Everything You Need to Know About Credit Back Money Laundering

Credit backed money laundering involves cleaning illegal cash for financial institutions to handle without any suspicion.

Credit backed method of money laundering involves cleaning of money obtained from criminal activities such as insider trading, extortion, illegal gambling, and drug trafficking to appear to have been derived from legal activities in order for financial institutions to deal with it without any suspicion.

Money can be laundered using various methods which vary in terms of sophistication and complexity. Loans and mortgages are usually taken as a cover to launder money proceedings, and lump sum cash repayments are used to repay the loans or mortgages.

Everything You Need to Know About Credit Back Money Laundering

In the "loan backed" money laundering method, a criminal provides an associate with a specific amount of illegitimate money. The associate then provides a "loan or mortgage" back to the money laundering for the same amount with all the necessary "loan or mortgage" documentation.

This creates an illusion that the trafficker's funds are legitimate. The scheme is reinforced through "legislatively" scheduled payments made on the loan by the money launderer.

Most often, the money launderer establishes an apparent legal origin of money through fabrication of transactions like agreements, book-keeping, and invoices, deeds, reports, and spoken/written statements.

The common method used to justify money laundering is fabricating a loan/credit/investment, also referred to as back-to-back or loan/credit/investment -back. The most popular loan/credit/investment -back form of laundering money is when criminals borrow their own criminal money.

This is usually done through the creation of a loan/credit/investment agreement between the criminal and a third party. Most used third parties are offshore corporations who are controlled by the criminals. Although back-to-back loan/credit/investments are the common ways that money can be washed. 

Money laundering through Real Estate Sector: 

The real-estate sector may be one of the many vehicles used by criminal organizations to launder their illicitly obtained money. The emerging markets seem to be more vulnerable to misuse of the real estate sector.

Due to worldwide market growth of real estate-backed securities and the development of property investment funds, the range of options for real estate investments has also grown. This effect has not gone without notice in emerging markets.

Money laundering transactions can be easily camouflaged in genuine commercial transactions among the huge number of real estate transactions taking place.

Complicating matter is the fact that often these less developed economies do not have an average market price for real estate, but rather prices varying across sectors and districts. To complete real estate transactions in some stage of the process involvement of legal expert is inevitable. 

The real estate sector merits closer consideration given the large scope of monetary transactions, its significant social impact, and because of the number of cases in which money laundering, and in limited circumstances terrorist financing and tax fraud schemes, have been detected.

Abuse in this sector also has the undesirable effect of political, institutional and economic destabilization. Moreover, due to the international nature of the real-estate market, it is often extremely difficult to identify real estate transactions associated with money laundering or terrorist financing.   

In order to misuse the real-estate sector, a number of methods, techniques, mechanisms, and instruments are available. Many of these methods are in and of themselves illegal acts; however, certain of them might be considered perfectly legal if they were not associated with a money laundering or terrorist financing scheme.

A series of the more common or basic methods are used which are mentioned as under: 

• Use of complex loans or credit finance.
• Use of non-financial professionals.
• Use of corporate vehicles. 
• Manipulation of the appraisal or valuation of a property.
• Use of monetary instruments.
• Use of mortgage schemes.
• Use of investment schemes and financial institutions.
• Use of properties to conceal money generated by illegal activities.

Complex Loans and Credit Finance:

Intercompany loans have become a frequent instrument used as a means for raising funds. The ease with which such loans can be arranged makes them popular with the general public.

These loans are also used in the real estate sector. Where an instrument is frequently used, misuse of the instrument becomes a possibility as well. Depending on the way in which the loan is structured, two different schemes have been detected.

Loan-Back Schemes:

Intelligence and law enforcement reports indicate "loan-back" transactions are used by suspected criminals to buy properties – either directly or indirectly – through the purchase of shares in property investment funds.

Essentially, suspected criminals lend themselves money, creating the appearance that the funds are legitimate and thus are derived from a real business activity.

The purpose of the loan is to give the source of the money an appearance of legitimacy and to hide the true identity of the parties in the transaction or the real nature of the financial transactions associated with it.  

Indicators and methods identified in the scheme:

The source of the funds used to finance the real estate transaction was from abroad, in particular from offshore jurisdictions and jurisdictions with strict bank secrecy. The lender of the money, an offshore company, had no direct relation with the borrower of the money.

