Some Money Laundering Methods

Money Laundering is often a diverse, complex and dynamic process. The degree of sophistication involved in money laundering is limited only to the creativity of the people perpetrating such crimes. It would not be wrong to say that some of the best minds are behind the planning and execution of these crimes.

Banks have become the prime target or mode of money laundering as it is easy to move money between different places, whether it be between two cities in a single country or between two countries. To make things worse, some banks have willingly aided in the process of money laundering either by becoming consultants or undertaking the job themselves. Over the years, banks and other law and order agencies have tried to form joint organisations to tackle the problems, and this has surely made it difficult for the money launderers to use banks as money laundering vehicles as freely as they used to. However, every now and then, we still come to know of some money laundering cases which are being carried through banking channels. It only points that the criminals are getting smarter and some banks are still willing to be accomplices in this crime.

In the recent years, the issue of money laundering has gained significance due to the involvement of terrorist activities. Any terrorist activity requires some amount of monetary resources, either in the form of payment to the terrorists as compensation and/or for purchasing resources to carry out the acts of terrorism. This requires movement of money from the place of planning to the place of execution or any other place or places; banks are a natural mode for facilitating such transfers. Considering the power of the terrorism in destabilising peace and an organised society, it is inevitable to do all that is required to stop such crimes. It has been noticed that one of the prime motivators of terrorist activities, apart from the religious, emotional and ideological aspect, is the monetary compensation that is being provided to the family of the terrorists, and the payment of the same is done using banking channels. Hence, increasing stringent norms are being put in place to understand customers’ profile, their legitimate sources of income and to track any suspicious transactions, in order to be prepared to take necessary action.

Apart from the acts of terrorism using the banking channels, there are other crimes that use the banking channels very frequently. The following is a broad list of such crimes.

Sources of Money Laundering

Overall, money laundering can be referred to as the process by which dirty money (or money that is being tainted with crime) gets converted into clean money. It is easy to imagine this process as being similar to washing clothes in a laundry. Just as the process of laundry cleans dirty clothes and gives us clean clothes to wear, the process of money laundering cleans dirty money and provides the user clean money to be used in normal transactions for everyday use. Just as in the case of laundry of clothes, water and detergent are being used in a particular process to remove the dirt, in the case of money laundering, transactions and institutions are used in a particular process to make the element of crime disappear.

Over the years, some similar patterns or processes have been identified and this has resulted in forming a general understanding of how these crimes are committed. These processes are also referred to as ‘steps’ in the money laundering process and are mentioned below.

Steps in Money Laundering

This is generally the first stage in the process. It involves placing the dirty money into the formal financial system in small quantities to avoid detection. For example, a hirer of a contract killer might pay a ransom to the contract killer as advance or upon completion of the job. Usually, such payments are made in cash to avoid detection. However, it is not easy and safe for the contract killer to keep such large amounts of cash and use it freely. He would want such money to be freely available in accounts of some banks in order to use it legally and freely. He can do that by opening accounts in various banks and deposit small quantities of cash on different dates to avoid detection and suspicion. This is a time-taking process but one which ensures that the cash is now converted into bank money for free use either in his home country or elsewhere. This process is followed widely and it is difficult for banks to detect such transactions in a maze of transactions that happen every day.

While transferring money from one point to another point, it is observed that a set of complex and deliberate transactions are entered upon in order to conceal the real transaction or transfer underneath. For example, in the case of the above mentioned contract killer, it is possible that he has an accomplice and he might need to share some of his income with his accomplice. One easy way of sharing his proceeds is by making a bank transfer of money from his account to the account of the accomplice. However, such a transaction might lead to suspicion, if an investigation were to be made by law enforcement authorities. An alternative approach could be that; the contract killer might enter into a fictitious trade with the accomplice and transfer the money as part of the trade. For example, the contract killer might enter into a business transaction with the accomplice for purchase of some art or artefacts, which in reality might be junk and of no value, but highly priced as per the Invoice. The contract killer may transfer money to the accomplice legitimately through a bank for payment against the Invoice. The accomplice may deliver to the contract killer the goods under the Invoice, which the contract killer may dispose-of locally or throw them away after a certain period of time. Similarly, other fictitious transactions in the nature of consultancy services, repairs and maintenance services, etc., may be entered upon in order to create a legitimate reason for the transaction that is being done underneath. The application of such methods is known as ‘layering’, as it involves layering the underneath real transaction with another deliberate and fictitious transaction in order to cover the real transaction. The example provided above is just a very simple method of layering; however, more complex methods may be utilised by criminals across longer durations in order to cover continuous and large transfers of money.

