Flashy felons: how to identify money laundering in unusual wealth types

Unusual wealth types are favoured by criminals and the wealthy alike. So how’s a compliance officer best to separate the legal from illegal? 

Both groups favour anonymity and the assets are difficult to value, trace, and verify. In this blog, we explore some of the most unusual forms of wealth and the AML challenges they present.

Artwork

Despite its high brow reputation, the art world is renowned for dirty deals and secret buyers. As the New York Times expertly explained in a 2021 article,  “Billions of dollars of art changes hands every year with little or no public scrutiny. Buyers typically have no idea where the work they are purchasing is coming from. Sellers are similarly in the dark about where a work is going. And none of the purchasing requires the filing of paperwork that would allow regulators to easily track art sales or profits, a distinct difference from the way the government can review the transfer of other substantial assets, like stocks or real estate."

In 2020, a report by the US Senate found “the art industry’s secretive nature allowed art intermediaries to purchase more than $18 million in high-value art in the United States through shell companies linked to Russian oligarchs after they were sanctioned.” New EU and UK laundering regulations were introduced in part as a response to the report.

In 2015 police raided a drug dealer’s house and found marijuana $2.5 million in cash and art including pieces from Renoir, Picasso and Salvador Dalí — 47 pieces in all.

Why carry cash or risk being exposed by using traditional laundering methods when the art world is so opaque and relatively unregulated?

What to watch for

Shell companies, multi-jurisdictional complex entities, tax havens and PEP / sanction dodgers are all typical AML challenges compliance experts face in the art world.

To address these challenges requires a robust process and exceptional execution. As well as a standard compliance approach including identity verification, transaction monitoring and training, the biggest defence is your risk-based approach. Deloitte has a thorough assessment framework helpful for art sellers and buyers. Consider the following:

• The type of buyer/seller (e.g. an individual collector, a specialised company, another art professional, an offshore trust, etc.)
• The way art professionals enter into contact with the buyer/seller (e.g., face-to-face, at an art fair, through a web platform or an intermediary, etc.)
• The type of artwork and transactions at stake (e.g., are the goods consistent with the profile of the buyer/seller, is the origin of the artwork well-known and documented, is the initiated transaction a sale, a loan, or a donation, etc.)
• The countries involved (e.g. is the buyer/seller domiciled in a country with equivalent AML and counter terrorist financing [CTF] regulations, is the artwork from a country that is subject to trade sanctions.

Cryptocurrency

Crypto, like everything else on the internet, favours anonymity. This is a problem for compliance officers trying to verify a source of wealth, or even a simple identity. 

While the transactions themselves are traceable (that’s the point of blockchain) the individuals behind them are not. 

According to Chainalysis, a blockchain data analysis platform, “Illicit transaction volume rose for the second consecutive year, hitting an all-time high of $20.1 billion. 44% of 2022’s illicit transaction volume came from activity associated with sanctioned entities.”

And just this year, our own research across 600 compliance experts globally showed that nearly 70% of individuals working in compliance are worried about the growing threat of money laundering via cryptocurrencies in business. And 41% of the 600 respondents had recently detected cryptocurrency-related money laundering schemes.

Enabling these statistics is the fact that crypto can be stored in mixed wallets e.g. Coinjoin with transactions hidden via anonymous browsers such as Tor so not only can the illegally gained funds be mixed and hidden with legitimate sources (placement) it can also be layered via online entities. It’s a simple step to move from there to integration and then onto illegal activities.

What to watch for

So what’s a compliance officer to do about clients using crypto for activities that are highly complex, lighting fast and cross multiple borders? As with art, much of it comes down to robust process and exceptional execution supported by a solid risk-based approach.

The second and more difficult aspect is to become a crypto ecosystem expert or partner with an AML provider who is. 

Take Bitcoin as an example. As a compliance officer, if you’re looking at someone who made wealth from mining Bitcoin, you don't just want the statement from the Bitcoin provided that they sold it to. You might want to ask for electricity or server bills as proof that they actually mined those coins. Or perhaps they used alternative servers so you’d want to ask for proof of them.

Depending on where the client cashed out their Bitcoin, you’d also want local bank statements or even just the portfolio statement.

But that’s not enough in this brave new world. You also need the knowledge that the exchange they used is reputable. There are hundreds of exchanges globally and even some of the most famous ones  (e.g. Binance) have actually been stung for poor AML practices. 

Luxury goods

From London to Sydney, luxury goods such as jewellery, watches, and exotic cars are favoured by money launderers. 

As with art, criminals favour the opaque, easily transported, single transaction and value-ambiguous world of luxury goods. Brand recognition, rarity, and provenance allow placement via inflated prices and the item itself supports easy layering. 

What to watch for

As with all the other unusual wealth types outlined in this article, compliance officers are best to watch out for a-typical behaviour such as:

• High-value purchases made with cash or wire transfers.
• Unusual purchase patterns, such as the client buying expensive items in quick succession.
• Inconsistencies between your client’s stated occupation or income and their purchasing behaviour.
• Purchases made by third parties on behalf of a client who wishes to remain anonymous.
• The use of shell companies or other complex ownership structures to purchase the luxury items.

Precious metals and gems

Precious metals and gems are also a common vehicle for money launderers due to their favourable value-to-mass ratio, price fluctuations and the relative laxness of global regulations for this industry.

On the buying side, compliance officers are on solid ground by following a well-defined AML process that ensures robust verifications and proactive behavioural red flag spotting (as noted in the Luxury Goods section). Where things get interesting is on the supplier side. 

What to watch for

The Singapore Police Force have excellent guidelines for red flags to look out for when dealing with precious metals and gems on the supplier side. In summary they are:   

Transactions

• Over or under-invoicing, structured, complex, or multiple invoice requests, and high-dollar shipments that are over or underinsured; or 
• Excessive transactions given the amount or quality, or potential profit from the sale; or 
• The shipment (consignment size or type) does not make economic sense for the receiver. 
• Use of third parties in transactions without legitimate business purpose. For example funds paid or delivery from. 

Behaviour

• Unable / unwillingness to provide information for KYC/KYB purposes. 
• Suspected forged, fraudulent or false ID documents for KYC/KYB purposes.
• Unusual interest in you AML/CFT policies
• The origin of the precious item/s appears to be fictitious. 
• Excessive secrecy regarding the transaction, for example – 
  • Requesting normal business records are not kept; or
  • Unwillingness to identify beneficial owners or controlling interests, where this would be commercially expected; or 
  • Request for payments to be made through money services businesses or other non-bank financial institutions for no apparent legitimate business purposes. 
• For diamonds - if rough diamonds are not accompanied by a valid Kimberley Process (KP) certificate. For example, not attached to the shipment or the KP certificate is or appears to be forged; or if the KP certificate has a long validity period. 
• The precious stones or metals have been transported through a country that is associated with money laundering or terrorism activities for no apparent economic reason. 

Unusual wealth types are unusually difficult

Unusual wealth types present unique challenges for AML efforts due to their complexity, opacity, and susceptibility to fluctuations in value. 

To combat this, AML practitioners do best to strictly follow AML best practices, hone in on unusual behaviours and deeply understand the ecosystems in which they exist.