• A financial institution was not involved in the loan structure.
• There was no loan agreement between the lender and borrower.
• The loan agreement was legally invalid.
• The information in the loan agreement was inconsistent or incorrect.
• The conditions in the loan agreement were unusual (for example, no collateral was required).
• No payment of interest or repayment of the principal.
• Transaction monitoring by financial institutions showed payable-through accounts, by which incoming payments from abroad were immediately transferred abroad without a logical reason.

Back-to-Back Loan Schemes:

As with loan-back schemes, back-to-back loans are also known to be used in real-estate related money laundering schemes. In this case, a financial institution lends money based on the existence of collateral posted by the borrower in the usual way.

However, the collateral presented to the financial institution originates from criminal or terrorist activities. Although financial institutions are obligated to disclose the existence of these funds on a risk dossier; there are occasions where this analysis may contain shortcomings.

Instances where the collateral posted is not specified in the loan agreement or unreliable information as to the nature, location and value of the collateral make it very difficult to recognize a back-to-back loan.

Indicators and methods identified in the scheme:

• No reference in the loan agreement to the underlying collateral.
• The collateral provided was not sufficient. 
• The collateral provider and other parties involved in the loan structure were not known.
• The borrower of the money was not willing to provide information on the identity and background of the collateral provider and/or the other parties involved in the loan structure.
• The complex nature of the loan scheme could not be justified. 
• There was an unexpected loan default.

The Role of Non-Financial Professionals:

In recent years, money launderers are increasingly forced to develop elaborate schemes to work around AML &CFT controls. This has often meant seeking out the experience of professionals such as lawyers, tax advisors, accountants, financial advisors, notaries and registrars in order to create the structures needed to move illicit funds unnoticed.

These professionals act as gatekeepers by providing access to the international financial system, and knowingly or not, can also facilitate concealment of the true origin of funds.

Obtaining Access to Financial Institutions through Gatekeepers:

Criminals and terrorists have used non-financial professionals or gatekeepers to access financial institutions. This is especially important during the process of determining eligibility for a mortgage, opening bank accounts, and contracting other financial products, to give the deal greater credibility.

It has also been documented that bank accounts are opened in the name of non-financial professionals in order to carry out various financial transactions on their behalf. Examples include depositing cash, issuing and cashing cheques, sending and receiving international fund transfers, etc., directly through traditional saving accounts or indirectly through correspondent accounts

Indicators and methods identified in the scheme:

Instrument: real estate, loan.

Mechanisms: bank, trust, real-estate agent.

Techniques: offshore customer, non-account holder customer, physical person intermediary, high risk jurisdiction, loan, purchase of real estate.

Opportunity taken: using a trust and appealing to a non-financial profession was clearly done to disguise the identity of the beneficial owner.

Assistance in the Purchase or Sale of Property:

Non-financial professionals such as notaries, registrars, real-estate agents, etc., are sometimes used by suspected criminals on account of their central role in carrying out real-estate transactions.

Their professional roles often involve them in a range of tasks that place them in an ideal position to detect signs of money laundering or terrorist financing.

The role of non-financial professionals in detecting illegal activity can also be significant in this area. There have been examples of notaries and registrars detecting irregularities in the signing of the property transfer documents (for example, using different names or insisting on paying a substantial part of the cost of the transaction in cash).

Other examples include buying land designated as residential through a legal person and then reclassifying it a short time later for commercial development. Professionals working with the real-estate sector are therefore in a position to be key players in the detection of schemes that use the sector to conceal the true source, ownership, location or control of funds generated illegally, as well as the companies involved in such transactions.

Indicators and methods:

Instruments: check, wire transfers, real estate.

Mechanisms: notary, bank.

Techniques: business account, front company customer, purchase of real estate, cross border transaction, incoming wire transfer, reverse/flip real estate, unknown source.

Opportunity taken: use of a notary when buying a real estate. Since the company's bank account was not used for any other transaction, it can be deduced that this company was a front company set up for the mere purpose of carrying out the property transaction.

Trust Accounts: 

A trust account is a separate bank account, which a third party holds on behalf of the two parties involved in a transaction. Funds are held by the trustee until appropriate instructions are received or until certain obligations have been fulfilled.

