive to avoid ownership transparency, with some states neglecting LLCs. Rosbottom and Kisla sought to conceal the proceeds of their crime by transferring money between different LLCs so that the funds’ origin would be difficult to determine. Accordingly, SCs, especially LLCs, are often used in the US, where such organizations are not strictly controlled.
Cryptocurrency
One more layering typology for laundering money concerns the usage of cryptocurrencies (CCs). The term refers to digital currencies that are secured by cryptography. The exchanges of CCs happen on unregulated platforms, can be traded for fiat currencies, and are international and non-traceable. For example, the most prominent CC, Bitcoin, allows for the anonymous transfer of funds by bundling unrelated payments and then moving the money. Other CCs, like Monero, Zcash, and Dash, also offer privacy features that make tracking of finances more complex. Accordingly, CCs can be used by delinquents to layer money by transferring it in ways that authorities cannot oversee.
Several real-life cases involving CCs have occurred across the world. In 2019, Ivan Manuel Molina Lee, the president of Crypto Capital Corporation, was accused of ML for drug cartels. Lee sought to disguise the proceeds of his crime through CC by relying on a cryptocurrency exchange firm. The rationale for the lawbreaker utilizing CC is that he was able to illegally obtain millions of euros that were moved online.
In another scenario, Mt. Gox, a Bitcoin exchange, was hacked, with its funds being laundered. The criminals have resorted to using CCs, believing that digital funds would not be traced. The delinquents attempted to hide the proceeds of their offense by exchanging CC on BTC-e and Tradehill platforms. Overall, the usage of CC appears to be a widespread way of transferring illicit funds.
Conclusion
To summarize, criminals rely on such methods as smurfing, using shell companies, and transferring cryptocurrency to layer the profits of their wrongdoings. During the former technique, a large amount of money is divided into smaller portions, with each one being moved separately without attracting attention. When utilizing the second typology, delinquents secretly relocate unlawful funds through various firms with limited responsibilities that are likely to be overlooked by authorities. Lawbreakers utilize the third method to anonymously transfer digital currencies on platforms that are not regulated. Each of the discussed typologies has been applied by people seeking illicit capital, which can be seen from different real-life cases. Consequentially, ML is a major problem since there are many ways to layer the proceeds of crime.
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