It usually refers to the nature and quantity of the layering and the amount of transfers that take place in each of such layers to ensure that detection becomes as much difficult as possible.

It is usually the last stage in the process where the dirty money mixes into the legitimate economic or financial system as ‘clean money’. For example, in the case of the above mentioned contract killer, the contract killer as well as his accomplice may use the money in their banks to start a legitimate business or invest in stocks, property or any other income generating assets or businesses. For example, the accomplice might invest his proceeds as capital in an existing legitimate restaurant business, thereby generating income out of his investment. It is also possible, if the law permits, to invest the proceeds in a business outside his home country thereby making it difficult or impossible for any audit trail or detection.

Anti-Money Laundering


Money Laundering is an act of directly or indirectly involving in transactions that involves property that is the proceeds of:
The term involves above includes knowingly receiving, possessing, concealing, disguising, transpiring, converting, disposing, involving or connected-to in the property that is the proceeds of crime.

Crime here is defined as any activity involving money and is declared as unlawful. Some of the examples of crime are:
The subject of money laundering gained prominence due to the enormous amount of money involved and its effect on world peace and security. Banks have been used as the means of transferring illicit money, and in most cases the banks have no clue about such transactions occurring through their accounts. Before we proceed further in understanding the means and methods of money laundering, a look of the following popular case study involving a bank would provide valuable insights.

Case Study

Bank of Credit and Commerce International (BCCI)

“The only laws that are permanent are the laws of nature. Everything else is flexible. We can always work in and around the laws. The laws change.”
Agha Hasan Abedi (1989)

“(The bank) should more appropriately be called (the)” Bank of Crooks and Criminals”.
Robert Gates (1991), then Assistant Director, US Central Intelligence Agency

The Bank of Credit and Commerce International (BCCI) was created in India before independence from British rule. After independence and partition of the sub-continent in 1947, BCCI move to Pakistan.

In 1958, BCCI’s founder, Agha Hasan Abedi, formed a new bank known as United Bank which was licensed by the Pakistani government. Within ten years, and with considerable political patronage, United Bank became the second largest bank in Pakistan and its operations expanded into other countries, including many in the Middle East.

In the early 1970s, Abedi prepared to move the United Bank outside Pakistan due to the changing political climate. The new government had plans to exercise more control over financial institutions. Abedi’s desire to relocate was considered suspicious and he was placed under house arrest.

During his house arrest, Abedi dreamed of his bank becoming international, providing a link between economically developed and developing nations. He planned to locate it outside Pakistan to compete with Western banks by offering not only financial services, but also involvement in areas as diverse as shipping, insurance, commodities, real estate and even charitable works.

To realise his international ambitions, Abedi needed financial support and cultivated a relationship with the Sheikh Zayed bin Sultan al Nahyan, the ruler of the oil-rich state of Abu Dhabi. Following the involvement of the Sheikh in BCCI, the Bank’s assets were at any time, often half made up of assets derived from Abu Dhabi, the Sheikh and his family.

The Bank of America, which hoped to use Abedi’s connections to expand its activities in the Middle East, became a 25% shareholder in September 1972 and provided BCCI with the much-needed acceptability necessary to gain links with Western financial institutions. On the strength of its Bank of America connections, BCCI was allowed to operate from its six offices – in London, Luxembourg, Lebanon, Dubai, Sharjah and Abu Dhabi.

Abedi wishing to further expand and avoid regulatory supervision, chose Luxembourg, a place known in financial circles to be a “loosely-regulated banking centre” in which to incorporate BCCI. Later, he created a holding company, BCCI Holdings in order to split the Bank in two parts. BCCI (SA) with head offices in Luxembourg, and BCCI Overseas with head offices in the Grand Cayman Islands.

The Luxembourg office handled European and Middle East operations while the Grand Cayman office dealt with developing countries. The organisation split was also accompanied by the creation of a series of parallel entities to circumvent local regulations.

BCCI’s expansion was rapid. In 1976 it moved its head office to London although it remained incorporated in Luxembourg. By 1977, BCCI became the world’s fastest growing bank, operating from 146 branches (including 45 in the United Kingdom) in 43 countries including Africa, the Far East and the Americas. Its assets for the same period increased from $ 200 million to approximately $ 2.2 billion. By the mid-1980s, it was operating from 73 countries with assets of around $22 billion.

To assist this rapid expansion, BCCI staff were often pressured into accepting any business that came their way, legal or otherwise, and would often be penalised for rejecting business. The organisational structure was segregated so that the nature of one unit’s activities would not be known to another, and where senior officials were discouraged from ‘asking too many questions”.