A trust account can be used during the sale of a house, for example. If there are any conditions related to the sale, such as an inspection, the buyer and seller may agree to use a trust account.

In this case, the buyer would deposit the amount due in a trust account managed by, or in the custody of, a third party. This guarantees the seller that the buyer is able to make the payment. Once all the conditions for the sale have been met, the trustee transfers the money to the seller and the title to the property is passed to the buyer.

Indicators and methods:

Instruments: cash deposits, real estate.

Mechanisms: solicitor, trust accounts.

Techniques: structured cash transactions, establishment of trust accounts to purchase properties and pay off mortgages, purchase of property in the names of the main target.

Opportunity taken: the solicitor set up trust accounts on behalf of the target and organized for transactions to purchase the property, pay off mortgages, and shares were purchased to avoid detection. In some cases properties were purchased in the names of relatives of the target.

Management or Administration of Companies:

There have been documented cases of non-financial professionals approached by money launderers and terrorists not just to create legal structures, but also to manage or administer these companies.

In this context, these professionals may have been generally aware that they are taking an active role in a money laundering operation. Their access to the companies' financial data and their direct role in performing financial transactions on behalf of their clients make it almost impossible to accept that they were not aware of their involvement.

Indicators and methods:

Instruments: cheques, cash, wire transfers, real estate.

Mechanisms: notary, bank. 

Techniques: intermediary account, purchase of real estate, incoming wire transfer.

Opportunity taken: by using the company and the notary's client account money was laundered by investing in real estate and the links between the individual and the company were concealed in order to avoid suspicions.  

Corporate Vehicles:

Corporate vehicles – that is, legal persons of all types and various legal arrangements (trusts, for example) – have often been found to be misused in order to hide the ownership, purpose, activities and financing related to criminal activity.

Indeed that practice is so common that it almost appears to be ubiquitous in money laundering cases. The misuse of these entities seem to be most acute in tax havens, free-trade areas and jurisdictions with a strong reputation for banking secrecy; however, it may occur wherever the opacity of corporate vehicles can be exploited.

Apart from obscuring the identities of the beneficial owners of an asset or the origin and destination of funds, these corporate vehicles are also sometimes used in criminal schemes as a source of legal income.

In addition to shell companies, there are other specialized companies that carry out perfectly legitimate business relating to real estate, which have sometimes been misused for money laundering purposes.

This aspect is illustrated by the use, for example, of property management or construction companies. The use of corporate vehicles is further facilitated if the company is entirely controlled or owned by criminals.

Offshore Companies:

Legal persons formed and incorporated in one jurisdictions, but actually used by persons in another jurisdiction without control or administration of a natural or legal resident person and not subject to supervision, can be easily misused in money laundering transactions.

The possibilities for identifying the beneficial owner or the origin and destination of the money are at times limited. In these scenarios actors with wrongful intentions have the distinct advantage of extra protection in the form of bank secrecy.

Indicators and methods:

Instrument: cash, wire transfers, real estate.  

Mechanisms: notary, bank.

Techniques: personal account, purchase of real estate, incoming wire transfer, dormant account, offshore transactions. 

Opportunity taken: use of an offshore company to buy real estate. It appeared that the party involved had connections with a company in insolvency and acted in this way to be able to buy the property with a view to getting away from his creditors.  

Legal Arrangements:

The use of some legal arrangements such as trusts can play an important role in money laundering. Under certain conditions these legal arrangements can conceal the identity of the true beneficiary in addition to the source and/or destination of the money.

The nature and/or structure of certain trusts can result in a lack of transparency and so allow them to be misused: 

Certain trusts may exist without the need for a written document constituting them. Although there may be a deed defining the trust, in some cases it does not need to identify the depositary and/or a specific beneficiary.

There may be no obligation to register decisions regarding the management of a trust, and it may not be possible to disclose them in writing to anyone.

In some types of trust, such as discretionary trusts, the beneficiary may be named or changed at any time, which makes it possible to safeguard the identity of the beneficiary at all times up until the moment the ownership of the assets is transferred.

Trusts set up to protect assets may protect the depositary against decisions to freeze, seize or attach those assets. Trusts may be set up to manage a company's shares, and they may make it more difficult to determine the identities of the true beneficiaries of the assets managed by the trusts.

