Many businesses are now implementing Know Your Customer (KYC) and Anti-Money Laundering (AML) solutions that are triggered when large transactions are carried out. This is why fraudsters continue devising new ways, like cleaning their money in small amounts so that it doesn’t raise red flags. This kind of laundering is known as micro laundering or structuring in money laundering.
Micro laundering is a scheme that is now used by cybercriminals and even terrorists to fund their operations. It’s a way for them to move large amounts of cash on digital platforms without attracting the attention of compliance officers, government authorities or law enforcement agencies. Since moving large amounts can raise red flags, breaking it into small fragments or buying digital assets in several little numbers has become a method fraudsters are beginning to utilize. With several micro-transactions completed daily, large amounts of cash can be laundered and appear legal - all within a short timeframe.
Micro Laundering as a Money Laundering Technique
Generally, money laundering involves 3 stages - placement, layering, and integration. In the placement stage, illegally acquired funds are placed into the legal financial system through the purchase of goods and services or through small bank deposits (as in the case of micro laundering). In the layering stage, the source of funds is concealed by moving it around the financial ecosystem. The final stage where the fraudster is able to eventually spend the money without attracting law enforcement is known as integration.
Micro laundering or the structuring money laundering technique makes it difficult for businesses to identify fraud since smaller transactions rarely trigger AML checks. It can enable fraudulent activities to remain undetected for a long time. With little or no due diligence carried out due to the micro cash flows, criminals may stay ahead of regulators and compliance officers of the business or platform they launder through.
Businesses and financial institutions are therefore obligated to ensure that they do not provide convenient platforms for any fraudulent activity. As criminals continue to seek new opportunities to exploit the digital marketplace for cleaning their dirty money, it is important to ensure that your platform’s KYC is up to industry standards with transaction monitoring, document authentication and verification and AML compliance. Not only will this safeguard your platform and customer’s investments, but also saves your business from AML fines and penalties by regulators - when an avoidable fraud occurs.
Effect of Micro Laundering on Businesses
There are some businesses online that still offer the kind of anonymity that could allow a user to create multiple accounts using different identities without proper verification. These accounts could be used by one fraudster or the logins shared amongst different people to perform several micro-transactions. Hence the need for effective AML compliance solutions including ongoing monitoring, authentication and liveness checks to help mitigate micro laundering. However, the effect of micro laundering cannot be overemphasized and here are some of the businesses that take the brunt:
1. Money Transfer and Online Payment Services
On money transfer platforms, micro launderers often create multiple accounts and move small amounts between them to avoid detection. They need these money transmitter sites to conveniently make their dirty cash appear legitimate after it has eventually accumulated in one account. Therefore, service providers must ensure they carry out authentication and monitoring to make their platform unconducive for fraudsters or suffer sanctions from regulatory agencies.
Online payment and money transfer platforms without adequate suspicious activity reporting procedures and KYC remain targets for micro launderers, as one entity can open and control many accounts and not be verified or checked. Once legitimate customers realize the vulnerabilities of your platform, they lose trust in your business.
The increase in popularity of digital currencies has led to its implementation as a financial exchange medium. Decentralization, speed, security, and transparency are the driving factors attributed to its rising market demand and growth. Micro launderers realize this and have diversified their operations beyond simply transferring cash through bank accounts. One example involves BestMixer, which was eventually taken down by Europol, due to a global digital assets fraud. This highlights the use of digital asset mixing services to obscure the original source of cryptocurrency funds. Evidence remains that the anonymity these mixers offer made it appealing to criminals who want to hide their activities.
Another instance is the EmpiresX cryptocurrency fraud incident where investors were scammed and the funds laundered through a foreign-based exchange. It involved three individuals who came up with a Ponzi-style scheme by pooling money from several investors in small amounts, promising them attractive returns. These micro transactions mean detection would be difficult unless there is an effective measure to prevent AML violations on the platform.
3. Online Gaming
Developers improve gaming experience by introducing in-game coins which players buy with real money. This virtual cash allows a player to purchase character accessories to improve performance and level up. Gaming platforms with a massive player base means large volumes of micro transactions are conducted daily. Some players buy this in-game coins and resell them on external customer-to-customer (C2C) sites at a lower price. Money launderers often take advantage of this avenue to buy and sell the in-game coins in small transactions, hiding the actual source of their lump of cash.
Since online gaming platforms allow players to enjoy anonymous identities, several accounts can be created and that makes tracking becomes difficult. For instance, there have been scenarios where sellers of discounted V-Bucks which are usable in other games, have made Fortnite seem like the ideal platform to launder money due to its lack of a strong KYC process. Platforms with little or no identity verification solution can be a fertile ground for micro laundering to grow.
How to Detect and Prevent Micro Laundering
Unusual activity like multiple transactions from different accounts using the same IP address could suggest that something illegal is going on. Also, when there is a single type of activity originating from an account over a long period, it could be a crucial sign. Continuous monitoring of these activities and transactions could save your business the risk and penalties that arise as a result of micro laundering.
For gaming platforms in particular, small transactions might at first glance seem completely normal. Most of their revenue comes from the sale of additional gear, character enhancements, and other modification accessories to enhance gaming experience. In this case, compliance officers could look out for daily top ups reoccurring continuously. It could be because of impulse or the need to quickly level up in the game; all behavior that is considered normal. But the fact that some actors acquire these in-game coins to resell raises micro laundering concerns. This is where the ongoing monitoring and (re)authentication can help.
Collaborating with compliance agencies and regulators will help businesses have the right tools to monitor micro laundering activities on their platforms for micro laundering. Up-to-date customer records and sophisticated KYC and AML solutions can guarantee that with multiple micro transactions, nothing goes unnoticed. Detecting unusual customer behavior and reporting suspicious activities by the compliance officer will go a long way in mitigating the risks from structuring money laundering.
As fraudsters come up with different money laundering techniques, implementing the AML compliance programs should be a priority for businesses. Getting the ideal solution might be challenging in this era of digital transformation and sophistication. However, with the complexity of the digital landscape, outsourcing to AML solution providers like Passbase could keep a business several steps ahead in avoiding risks associated with micro laundering. The knowledge that a platform is secure without exploitable loopholes for fraud and micro laundering can drive business growth and improve consumer trust.
Passbase provides a convenient way for businesses to perform KYC and AML checks through identity verification. You can integrate Passbase into your platform via the Passbase API or with SDKs for iOS, Android, and web. To see how identity verification can work for your business today, try Passbase today or book a demo here.