Another example of this compartmentalisation was BCCI’s decision to divide its operations between two auditors (Price Waterhouse and Ernst & Whinney, neither of whom had the right to audit all BCCI operations), this was a significant factor in helping BCCI to hide fraud during its early years. For more than a decade, neither of BCCI’s auditors objected to this practice. However, Ernst & Whinney did resign as Auditors in 1986.

Mid 1970s the US authorities rejected BCCI attempt to purchase an American Bank. The major concern was the absence of a primary designated regulator and the lender of last resort to supervise BCCI’s consolidated banking operations. BCCI was forced to rely upon Bank of America as its correspondent bank. The development and expansion of BCCI was dependent on a link to the United States since all its activities were in US Dollars (as the dominant world currency). The Bank of America relationship gradually deteriorated, as BCCI officials were not always forthcoming with information and documents requested by Bank of America. They eventually sold their stake in BCCI in 1980 although they remained BCCI’s clearing bank.

Abedi enlisted the help of senior US political figures and in the late 1970s overcame regulatory obstacles to acquire four major banks, including the National Bank of Georgia and Financial General Bankshares/First American Bank, operating from seven states and Washington DC. In violation of US federal banking laws, the US acquisitions were made in the names of secret nominees in order to conceal BCCI’s involvement and circumvent requirements to file financial information and to have a recognised regulator.

The Bank of England welcomed BCCI’s presence in the United Kingdom even though it was concerned about the absence of a single international regulator and lender of last resort. BCCI did little banking business in Luxembourg and the Luxembourg Banking Commission felt that “it was impossible to supervise BCCI (SA) effectively from Luxembourg”. Following enactment of the Banking Act of 1979, the Bank of England licensed BCCI (SA) as a deposit taking institution (although not a full bank) based, in part, on the assurance that “external auditors were not qualifying the reports”.

BCCI’s activities in many of the 73 countries in which it operates were dependent on the widespread use of pay-offs to prominent political figures. BCCI would obtain an important figure’s agreement to give BCCI deposits from a country’s Central Bank, exclusive handling of a country’s use of U.S. commodity credits. BCCI gained preferential treatment on the processing of money coming in and out of the country where monetary controls were in place, the right to own a bank, secretly if necessary, in countries where foreign banks were not legal, or other questionable means of securing assets or profits. In return, BCCI would pay bribes to the figure, or give him other reward in the form of goods and/or services.

The result was that BCCI had relationships that ranged from the questionable, to the improper, to the fully corrupt with officials from countries all over the world. Amongst those countries were; Argentina, Bangladesh, Botswana, Brazil, Cameroon, China, Colombia, the Congo, Ghana, Guatemala, the Ivory Coast, India, Jamaica, Kuwait, Lebanon, Mauritius, Morocco, Nigeria, Pakistan, Panama, Peru, Saudi Arabia, Senegal, Sri Lanka, Sudan, Suriname, Tunisia, the United Arab Emirates, the United States, Zambia, and Zimbabwe.

To manage the $10 billion pool of cash that lay in its international network, BCCI decided to centralise its treasury operations in 1982. However, the Banks excursions into the money market were not very successful and its officials resorted to “creative accounting” to cover trading losses.

One of the techniques employed was to sell large quantities of “options” to purchase currency or securities at a set price at a later date. The proceeds of these sales were shown in the books as profits. As liabilities materialised, BCCI was forced to sell even more contracts to keep the cash flow and profits running. The workings of a classic Ponzi scheme began. As BCCI’s internal operations were split, it was also possible for executives to move the accounts around and cover-up their losses.

The complicated structure involving its use of shell corporations, bank confidentiality and secrecy havens, a layered corporate structure of front-men and nominees together with the endemic corruption ingrained in BCCI’s operations made it an ideal environment for crime.

BCCI’s criminality included:
In October 1988 the US authorities in Tampa, Florida indicted BCCI and its officers on charges of fraud, money laundering and falsifying bank records following an elaborate sting operation conducted by US Customs. The BCCI attorneys argued that it was inevitable that a bank operating in so many countries and where banking laws afforded maximum secrecy would be used by drug traffickers. In January 1990 in its guilty plea BCCI was only admitting that a few of its employees had engaged in money laundering and their guilt was solely on a theory of corporate responsibility.

However, following the Tampa indictments nobody believed BCCI were unknowingly involved in money laundering. One BCCI official told investigators in the spring of 1992:

The degree of BCCI-US’s reliance on money laundering as a principal business was demonstrated by what happened when BCCI put into place a ‘compliance program” as part of its January 1990 plea agreement resolving the Tampa money laundering case: business dropped noticeably, especially referrals from other BCCI locations, because neither BCCI nor its customers wanted to provide details about the customers’ businesses.”