Certain legislation may expressly prohibit the freezing, seizure or attachment of assets held in trust. Certain clauses commonly referred to as escape clauses, allow the law to which the trust is subject to be changed automatically if certain events arise.

Such clauses make it possible to protect the assets deposited in the trust from legal action. These conditions may create a significant obstacle for the authorities charged with applying anti-money laundering and counter terrorist financing laws – especially in relation to international cooperation – thus significantly slowing the process of collecting information and evidence regarding the very existence of the trust and identifying its ultimate beneficiary.

Under these circumstances it may be very difficult, if not impossible, for a bank or other financial institution to comply with the "Customer Acceptance Policies" or KYC policies applicable in the country or territory in which it is located. 

Indicators and methods:

Instruments: wire transfers, real estate. 

Mechanisms: lawyer, trust, bank. 

Techniques: trust account, purchase of real estate, legal entity transactor, offshore, and incoming wire transfer.

Opportunity taken: use of trusts to buy real estate. The trusts were used to conceal the identity of the true owners.

Shell Companies:

A shell company is a company that is formed but which has no significant assets or operations, or it is a legal person that has no activity or operations in the jurisdiction where it is registered.

Shell companies may be set up in many jurisdictions, including in certain offshore financial centers and tax havens. In addition, their ownership structures may occur in a variety of forms.

Shares may be held by a natural person or legal entity, and they may be in nominative or bearer form. Some shell companies may be set up for a single purpose or hold just one asset. Others may be set up for a variety of purposes or manage multiple assets, which facilitates the co-mingling of legal and illicit assets.

The potential for anonymity is a critical factor in the use of shell companies. They may be used to hide the identity of the natural persons who are the true owners or who control the company.

In particular, permissive practices regarding the form of the shares, whether corporate, nominative or bearer, together with the lack of co-operation on the collection of information, represent a significant challenge when seeking to determine the ultimate beneficial owner. 

Property Management Companies:

When using the real-estate sector, the purchase or construction of properties is a commonly used means by which criminals carry out financial transactions. However, a property that is bought or constructed using illegally obtained funds may subsequently be rented out to provide an apparently legal source of income in order to camouflage movements of funds between various jurisdictions (for example, the tenant and the landlord are located in different jurisdictions).   

Indicators and methods:

Instruments: cash, wire transfers, real estate.

Mechanisms: notary, bank. 

Techniques: business account, purchase of real estate, transactor inconsistencies, non-resident customer, unknown source.

Opportunity taken: the establishment of a company managed by a family member with the aim of letting real estate paid by a foreign company disguised the link between the origin and the destination of the money.

Non-trading real estate investment companies:

Several characteristics of these companies make them especially vulnerable to abuse by suspected criminals. First, it is often very difficult to identify the real owner or controller.

Second, the company can be created very easily with no minimum initial capital and without an authentic deed. Additionally, these entities are only recorded at the trade register. Finally, the shares of such companies can be sold without certification so that the true owner is not easily identified.

Indicators and methods:

Instrument: real estate, single payment. 

Mechanisms: bank, SCI (An SCI is a rather specialist type of French company that is constituted for the ownership and management of real estate). 

Techniques: purchase of real estate, French SCI (An SCI is a rather specialist type of French company that is constituted for the ownership and management of real estate) and foreign/offshore companies as intermediary, high value, physical intermediaries linked to the beneficial owner. 

Opportunity taken: the FIU analysis revealed that the managers of the French SCI were linked to the beneficial owner through a company owned by him and in which the two managers had senior responsibilities.  

Manipulation of the Appraisal or Valuation of a Property:

Manipulation of the real value of properties in relation to real estate involves the overvaluing or undervaluing of a property followed by a succession of sales and purchases.

A property's value may be difficult to estimate, especially in the case of properties that might be considered atypical, such as hotel complexes, golf courses, convention centers, shopping centers and holiday homes. This difficulty further facilitates the manipulation when such property is involved.

Over-valuation or Under-valuation:

This technique consists of buying or selling a property at a price above or below its market value. This process should raise suspicions, as should the successive sale or purchase of properties with unusual profit margins and purchases by apparently related participants.

An often-used structure is, for example, the setting up of shell companies to buy real estate. Shortly after acquiring the properties, the companies are voluntarily wound up, and the criminals then repurchase the property at a price considerably above the original purchase price.

