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Why financial crimes are more difficult to track down: from a briefcase of cash to virtual wallets


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    From briefcase of cash to virtual wallets: Why financial crimes are harder to trace

    Source: Straits Times
    Article Date: 24 Oct 2023
    Author: Angela Tan

    Unlike cash, digital currencies like cryptocurrencies offer one of the easiest methods to move money out of a country.

    Not too long ago, criminals carried their ill-gotten cash in briefcases to dodge banking scrutiny and the police.

    With technological advancements, many have turned to the virtual world and digital currencies, making it harder for the authorities to trace the more than US$800 billion (S$1.1 trillion) estimated to be laundered globally every year. 

    Mr Chenthil Kumarasingam, a partner at Withers KhattarWong’s dispute resolution practice, told The Straits Times that criminals employ various methods to circumvent most countries’ capital controls by using sophisticated tactics to disguise the true nature and origin of the funds.

    “These methods are designed to misrepresent or disguise the actual amounts of money being moved, making it difficult for the authorities to detect or trace these illicit transfers,” said Mr Kumarasingam. 

    The creativity and complexity of these schemes often rely on a deep understanding of financial, legal and regulatory systems, both within and outside the country, he added.

    Unlike cash, digital currencies like cryptocurrencies offer one of the easiest methods to move money out of a country, even from places like China, which has one of the world’s strictest capital controls, and Russia, which has been sanctioned by the West for its attack on Ukraine.

    There are many cryptocurrencies. Many are not regulated and not traceable, effectively allowing anyone to move funds around without much scrutiny, experts said.

    Criminals take advantage of unregulated cryptocurrency exchanges that do not require proof of identification or registration information to move funds, said CipherTrace, a crypto intelligence company.

    With the explosion of crypto values in 2021, and the creation of overnight millionaires, these virtual coins became a credible and acceptable form of new wealth. 

    A retired Singapore banker recalled how he once overheard a bank officer dutifully asking a customer about his source of funds. When informed that the money was profit from trading in cryptocurrencies, the bank officer congratulated the customer and proceeded to ask him to teach her how to get rich from crypto too.

    However, using cryptocurrency has its limitations, as it is not a scalable operation, experts said.

    It is very hard to shift huge amounts “because you would have to do so in many transactions in order to hide the sources, and it’s too time-consuming”, said a financial crime compliance consultant.

    Cryptocurrencies, worth millions, were found in Singapore’s $2.8 billion money laundering case which is still unravelling.

    Students as money mules

    Experts said illicit funds are transferred out of a country either through an individual or a business. 

    An individual, especially a young person who is allowed entry into a foreign land to study on a student pass, tends to attract less scrutiny.

    Earlier in October, British bank Barclays issued an urgent warning about a surge in student money mules, who knowingly or unwittingly let criminals use their bank accounts to move money. 

    Barclays said two in five money mules in Britain are under the age of 25, and one in five is under 21.

    Mr Ross Martin, head of digital safety at Barclays, said criminals target young people using social media to advertise get-rich-quick schemes, job applications which require payments through their personal bank accounts, online dating, investments, cheap loans and refunds. 

    Non-fungible token (NFT), a form of digital asset that is used to certify ownership and authenticity of a digital file such as an image, video or text, is another conduit that has gained traction in recent years. 

    The total value of all NFT transactions worldwide stood at a staggering US$17 billion at its peak in 2021, according to NFT data company Nonfungible.com. But most NFTs are now worthless, and struggling to find buyers.

    This is because NFTs are only as valuable if someone else is willing to pay for it, making them susceptible to criminal manipulation, experts said.

    Criminals use illegal funds to buy NFTs and proceed to transact among themselves to create a record on the network. They can also create their own NFT project and sell them to unwitting individuals. 

    Many NFT platforms – including OpenSea, the largest NFT marketplace – do not require customer information for its customers, providing an invisible cloak for criminals. 

    Fake trade deals

    Like NFTs, art has also been used to move money around.

    “These are things that are worth something only if you or someone says so,” a financial crime compliance expert said. 

    Criminals also employ trade-based money laundering methods, under the guise of legitimate trade deals, to move money out of a country. They may over-invoice or under-invoice the value of goods and services in trade transactions.

    Mr Kumarasingam said: “For example, a Chinese company might export goods worth $1 million but invoice the foreign buyer $2 million. The foreign buyer who is in on the scheme then pays the inflated amount, and the excess $1 million is moved out of China illicitly.”

    In the past, gold and diamonds were extremely attractive vehicles for money laundering. But these days, criminals are using rare metals, given that their values are hard to ascertain. 

    Money is also moved outside the formal banking system using informal value transfer systems such as remittance companies or unlicensed money brokers to hide cross-border payments. 

    This transfer method involves depositing money in one location and withdrawing the equivalent value in another. 

    “Funds are transferred without any money actually crossing borders, relying on trust within tightly knit communities,” said Mr Kumarasingam.

    Criminals often set up companies in jurisdictions with strict secrecy laws. For instance, an individual in China might “loan” money to his own shell company outside of China. 

    “This is not seen as a capital transfer but as a business transaction. The funds are then withdrawn or used abroad without breaching the capital controls,” said Mr Kumarasingam.

    Some leverage legal structures to avoid scrutiny. 

    Financial crime experts said it is “almost impossible” to unravel criminal connections after more than five years. 

    This is in spite of the fact that the Inland Revenue Authority of Singapore mandates that companies must keep proper records and accounts of all business transactions and retain them for at least five years.

    Banks are required to present up to seven years of record, if there is a legal case that requires documents to be shown as evidence.

    One financial crime compliance expert said: “Criminals typically do not use the same financial institution for too long. They maintain relationships with several banks in order to minimise the banking trail.

    “This confuses and complicates investigations.”

    He said financial crimes like money laundering will continue to test financial systems globally. 

    “It’s just the nature of the beast.

    “You will never catch everything because if you do, that means you create so much pain and paperwork, even for the good customers that they may not want to come to Singapore and bank here,” he added.

    Source: Straits Times © SPH Media Limited. Permission required for reproduction.

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