BCCI’s clients for money laundering included Panamanian General Manuel Noriega, for whom it managed some $23 million of criminal proceeds out of its London branches; Pablo Escobar, of the Medellin cartel; Rodriguez Gacha, of the Medellin cartel; and several members of the Ochoa family.

Despite the US money laundering scandal and the reports from Price Waterhouse (UK auditors) advice that they had found serious problems with the BCCI, the Bank of England’s response was not to close BCCI down, but find a way to prevent its collapse. In hindsight, many ideas as to why this happened, including fears that repercussions in the Middle East would result, to suspicious that BCCI had been involved in ongoing intelligence activities at the time, have been circulated.

In April 1990, the Bank of England reached an agreement with BCCI, Abu Dhabi, and Price Waterhouse to keep BCCI from collapsing. Under this agreement, Abu Dhabi agreed to guarantee BCCI’s losses and Price Waterhouse agreed to certify BCCI’s books. BCCI was permitted to move its headquarters, officers and records to Abu Dhabi. Consequently, innocent depositors and creditors were deceived into believing that BCCI had no serious financial problems. Following the eventual closure of the Bank in June 1991, investigators from the US and elsewhere were hampered in their enquiries by essential documents and witnesses being in the grasp of the Abu Dhabi government.

On July 5, 1991, when BCCI was closed, some one million small depositors in BCCI around the world lost their deposits. There was no way of knowing even now precisely who were among all those who lost money. BCCI made frequent use of “managers’ ledgers” or numbered accounts for its most sensitive depositors, whose identities were typically kept secret from everyone other than their personal banker at BCCI. Given the anonymity, the secrecy, and the source of the income behind many of these deposits, some depositors, including government officials or agencies, have not necessarily been in a position to asset claims to the money they have lost.

When New York District Attorney Robert Morgenthau announced the indictment on July 29, 1992 of BCCI’s former heads, Agha Hasan Abedi and Swaleh Naqvi, and two of BCCI’s front men, Ghaith Pharaon and Faisal Saud Al Fulaij, he alleged, in some detail, how BCCI systematically engaged in criminal activities with officials and prominent political figures from many countries to generate assets for BCCI’s Ponzi scheme, both from the governments involved, and from innocent, legitimate depositors.

There is no doubt that there was corporate culture at BCCI of secrecy, fraud, deception and looking the other way at money coming from criminal enterprises. This culture extended to the highest level of the bank and probably started in the early 1980’s. Bank officials were advised by US Customs undercover agents that money being deposited in the bank came from cocaine sales. Money laundering of the proceeds of narcotics trafficking becomes a relatively easy thing to do when a banking institution such as BCCI and a number of its key officials cooperate fully in the laundering activity.

Source: Paper on Corruption in International Banking and Financial Systems presented by Lynne Walker (Australian Federal Police, NSW) at the Transnational Crime Conference conveyed by the Australian Federal Police and Australian Customs Service

Customer Identification Program

The customer identification program is a part of customer due-diligence. This includes:
The following are the details that are generally collected under the idenficiation program for individual clients.
For business accounts, the following additional information is required to be collected.

Customer Risk Assessment

The Customer Risk Assessment (CRA) is an on-going, dynamic, risk-based methodology for assessing a Customer's money laundering and economic sanctions risk. It encompasses the following.
  1. Initial Risk Rating
  2. Dynamic Risk Rating
Initial Risk Rating
The initial risk rating is done at the time of onboarding based on information collected from various sources, including the client. The front line units (FLUs) assign a rating based on their assessment of the client's risk. They can categorise the client as low risk, medium risk or high risk or in any other quantitative or qualitative form.

Dynamic Risk Rating
This rating is done after the client has been onboarded. This is based on actual client activity and changes due to KYC Refresh.

As mentioned above, the CRA can be either a quantitative or qualitative measure. The following is a common qualitative CRA rating.

Risk Rating Description
Standard Risk This is the baseline risk as per the information obtained from various sources
Elevated Risk This represents a higher risk than the Standard Risk
High Risk This represents a significantly higher risk than the Standard Risk

Prohibited Customers

The following customers are generally prohibited in all jurisdications, particularly in United States.

  1. Shell Banks
  2. Non-Operating Bearer Share Entities
  3. Anonymous Accounts
  4. Payable Through Accounts
  5. Customers and Individuals directly involved in cultivation, distribution, sale or dispensing of Marijuana (particularly for United States)
  6. Individuals who are employed by Embassies, Consulates or Permanent Missions of Sanctioned Countries

Shell Banks
A shell bank is a bank that does not have a physical presence in any country and is not a regulated entity.