This enables them to insert a sum of money into the financial system equal to the original purchase price plus the capital gain, thereby allowing them to conceal the origin of their funds.

Mortgage Schemes:

Mortgage loans comprise one of the main assets on the balance sheets of banks and other financial institutions. An inherent risk in this activity arises from the fraudulent or criminal use of these products.

Through this misuse of the mortgage lending system, criminals or terrorists mislead the financial institution into granting them a new mortgage or increasing the amount already lent. This use constitutes, in the majority of the cases analyzed, a part of the financial construction established to carry out criminal activities.

It was observed in many instances that financial institutions consider these mortgage products to be low risk. A risk-based approach to monitoring subjects related to money laundering and terrorist financing, similar to those based on customer due diligence or "know your customer" principles, could mitigate some of the risk of this activity.

Illegal Funds in Mortgage Loans and Interest Payments:

Illicit actors obtain mortgage loans to buy properties. In many cases, illegal funds obtained subsequently are used to pay the interest or repay the principal on the loan, either as a lump sum or in installments.

The tax implications of using these products should also not be overlooked (for example, eligibility for tax rebates, etc.).

Front men are also sometimes used to buy properties or to apply for mortgages. The analyzed cases seem to indicate that this misuse of mortgages goes hand in hand with a simulated business activity and the related income so as to deceive the bank or other financial institution when applying for the mortgage.

On occasion the property is apparently purchased as a home, when in reality it is being used for criminal or terrorist activities (for example, selling or storing drugs, hiding illegal immigrants, people trafficking, providing a safe house for members of the organization, etc.).

Methods:

Under-valuation of Real Estate

Over-valuation of Real Estate

Investment Schemes and Financial Institutions:

Direct or indirect investment in the real estate sector by banks and other financial institutions is significant. However, the volume of investment by insurance companies and pension fund managers is also significant, as these institutions place a large part of their long-term liabilities in the property sector at both national and international levels.

Bank and other financial institution investment policies demonstrate that investment in property is gaining ground relative to other direct investments.

Concealing Money Generated by Illegal Activities:

The use of real estate to launder money seems to afford criminal organizations a triple advantage, as it allows them to introduce illegal funds into the system, while earning additional profits and even obtaining tax advantages (such as rebates, subsidies, etc.).

Some areas within the real-estate sector are more attractive than others for money laundering purposes, since the financial flows associated with them are considerable. This makes the task of hiding the funds of illegal origin in the total volume of transactions easier.

The real estate sector offers numerous possibilities for money laundering: hotel businesses, construction firms, development of public or tourist infrastructure (especially luxury resorts), catering businesses.

It is worth highlighting that over the course of the study, trends in these activities were noticed that depend on different regional characteristics: for example, more cases occur in coastal areas, in areas with a pleasant climate, and where non-resident foreign nationals are concentrated, etc.

It is also worth noting that countries which have regions of this kind are more aware of the problem and have increasingly begun to establish appropriate measures and controls in the real-estate sector.

Investment in Hotel Complexes, Restaurants and Similar Developments:

Real estate is commonly acquired in what is known as the integration or final phase of money laundering. Buying property offers criminals an opportunity to make an investment while giving it the appearance of financial stability.

Buying a hotel, a restaurant or other similar investment offers further advantages, as it brings with it a business activity in which there is extensive use of cash.

Indicators and methods:

Instruments: loan, wire transfer, cash, real estate.

Mechanisms: bank.

Techniques: personal account, purchase of real estate, physical person intermediary, cash deposit, withdrawal, outgoing wire transfer

Opportunity taken: repayment of the mortgage by transfers from an account opened with another bank in name of his spouse.

Personal Loan/Car Loan/Home Loan:

Any person can take personal loan from FIs and repay it by illegally earned money; thus he/she can launder money and bring it in the formal channel. After taking home loan or car loan, money launderers can repay those with their illegally earned money and later by selling that home/car, they can show the proceeds as legal money.

SME/Women Entrepreneur Loan:

Small, medium and women entrepreneurs can take loan facilities from FIs and in many cases; repayment may be done by the illegally earned money. They even do so only to validate their money by even not utilizing the loan. This way they can bring the illegal money in the financial system.

