Reverse Money Laundering – What Is It?

Reverse Money Laundering

Reverse money laundering, as the name implies, is simply money laundering in reverse, but what does that mean? The purpose of money laundering is to disguise the origin of dirty money that was earned through illicit means such as drug dealing or human trafficking by making it appear as if it were earned through legitimate means such as work or investment. Reverse money laundering takes clean, legitimate money and tries to turn it into dirty money by disguising its true origins so that it can then be used without raising suspicion.

What is Reverse Money Laundering

Reverse money laundering is a process used to transform illegitimate proceeds into clean money. The process may also involve terrorist financing, public corruption, and other forms of criminal activity. In reverse money laundering, an individual or organization receives funds and then conceals their source in order to evade detection by regulators or law enforcement agencies. Reverse money laundering can be executed through asset purchases (i.e., purchasing real estate with dirty cash), wire transfers, and traditional financial institutions. This tactic allows wrongdoers to hide large amounts of currency in domestic or foreign bank accounts until they are ready to spend it.

The process of disguising a legitimate source of funds into a stream of money that appears to have come from an illegitimate source. An example would be when drug cartels or terrorist organizations receive funding from supporters in North America. If they deposit it into banks, it will appear clean because it is legal money. If they deposit it in cash, however, or buy assets with cash, law enforcement can trace its origin.

The Financial Action Task Force defines money laundering as the conversion or transfer of property, knowing that such property is derived from any activity that constitutes a serious crime and further says that [t]he term ‘money laundering’ also includes the financing of terrorism. (emphasis added). According to FATF Recommendation 16, therefore, one of five methods used to disguise or conceal (in other words, launder) proceeds from crime is by moving those proceeds through financial systems. FATF refers to these activities as reverse money laundering. More formally, those activities are known as layering and are identified in A Typology of Money Laundering Schemes produced by Europol.

How Does Reverse Money Laundering Work

In a nutshell, reverse money laundering is a method of masking illegal or illegitimate funds to make them look like they are coming from legal sources. The process essentially moves money through a number of different accounts and transactions until it comes out on the other side clean. At times, companies will use reverse money laundering in order to disguise payments from government agencies in an effort to secure contracts and avoid penalties. At other times, individuals with criminal ties will launder money through more legitimate-looking businesses that don’t appear to be involved in any illegal activity. In short, when criminals don’t want others to know where their funds come from, they will go through some extra steps to make sure their cash doesn’t stand out as illegitimate or suspicious.

Reverse Money Laundering Process in Layman Term

You buy a home for $300,000 with $30,000 in cash. You receive a mortgage from Bank XYZ that totals $270,000 (in an all-cash transaction). You then take out a line of credit for $10,000 and make several thousand dollars in renovations. A few months later you sell your house for $380,000 and pay off your loan balance in full. How much tax do you have to pay on your profits? None! Because you never really made any money at all. In fact, if it weren’t for reverse money laundering schemes like these (illegal as they are), our housing market wouldn’t be anywhere near as robust as it is today.

Examples of Reverse Money Laundering

Often conducted as part of an effort to conceal money obtained through criminal activities. This practice often involves layering transactions so that multiple transactions are made in quick succession, with large sums of dirty money being transferred from account to account through various institutions, oftentimes located in foreign countries. The cash obtained from these illegal activities—such as drug trafficking or prostitution—is then put into new accounts and other investments. These funds can be used for a variety of purposes, ranging from funding more illicit activities to simply padding one’s bank account for personal use. When reverse money laundering is done on a larger scale, it can have serious implications for local economies where banks may begin experiencing an influx of dirty money.

Reverse Money Laundering Case Study

RML refers to a type of fraud in which a financial intermediary tricks legitimate businesses into giving them illegitimate cash that can then be funneled into criminal enterprises. Let’s take a case study to better understand how reverse money laundering works: In early 2015, law enforcement officials seized over $19 million in cash from an airport terminal in Los Angeles. The money belonged to two Nigerian businessmen (Andrew Oladele and Ehi Ogundare) who were attempting to get it back home. To avoid being flagged by banks as potential terrorists or criminals, Oladele and Ogundare went through 22 people who used their individual bank accounts and IDs to transfer $50,000 at a time over the course of months.

Case Study in the United States

One reverse money laundering case, also known as round-tripping, took place in New York. Using a complex web of shell companies that banked in Europe and Africa, along with a few U.S.-based corporations, two traders moved nearly $2 billion through American financial institutions over several years by abusing loopholes in tax laws on dividends. The traders received millions of dollars from U.S.-based corporations and then returned most of it to these companies as stock dividends—which were taxed at a much lower rate than corporate profits are under current law. To cover their tracks, they arranged for kickbacks from related parties and entities located outside of North America.

Case Study in the United Kingdom

A reverse money laundering case in the United Kingdom found that a customer of a local bank deposited millions of dollars into its account over a year’s time period. At one point, $80 million was transferred into that account without any identifiable source. The funds appeared to be from sheepskin coats and some other unknown sources. When account representatives investigated, they discovered that most of these deposits were cash and represented proceeds from drug trafficking. Under an agreement with several law enforcement agencies, each deposit was met with an equal withdrawal for business expenses such as importing sheepskins from Australia and buying machinery to process them in Pakistan.

Case Study in HSBC Bank

Reverse money laundering is a complex process of concealing criminal origins for illicit funds through exploiting foreign banks’ regulations. In 2015, HSBC was fined $1.9 billion by US federal prosecutors in a case that exposed serious deficiencies in compliance procedures and internal controls. The accusations indicate that an affiliate of HSBC defrauded Mexican currency exchange customers by manipulating trade routes to generate fees on forex transactions between 2007 and 2008. HSBC failed to monitor or investigate its affiliates’ operations, thus enabling fraud within its global banking system.

Preventing Reverse Money Laundering

Although it’s difficult to do, it is possible to prevent reverse money laundering. The key to preventing reverse money laundering is identifying warning signs that may indicate potential money laundering. Most organizations require their employees to report any suspected or possible incidents of illegal activity, including reverse money laundering. If you have a reason to suspect someone may be trying to launder money through your organization, you should immediately report it by contacting law enforcement and providing all necessary information related to your suspicion. Your reporting will help law enforcement officials combat financial crimes such as money laundering and can help prevent further illicit activity.

Reverse Money Laundering Act in the United States

The Preventing Reverse Money Laundering Act of 2017 was introduced to Congress on February 16, 2017. The bill aims to curb terrorism financing and money laundering activities through prepaid access devices, which are used by an estimated 60 million people in the United States every year. These cards can be loaded with funds and then used at a later date for cash or purchases without having to be physically present at an establishment where a financial transaction is made. This bill provides critical safeguards against reverse money laundering by requiring these providers to register with FinCEN, report suspicious transactions, and collect personally identifiable information from users who load more than $10,000 in their accounts during a calendar year.

FATF Reverse Money Laundering Recommendation

Identify high-risk customers and Check customer identity against watch lists. The Financial Action Task Force (FATF) is an intergovernmental body created to combat money laundering. FATF has issued a number of recommendations on combating financial crime, including Recommendation 21, which contains detailed requirements for detecting and preventing money laundering activity. Specifically, Recommendation 21 requires that jurisdictions establish systems for identifying suspicious customers and checking their identities against law enforcement databases. In addition to establishing rules regarding customer due diligence requirements, FATF members are also required to designate one or more financial intelligence units (FIUs) to analyze Suspicious Activity Reports (SARs) submitted by financial institutions.