Non-Operating Bearer Share Entities
A non-operating entity is an entity that is not involved in commercial activity such as manufacturing or the provision of services, but rather is a vehicle or structure such as passive asset/investment holding entity, trust, etc. A bearer share entity is an entity with ownership established based upon physical possession or ownership of shares. If a non-operating entity has the ability to issue bearer shares then such an entity is a part of the prohibited list. Such clients can be onboarded provided they convert their bearer shares into registered shares.

Anonymous Accounts
Anonmyous account is an account where the identify of the owner of the account is deliberately obscured to prevent anyone from knowing who owns the account.

Payable Through Accounts
An account opened by a bank, broker-dealer in securities, future commission merchant, introducing broker in commodities, mutual funds and other institutions that allows their customers to engage, either directly or through a sub-account, in activities in such a manner that the financial institutions's customers have direct control over teh funds in the account.

Screening Requirements

A financial institution should conduct different types of screening activities on customers, beneficial owners and other parties. The following are some of the common screening that is done.
  1. Economic Sanctions Screening
  2. Sanctions Screening
  3. Senior Political Figure / Politically Exposed Person Screening
  4. Material Negative News Screening
The following table shows the types of party and the common screening requirement.

Party Various Screening Activities
Economic Sanctions Sanctions Politically Exposed Persons Material Negative News
Individual Customer Screen Screen Screen Screen
Entity Customer Screen Screen Screen Screen
Beneficial Owner Screen Screen Screen Screen
Ultimate Parent Company Screen Screen - -
Signatory Screen Screen - -

Enhanced Customer Due-Diligence

Sometimes enhanced due-diligence is required to be conducted for certain type of customers. This could be due to the client's business activity, ownership structure, anticipated or actual volume and types of transactions, including transactions involving higer-risk jurisdiction. In short, the following are the main factors to consider when determining enhanced due-diligence requirements.
  1. Products or Services
  2. Customer and Entity Type
  3. Geographic Locations
  4. Customer Activity or Behaviour

Products or Services
Certain products and services may pose a higher risk of money laundering and/or terrorist financing. The following are some of the activities that require enhanced due diligence in the United States; other jurisdictions may require similar or other measures.

Customer and Entity Type
The following types of customers pose higher risk and hence they are subjected to enhanced due-diligence.

Geographic Risks
Certain geographic locations are considered risky; enhanced due-diligence need to be carried out for clients and/or transactions connected to these locations. In general, the following are the geographic risks.

Customer Activity or Behaviour
Certain activity types are risks from the perspective of financial crimes and terrorist financing. The following are two parameters which are generally considered for conducting enhanced due-diligence.

Suspicious Activity Reporting

Employees are required to report any suspicious activity that they may come across. In general, the following are the responsibilities of the employees dealing with customers.

KYC Refresh

It is the process through which the current information of the customer is maintained by a financil institution for the purpose of customer due-diligence and other compliance. It is an ongoing process wherein information is obtained from various sources to ascertain the current risk that the client poses. The customer due-diligence refresh or commonly known as KYC refresh has to be done on an ongoing and periodic basis. The following table shows the frequency.

Customer/Risk Frequency
High Risk Annually
Elevated Risk Once every two years
Standard Risk Once every three years
Hedge Funds Once every two years
Charities / Non-Governmental Organisations Annually
Government Entities Could be exempt

Country Risk Rating

Please click on the links below to see the country lists.
  1. High Risk
  2. Elevated Risk
  3. Standard Risk

From a process perspective

The following are the steps involved in client onboarding.

Initiate onboarding request received from sales
Sales submits details of the client that needs to be onboarded. The provide certain details of the client for enabling this process.

Determine required documents
The required documents depend on the type of entity, branch, country, risk level of the customer and a few other parameters. Certain information about the client can be gathered from approved sources to determine the documentation requirements. Once the required documents are ascertained, a checklist maybe prepared and sent to the customer or sales or both for procuring the same.

Collect documents
Either the sales can procure the documents or the client itself can send over the documents. These documents should be sent to the AML/KYC team for their verification and further processing.

Complete Client Due-diligence process
Once the documents are received by the AML/KYC team, it should perform Customer Due-Diligence (CDD) by screening for the following. In some cases, depending on the type of entity and risk level, enhanced due diligence may have to be conducted. If necessary, additional documents may be sought from the customer for completing the due-diligence.

Based on the customer due-diligence, a decision may be taken about whether the customer is suited for onboarding or not.

Updation History
  1. Last updated on 30th March 2021
  2. Second updated on 21st July 2018
  3. First updated on 23rd May 2016