Money laundering through Credit Cards:

Criminals and terrorist groups are finding new and complex methods to conceal the illegal profits they earn via an online environment. Now a days, an extensive range of payment systems has become available such as PayPal, Google Pay, Amazon Pay, Apple Pay etc.

This, along with the progressively increasing amounts of e-commerce activities happening online, causes difficulties when it comes to detecting fraudulent financial transactions and money laundering through credit cards, payment service providers and banks.

As a prominent payment method, credit cards have been used as a vehicle to conduct money laundering. Therefore, detection and prevention of transaction laundering or credit card money laundering is a pressing concern for financial services.

They need to develop rigorous anti money laundering (AML) policies to act on credit card money laundering red flags and mitigate credit card money laundering risk.  

a) Transaction laundering through credit cards:

Transaction laundering or electronic money laundering is an extension of money laundering .It is a streamlined form of money laundering used to secretly processed credit card or other digital payment forms.

Laundering happens when one approved merchant/vendor uses payment credentials to process payments for another undisclosed store often selling illegal products and services.

Structured credit card money laundering schemes help illegal merchandise sellers hide their transactions by entering sales receipts into payment system and washing the dirty money.

While these illegal sellers can be a bricks and mortar store, they are primarily set up as web stores in modern days. The largest amount of credit card money laundering is committed by those who sell counterfeit merchandise, drugs, sex services and online casino operators and who operate without a license.

Even when the goods and services are sold legally, representing the nature of credit card payment falsely violates the processing merchant's agreement with its acquiring bank. By benefitting from a scheme such as this, the criminals are violating number of state, FIU and AML laws, depending on the nature of the transactions.

b) Forms of Credit card Money Laundering:

Transaction laundering or credit card money laundering can take three different forms: 

Shell companies use legal businesses as a front for criminal activities. For example as a supplement seller who launders illicit funds by selling drugs, which is achieved by inflating the receipts.

Another example is someone who sells counterfeit medicines under the vitamin and supplements "Merchant category Code." Shell companies may usually operate online or out of a physical storefront.

The pass through companies make it easy for illegal business to process their credit card receipts, specifically by  allowing them access to the legal companies payments processing account.

This is often done by inserting link for payment on the illegal company's website. Following this, they manually enter illegal sales into their payment systems in order to make them harder to detect.

Funnel accounts are similar to pass through companies. Indeed they are legal businesses that accept credit card charges from multiple companies. These companies do not have their own merchant payment account, as they engage in either illicit transactions or are too small. Following this, the funnel companies then enter through these payments as legal transactions into card into payment processing system.  

c) Credit Card Money laundering schemes:

Credit card money laundering or transaction laundering is also known as "factoring" and un-authorization Aggregation. This takes place when one business (often a website) processes payment for another website.

This allows the sellers for illicit products (goods & services) to hide their transactions and wash their illegal money by illicitly entering their sales receipt into official and legal payment system. For example, a fashion e-commerce website can help process payment made from illegal drug networks.

In order to target the system, supporting drug businesses, the U.S. Food and drug administration (FDA) set out a series of investigations that were focused on credit card processors involved in the credit card money laundering or transaction laundering arrangements.

This operation was a notable example to show the payment industry why transaction laundering monitoring is so important. It also witnessed how law enforcement agencies perceive the role of credit card processors in the network of illegal business.

d) Integrating illegal money into the economy with credit cards:

Money Launderers can also use credit cards to integrate illegal money into the financial system. They do this by maintaining an offshore account in another jurisdiction through which payments are made.

The criminals limit the financial trail that may lead back to their own country, where they reside. Authorities have now become more aware of this use of offshore credit cards as a credit card money laundering technique.

Because of this, certain offshore jurisdictions have now enabled regulators to obtain records from banks of transactions made by their clients who have credit cards.

With the increasing growth of e-commerce and the anonymity offered by the web, money laundering risk with credit cards is surging globally. Keeping this in mind, regulators and credit card networks have launched a campaign to deflect the efforts, specifically by holding acquirers and payment processors accountable for their merchant's actions.

