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Following the money

Adrian Gains
PA Consulting Group Police Professional: IPJ, pages 14 to 16
July 2009

Fighting criminals where it hurts the most and at no cost to the public purse: Adrian Gains discusses finding a better and more collaborative approach to combating money laundering

With some exceptions criminals are primarily involved in illegal activity because they believe that it is an easier way of making money than from legitimate business.   In fact, the more successful ones exhibit many of the behaviours of successful entrepreneurs.

Money laundering is a term that is used to describe a process by which criminals, for example drug traffickers, convert ‘dirty’ money (or the money made from crime) into ‘clean’ money. This happens in order to try to prevent law enforcement agencies tracing this back to the original crimes and seizing their assets, under the Proceeds of Crime Act (POCA).  It is estimated that a staggering 10% of the total money in circulation comes from criminal activity and money laundering is believed to be the third largest global business.

The systems for tackling money laundering vary from country to country but in general are fairly limited in their effectiveness.  In the UK, organisations are obliged to report suspicious activity under POCA, with particular obligations placed on financial institutions, including banks, solicitors and estate agents.  The reporting ‘net’ is being extended under new money laundering regulations but the level and quality of reporting varies significantly within and between organisations. 

Another problem with extending the net to less regulated organisations is that it can increase the number but reduce the quality of reports received.  Since the New York terrorist attacks, the volume of suspicious activity reports has increased five-fold but the quality of the reports varies.

However, despite an increase in the number of reports the actual detection rates have not increased in proportion. The large number of poor quality reports, together with constraints on resource to investigate them, means that it can be extremely difficult to identify and investigate genuinely suspicious behaviour and genuine reports can get missed.

Given all these factors and the amount of dirty money in circulation, you might expect this to be an area that has been well researched.  In fact, there have been very few research studies into how money is laundered and how to prevent and detect it.  Given the scale of the problem, this is surprising.  In this article we set out the case for more investment in:

  • greater collaboration between stakeholders in the UK and abroad

  • improved profiling tools and techniques to identify suspicious behaviour

  • building up knowledge about criminal networks

  • increasing collaboration.

Crime, particularly serious organised crime, is a global problem and greater collaboration is needed between and within countries to tackle it effectively.  Whilst approaches to tackling money laundering vary from country to country, there is little in the way of reliable evidence about what interventions work and what the benefits are.  Most published articles are largely theoretical. 

The largest single handler of cash, well over £2bn every month, in the UK is the Post Office.  It also offers products such as postal orders, international money transfers, premium bonds, foreign exchange, business banking and savings/ investment products. As such there is a very strong case for law enforcement agencies to forge much stronger links between retail outlets, such as post offices, including, for example, sharing information on unusual patterns of transactions. 

There are also ‘new generation’ organisations that handle large volumes of virtual cash transactions, like eBay and PayPal.  Monitoring these transactions is made more challenging because they may well be hosted in countries that are less regulated.

In most countries, even those that are relatively well advanced in terms of anti-money laundering legislation, the process can be quite mechanistic.  Organisations are obliged to report suspicious activity but, with a few exceptions, it is generally regarded as an administrative burden and not part of their core business.    There is also very little in the way of feedback from law enforcement agencies on what happens to the reports that they receive.  At the very least, it would be useful to provide feedback to reporters on what happens with suspicious activity reports.

We know that there are a large number of financial institutions that do have a genuine interest in tackling the problem.   After all, they invest a lot of money in monitoring and reporting suspicious financial transactions.  It would be useful to put in place formal mechanisms for identifying and sharing best practice within the UK and internationally.

A good practice guide would identify the approaches that achieved the best outcomes against the investment required. There is a strong argument that this should be a joined-up activity with law enforcement agencies, the private sector and academics but coordinated from a central point so that interventions can be evaluated in a consistent way. 

Profiling suspicious individuals and businesss: making better use of existing data

There is a lot of information about suspicious activity reporting that has not been fully analysed.  Internationally, there are millions of suspicious activity reports each year.   Setting aside known issues with data quality, we believe that this information is not been fully exploited – not least if it is combined with other intelligence sources.

Criminals, and the professionals they employ, are well aware of the methods used to detect suspicious activity and change their behaviour accordingly.  This is particularly so for more sophisticated organised crime gangs and terrorist groups.  For example, analysing the extremes of over and under-reporting by sector could lead to a much better understanding as to which sectors and organisations are worth targeting.

One interesting question worth asking is: why do some sectors of industry report suspicious transactions and others do not?  Are some institutions /organisations over-reporting and why?  Apart from volumes, there is the issue of quality.  Some organisations over-report but the quality is poor.   It would be useful to analyse the sources that do/ do not lead to actionable intelligence.

Behaviours used by money launderers

In addition to there being very few convictions for pure money laundering, there are also significant gaps in knowledge regarding criminals.

The behaviours of different types of money launderer need to be understood to both detection and enforcement.  Not enough is done to share information between law enforcement agencies, although this is changing.

