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Money laundering methods

An examination of international money laundering case studies reveals five main methods of laundering the proceeds of corruption. These methods illustrate how public officials use similar money laundering methods as those used by organised crime groups. These include:


Method 1 – Use of corporate vehicles and trusts

International case studies point to the use of corporate vehicles and trusts by corrupt PEPs (14). Corrupt PEPs use shell companies, trusts and company structures established domestically or offshore to launder illicit funds (15).

Illicit funds held in the name of a company, a shell company or a trust distances the corrupt PEP from ownership of the funds, with control vested in the hands of third parties to avoid any obvious links. Companies in foreign jurisdictions with weak AML/CTF regimes are also used to receive cash deposits, which are subsequently sent to other jurisdictions.  
The following is an example of this method.

  1. Suspects A and B are senior politicians in country 1 and both are considered PEPs.
  2. Suspect A provides confidential information to suspect B about the proposed privatisation of a large government entity. 
  3. Suspect B pays suspect A the equivalent of AUD700,000 cash for this information.
  4. Suspect A instructs suspect B to deposit the cash into several bank accounts in the name of company X.
  5. Company X is a shell company registered in country 2.
  6. Company X’s bank accounts are held in country 3.
  7. Over a period of time the funds are transferred to a trust with a bank account in country 1. Suspect A is the beneficiary of the trust and, as such, can access the illicit funds.
  8. Because the funds in the trust are transferred via country 3, it is difficult for authorities in country 1 to trace the source of the funds back to suspect B. The use of a shell company in country 2 further complicates the money trail.

Figure 1 provides an overview of this method.

Figure 1 – Overview of use of corporate vehicles and trusts


Method 2 – Use of third parties

Corrupt PEPs commonly use family members or associates to access the financial system and launder money through it (16). The use of a third party distances corrupt PEPs from the illicit funds, disguises ownership of assets and complicates asset confiscation efforts by authorities.
For example:

  • A corrupt PEP based overseas may move funds through their children who are studying in another country.
  • A corrupt PEP may use a close associate to exchange cash for gaming chips (or vice versa) on their behalf at a casino.
  • A corrupt PEP may buy property using a third party or family member as a legal owner.
  • A corrupt PEP may use a third party’s bank account to deposit and withdraw illicit funds. Alternatively, a corrupt PEP may use third parties to undertake transactions on their behalf.

The following is an example of how third parties may be used to launder the proceeds of corruption. 

  1. Suspect  A (PEP) receives confidential information about the privatisation of a government entity. 
  2. Suspect A persuades a close associate to buy shares in company Y on his behalf. 
  3. Company Y submits a tender for the right to buy the government entity. 
  4. Suspect A uses his position to improperly exert influence and favours company Y as the purchaser of the government entity. 
  5. Suspect A’s close associate moves the profits generated by the shares in company Y through his personal and business accounts to suspect A’s wife. 
  6. Suspect A’s wife buys a house using the funds, which are the proceeds of corruption.

Figure 2 provides an overview of this method.

Figure 2 – Overview of use of third parties


Method 3 – Use of professional facilitators

Professionals such as lawyers, accountants, real estate agents, financial advisers and trust and company service providers are known as ‘gatekeepers’ because they provide an entry point for those seeking to access financial products and services, to purchase real estate, and to establish companies and trusts.

Professional facilitators are commonly featured in international cases involving corruption and money laundering (17).

The following is an example of how professional facilitators can be used to launder the proceeds of corruption.

  • Suspect A is a senior government official in country X. 
  • Company ABC is based in country Y and wants to secure a lucrative government infrastructure contract in country X.
  • Suspect A receives cash bribes from company ABC. In return, suspect A secures the lucrative government infrastructure contract for company ABC.
  • Suspect A gives the cash bribe to his legal practitioner. The bribe is in a foreign currency.
  • The cash is deposited into the legal practitioner’s trust account and later transferred to various bank accounts held in the name of the legal practitioner’s business.
  • The legal practitioner is instructed to transfer the funds to companies and bank accounts controlled by suspect A’s family and associates.
  • The funds are used to fund suspect A’s lifestyle and to buy high-value assets.

Method 4 – Use of international funds transfers

Corrupt PEPs use international funds transfers to move illicit funds outside their home jurisdiction. Bank accounts and legal entities in foreign jurisdictions are commonly used to launder the proceeds of corruption. International funds transfers to and from foreign jurisdictions, including Australia, distances corrupt PEPs from the criminal activity and illicit funds.
The following is an example of the use of foreign jurisdictions to launder bribery payments.

  1. Executives of an Australian company, company A, bribe foreign PEPs of country 1. In return, company A secures lucrative government contracts in that country.
  2. To disguise the bribery payments made by company A and received by PEPs of country 1, it is agreed that the payments will be channelled through foreign countries and subsequently paid to company XYZ (in country 1).
  3. Company XYZ is a front company which acts as a collection agent or conduit for the government of country 1. The use of a front company provides an element of legitimacy to the activities of the company.
  4. Company A conceals the bribery payments by moving the funds through the accounts of companies B and C in other countries, including secrecy havens. Company A controls companies B and C (18).
  • Company B is incorporated in country 2 and operates bank accounts in that country. Company B also operates accounts in country 3.
  • Company C is incorporated in country 4. The company holds a bank account in this country. 
  • Transfer via company B’s accounts in country 3 Company A uses company B to make bribery payments to company XYZ (in country 1). Company B makes these payments via its bank accounts in country 3. 
  • Transfer via company C’s accounts in country 4Company A again uses company B to make bribery payments to company XYZ (in country 1). Company B makes these payments via company C and its bank accounts in country 4.
  • Transfer via company A’s accounts in country 5Company A holds bank accounts in country 5. Funds are transferred from these accounts to the accounts of company XYZ in country 1.
  • Over a period of time, company A pays approximately AUD5 million in bribes to officials of country 1. The bribery payments are disguised as legitimate overseas expenses of company A; for example, transportation costs.
  • The bribery payments to PEPs in country 1 are disguised as legitimate expenses and moved through foreign jurisdictions as seemingly legitimate funds.

    Figure 3 provides an overview of this method.

    Figure 3 – Overview of use of international funds transfers


    Method 5 – International trade in services payments

    International trade in services payments may be used to conceal foreign bribery payments. This method involves companies or individuals, intent on securing lucrative contracts in a foreign jurisdiction, sending international funds transfers to companies known or suspected to be linked to PEPs in that jurisdiction. The bribery payments are disguised as legitimate payments for services: for example ‘consultancy’ fees.


    Footnotes

    1. See fn. 1, p. 17.
    2. Shell company – a company that, at the time of incorporation, has no significant assets or operations. Shell companies can be set up domestically or offshore and the ownership structure of a shell company can take several forms. Shell companies have no physical presence, employees or products and may be owned by corporations, nominee owners and bearer shares, obscuring beneficial ownership.
    3. For more information about family members and associates, see FATF, Guidance: Politically Exposed Persons (Recommendation 12 and 22), June 2013, viewed 11 February 2015
    4. See fn. 1, p. 19.
    5. A ‘secrecy haven’ (or ‘secrecy jurisdiction’) is a country, region or state that does not divulge information about an individual’s financial/banking affairs or structures. See the ATO website for more information
    Last modified: 17/08/2015 10:36