Red Flag Indicators:

The following red flags to be considered when a merchant service provider's licensee acquires vendors/merchants for credit card transactions:

• The principles of the merchant appear to be unfamiliar with, or lack a clear understanding of, the merchant's business.
• The proposed transaction volume and/or refunds are inconsistent compared to the information obtained from on- site visits or merchant peer groups.
• Unusual or excessive cash advances or credit refunds. 
• There are indicators showing that a merchant’s credit card is being used by any third party.

The role of current technology in detecting money laundering techniques:

The countries that are suffering the most due to money laundering have complex financial systems, ineffective AML & CFT compliance programmes or operations which lead them to become vulnerable to various criminal activities.

Current AML programmes powered by legacy rule- based systems are proving to be costly to manage and ineffective as criminals constantly improve on their laundering strategies.

Modern Regtech solutions powered by artificial intelligence, machine learning and big data analytics can effectively detect layering techniques such as the use of money mules and offshore shell companies. 

Red Flag Indicators:

These indicators are not intended to represent an exhaustive list of all the possible types of transactions that might be linked to money laundering or terrorist financing. Nor should it in any way be implied that the transactions listed here are necessarily linked to such activities.

It should be remembered that activities related to money laundering or terrorist financing are always carried out with the aim of appearing to be "normal". The criminal nature of the activity derives from the origin of the funds and the aim of the participants.

Natural persons:

Transactions involving persons residing in tax havens or risk territories, when the characteristics of the transactions match any of those included in the list of indicators. Transactions carried out on behalf of minors, incapacitated persons or other persons who, although not included in these categories, appear to lack the economic capacity to make such purchases.

Transactions involving persons who are being tried or have been sentenced for crimes or who are publicly known to be linked to criminal activities involving illegal enrichment, or there are suspicions of involvement in such activities and that these activities may be considered to underlie money laundering.

Transactions involving persons who are in some way associated with the foregoing (for example, through family or business ties, common origins, where they share an address or have the same representatives or attorneys, etc.).

Transactions involving an individual whose address is unknown or is merely a correspondence address (for example, a PO Box, shared office or shared business address, etc.), or where the details are believed or likely to be false.

Several transactions involving the same party or those undertaken by groups of persons who may have links to one another (for example, family ties, business ties, persons of the same nationality, persons sharing an address or having the same representatives or attorneys, etc.). 

Individuals who unexpectedly repay problematic loans or mortgages or who repeatedly pay off large loans or mortgages early, particularly if they do so in cash.

Legal persons:

Transactions involving legal persons or legal arrangements domiciled in tax havens or risk territories, when the characteristics of the transaction match any of those included in the list of indicators.

Transactions involving recently created legal persons, when the amount is large compared to their assets. Transactions involving legal entities, when there do not seem to be any relationship between the transaction and the activity carried out by the buying company, or when the company has no business activity.

Transactions involving foundations, cultural or leisure associations, or non-profit-making entities in general, when the characteristics of the transaction do not match the goals of the entity.

Transactions involving legal persons which, although incorporated in the country, are mainly owned by foreign nationals, who may or may not be resident for tax purposes. Transactions involving legal persons whose addresses are unknown or are merely correspondence addresses (for example, a PO Box number, shared office or shared business address, etc.), or where the details are believed false or likely to be false.

Various transactions involving the same party. Similarly, transactions carried out by groups of legal persons that may be related (for example, through family ties between owners or representatives, business links, sharing the same nationality as the legal person or its owners or representatives, sharing an address, in the case of legal persons or their owners or representatives, having a common owner, representative or attorney, entities with similar names, etc.).

Formation of a legal person or increases to its capital in the form of non-monetary contributions of real estate, the value of which does not take into account the increase in market value of the properties used.

Formation of legal persons to hold properties with the sole purpose of placing a front man or straw man between the property and the true owner. Contribution of real estate to the share capital of a company which has no registered address or permanent establishment which is open to the public in the country.

Transactions in which unusual or unnecessarily complex legal structures are used without any economic logic.

Natural and legal persons:

Transactions in which there are signs, or it is certain, that the parties are not acting on their own behalf and are trying to hide the identity of the real customer.

Transactions which are begun in one individual's name and finally completed in another's without a logical explanation for the name change. (For example, the sale or change of ownership of the purchase or option to purchase a property which has not yet been handed over to the owner, reservation of properties under construction with a subsequent transfer of the rights to a third party, etc.).

