When criminals profit from illicit activities, they usually need to “clean” or disguise the proceeds of their crimes. Money laundering disconnects illegally acquired funds from sources that include theft, drug trafficking and terrorism. This makes it harder for law enforcement to connect the dots, arrest the perpetrators and seize their money.
Unfortunately, money launderers often use innocent small businesses to clean their dirty money. In some cases, businesses might be pressured to participate in money laundering. How can you keep your business safe from these criminal activities?
Money laundering generally involves three stages:
- Placement. Here, criminals introduce their illegally obtained funds into the economy, making them appear legitimate. Strategies could include separating large amounts into smaller ones and depositing them in multiple accounts, including offshore accounts.
- Layering. The purpose of layering is to create a complex web of transactions that makes it difficult for law enforcement to classify funds as criminally connected. Criminals might transfer funds into and out of accounts, invest in financial securities, buy and sell real estate or set up shell companies that exist only to hold criminal proceeds.
- Integration. This final stage is where criminals use or spend their now “clean” money — often on luxury goods and new business enterprises.
Such activities can occur with or without a legitimate business owner’s or insider’s involvement. However, it’s far easier to launder money if an accomplice is employed by the company and can facilitate transactions.
Frequent Business Targets
Any business can become involved in money laundering, but some companies are more susceptible to being used this way. For example, cash-intensive businesses such as bars and restaurants are particularly attractive to launderers because reconciling food and drink sales with inventory is typically complicated and, thus, simple to falsify.
Also, due to the size and frequency of their transactions, real estate businesses are often favored by money launderers. Similarly, the construction industry can easily be used to launder money due to the size of many contracts and the complexity of supply chains and billing practices.
Prevention and Detection
To help mitigate the risk of money laundering occurring in your business, closely monitor transactions. Money laundering schemes often start with small dollar transactions, then increase in size if perpetrators believe they’ve escaped detection. Scrutinize transactions randomly and based on their frequency and dollar amounts. If a transaction appears suspicious, ask the employees involved for an explanation and consider engaging the services of a forensic accountant.
It’s also critical to know your customers. Depending on the type of business, it may be possible for you to keep customer names, addresses, transactions and other details in a database. For significant transactions or contracts, engage a third party to conduct a detailed background check. In general, the more you know about your customers, the better.
Know your employees, too. Criminal gangs sometimes place infiltrators inside businesses to make it easier to conduct illicit transactions and falsify company records. Conduct background checks on all serious job candidates. If someone’s employment history or other resume item raises questions, dig deeper before hiring that person.
As for current employees, train them to look for money laundering. Give examples of scenarios that might occur in your line of business and provide a confidential reporting method (such as a hotline) for employees to use if they spot something suspicious.
Admit the Risk
The first step to preventing money laundering in your business is to admit it’s a threat. Then put controls in place to thwart it. If you suspect an actual scheme is underway, contact your attorney immediately. A fraud expert can also help you get to the bottom of any suspicions and gather evidence for potential legal proceedings.