Some examples of money laundering behaviour:

  • ‘Smurfing’ involves breaking up large volumes of cash that, if deposited on their own would certainly register as a suspicious activity, into smaller amounts that may be deposited on different days, in different branches and by different people.  Whilst individual transactions may not be regarded as suspicious, the overall pattern certainly is – not least if a variety of financial institutions are involved. This may be more prevalent in less regulated sectors, such as on-line gambling web-sites and eBay.

  • The growth in electronic money transfer has helped facilitate the transfer of laundered money around the world but a large amount of money is still physically distributed in bulk. Foreign exchange outlets are also used to convert large numbers of low value notes for notes of higher value to help distribution.

  • Legitimate businesses are also commonly used as a ‘front’ for illegal activities. These include businesses which may have a distribution activity that would not normally need to turnover surprisingly large volumes of cash, or import materials from countries that are known to be part of the supply chain for illegal substances. 

A greater profiling capability would help identify suspiciously activity and help tackle money laundering. There are some systems available that look for suspicious patterns in transactions, for example those used by the credit card industry, and the larger financial institutions do carry out some of these checks, prior to submitting suspicious activity reports, but this is not done routinely between organisations and in some organisations not at all. 

For example, it would be interesting to know routinely which individuals have accounts with more than one bank, in more than one geographical location, with large numbers of cash deposits and international money transfers.  Individual transactions may not appear to be suspicious but in combination they certainly are.

Building up knowledge about criminal networks

Criminals, especially the more sophisticated, rely on networks of individuals to operate and these vary in size, complexity and fluidity.  Looking at networks of transactions can be more productive than looking at individual accounts or businesses as this allows agencies to ‘follow the money’.  One of the key challenges of sharing bulk data is to make the information entity-centric or, in other words, have an identifier that uniquely defines individuals or groups.

The links between drugs and acquisitive crime is well documented, however there is less certainty about patterns of money laundering.  It would be a reasonable hypothesis to suggest that high crime areas (particularly drug crime) would have a higher density of money laundering but there is little published research to support this.  Similarly, there must be physical locations that would attract money laundering, such as regulated points of access to the UK (airports, ports, rail terminals and, increasingly, Internet ‘locations’).

It is known that drugs and other illicit goods enter the UK through regulated points of access to the country and it is also known that hard currency also follows similar routes (albeit often in the opposite direction).   One of the biggest unregulated points of access to the UK is the international postal system.  Couriers and distribution companies are also used to transfer money.    These follow the principle of ‘little and often’ to reduce risk.

The growth in electronic communications has also transformed the way that money is laundered.   One traditional method was to buy and sell goods in auction.  Nowadays, it is almost certain that electronic auction sites, such as e-bay are used.  Internet gaming sites are now used to launder money and chat-rooms are often used by criminals to communicate.  

Criminals are acutely aware of surveillance techniques and routinely use counter measures, for example internet cafes. 

Overall, law enforcement agencies do not have the full capability and capacity to physically track money laundering networks. However, there is technology available that is under utilised. For example, there are ways that bank notes can be marked covertly to track notes from source through to entry into the financial system.  

Also, sensing devices are becoming available that can detect the presence of bulk transfers of money and financial instruments in packages to and from key countries (these can also detect the presence of drugs).

Techniques, such as social network analysis, can allow law enforcement agencies to plot networks of individuals to identify critical nodes.  They can also help establish both origin and destination points and increase the knowledge of the end-to-end supply chain.

A greater understanding of the mechanics, location and ultimately the networks involved in money laundering would assist in proactively targeting resources to investigate the root source of the activity.

Bringing it all together

The fight against crime is like an arms race – as criminals get more sophisticated, law enforcement agencies need to raise their game. We have set out a number of concepts about how law enforcement agencies within the UK and internationally could collaborate and work with third parties to use techniques to tackle money laundering and ultimately fight crime.  There is already some information available about what works well.

The area of biggest challenge is the ability to bring all that information together and review the full range of interventions in a consistent way. For example the National Policing Improvement Agency (NPIA) are working to professionalise financial investigation and to bring it into mainstream policing. However, one of their key challenges will be to break down some of the barriers that are perceived to exist between law enforcement agencies, financial regulators and the private sector, not least to deal with funding issues and sharing of information.

There is a case for increased investment in dedicating resources to improving anti-money laundering detection. Why?  The simple answer is the criminals themselves can help fund the programme.  Legislation is in place to recover the assets from criminals and this can now be ring-fenced into crime prevention and enforcement.   Fighting criminals where it hurts the most and at no cost to the public purse.

Adrian Gains is an experienced management consultant with PA Consulting Group. Over the past ten years he has worked closely with law enforcement agencies across the UK on a number of award-winning assignments. He has been heavily involved in the development of automatic number plate recognition (ANPR) and led PA’s work with the Association of Chief Police Officers (ACPO) and the Highways Agency to transfer non-core activities away form the police. He has an MCs and BSc in Operational Research and Statistics.

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