Transactions in which the parties:

• Do not show particular interest in the characteristics of the property (e.g. quality of construction, location, date on which it will be handed over, etc.) which is the object of the transaction.
• Do not seem particularly interested in obtaining a better price for the transaction or in improving the payment terms.
• Show a strong interest in completing the transaction quickly, without there being good cause.
• Show considerable interest in transactions relating to buildings in particular areas, without caring about the price they have to pay.

Transactions in which the parties are foreign or non-resident for tax purposes and:

• Their only purpose is a capital investment (that is, they do not show any interest in living at the property they are buying, even temporarily, etc.).
• They are interested in large-scale operations (for example, to buy large plots on which to build homes, buying complete buildings or setting up businesses relating to leisure activities, etc.).
• Transactions in which any of the payments are made by a third party, other than the parties involved. 
• Cases where the payment is made by a credit institution registered in the country at the time of signing the property transfer, due to the granting of a mortgage loan, may be excluded.

Intermediaries:

Transactions performed through intermediaries, when they act on behalf of groups of potentially associated individuals (for example, through family or business ties, shared nationality, persons living at the same address, etc.).

Transactions carried out through intermediaries acting on behalf of groups of potentially affiliated legal persons (for example, through family ties between their owners or representatives, business links, the fact that the legal entity or its owners or representatives are of the same nationality, that the legal entities or their owners or representatives use the same address, that the entities have a common owner, representative or attorney, or in the case of entities with similar names, etc.).

Transactions taking place through intermediaries who are foreign nationals or individuals who are non-resident for tax purposes.

Means of payment:

Transactions involving payments in cash or in negotiable instruments which do not state the true payer (for example, bank drafts), where the accumulated amount is considered to be significant in relation to the total amount of the transaction.

Transactions in which the party asks for the payment to be divided in to smaller parts with a short interval between them. Transactions where there are doubts as to the validity of the documents submitted with loan applications.

Transactions in which a loan granted, or an attempt was made to obtain a loan, using cash collateral or where this collateral is deposited abroad. Transactions in which payment is made in cash, bank notes, bearer cheques or other anonymous instruments, or where payment is made by endorsing a third-party's cheque.

Transactions with funds from countries considered to be tax havens or risk territories, according to anti-money laundering legislation, regardless of whether the customer is resident in the country or territory concerned or not.

Transactions in which the buyer takes on debt which is considered significant in relation to the value of the property. Transactions involving the subrogation of mortgages granted through institutions registered in the country may be excluded.

Nature of the Transaction:

Transactions in the form of a private contract, where there is no intention to notarize the contract, or where this intention is expressed, it does not finally take place.

Transactions which are not completed in seeming disregard of a contract clause penalizing the buyer with loss of the deposit if the sale does not go ahead.

Transactions relating to the same property or rights that follow in rapid succession (for example, purchase and immediate sale of property) and which entail a significant increase or decrease in the price compared with the purchase price.

Transactions entered into at a value significantly different (much higher or much lower) from the real value of the property or differing markedly from market values. Transactions relating to property development in high-risk urban areas, in the judgment of the company (for example, because there is a high percentage of residents of foreign origin, a new urban development plan has been approved, the number of buildings under construction is high relative to the number of inhabitants, etc.).

Recording of the sale of a building plot followed by the recording of the declaration of a completely finished new building at the location at an interval less than the minimum time needed to complete the construction, bearing in mind its characteristics.

Recording of the declaration of a completed new building by a non-resident legal person having no permanent domicile indicating that the construction work was completed at its own expense without any subcontracting or supply of materials.

Transactions relating to property development in high-risk urban areas based on other variables determined by the institution (for example, because there is a high percentage of residents of foreign origin, a new urban development plan has been approved, the number of buildings under construction is high relative to the number of inhabitants, etc.).

Reference: 1. MONEY LAUNDERING & TERRORIST FINANCING THROUGH THE REAL ESTATE SECTOR – published by Financial Action Task Force, 29th June, 2007.

2. link: https://thebusinessprofessor.com/en_US/criminal-civil-law/loan-back-method-of-money-laundering-definition

3. https://www.tookitaki.ai/compliance_hub/what-is-credit-card-money-laundering-and-its-schemes/

4. https://sanctionscanner.com/knowledge-base/lending-and-anti-money-laundering-68