There are a variety of routines that are used to launder money; after going through the research repository of the CLRF you might be quite familiar with several presently (i.e. utilizing the DMT network for such purposes). Nevertheless, an end user must also be aware of the monies transactional workflow, physical institution transfers, and methodologies that are inherent to a launderer and his operation.
Clearly, there are several conduits that are much more appealing to the launderer outside of the US for an assortment of reasons. Foreign banks often time have three parent appeals, and several smaller children aspects inherently beneficial.
1) Poor Banking Management – This is a clear appeal to a launder, being able to “buy” employees to be involved in legal transactions through a legit bank is often more feasible then setting up their own shell banking company.
2) AML regulations – AML regulations are often complex and require input from verified, educated sources. This is noticeably not a common occurrence in some countries due to financial constraints, or a clear inconsideration.
3) Shell Banks – If a launderer can’t get in contact with a corrupt employee for filtration and cloaking, it is often times easier to set up their own personal shell bank for laundering purposes (or find an operation to provide the same variety of service)
Once the money is established in the foreign bank, the options for legit money transformation become a much more feasible operation, including, however not limited to flowing the monies back into the US financial system, which is often times the end goal as most laundered money is pushed through the normal three-tiered process.
Major banks throughout the US have endowed relationships with several foreign banks; clearly this is just good business practice of establishing a sound financial network. As discussed before, some of these banks can be inherently shell banks, meaning they are virtual banks, which are becoming increasingly more popular with the digital transfer age.
But what are the three most common “types” of these banks? According to a report by the Minority Staff of the U.S. Senate they are:
1) Shell banks with no physical presence in any country for conducting business with their clients
2) Offshore banks with license limited to transacting business with person outside the licensing jurisdiction
3) Bank licensed and regulated by jurisdictions with weak AML controls that invite banking abuses and criminal misconduct.
This may be true, but in the same respect these bank play a vital role in our economy, and as well for the general financial structure of the world wide economic model. Macroeconomic theory of banking practices heavily depends on variables inclusive to these types of institutions, and in fact, these banks are a crutch of US business practice.
The structure of a typical shell bank is meager at best. As stated before, these presences of these types of banks are rather elusive and weak, with small employee counts, and limited actual banking knowledge.
Correspondent banking offers the launder the most crucial portion of any laundering project, transformation and movement. Through the use of correspondent accounts, the launderer can transact through multiple instances, increasing trail length, and decreasing the logical path that normal monies go through. In the end, the transformation process will end with the launderer’s end goal of “legitimate” US funds after a deep filtration process through correspondent accounts.
It is very, very rare for any banking institution to not have an endowed relationship among several correspondent banking accounts clients, most likely your neighborhood bank in fact has ties to one. You might also be surprised that these banks in turn can also be virtual, the shell accounts that were discussed previously in this documentation.
The relationship between the two banks is also fluent, meaning most US banks that have established correspondent accounts, in turn, also offer US accounts to their correspondent banks. The implications of this type of relationship are quite clear, and can be interpreted by the end user.
The legality behind correspondent banking accounts has always been a gray area in US history, neither provoking much attention, but not staying out of jurisdictional hindsight. The process for a US bank (generally) follows this pattern:
Bank X = US Bank
Bank Y = Foreign Bank (Target)
1) Bank X as a legit US bank, acquires a license from the Bank Y.
2) Bank Y opens the correspondent account for Bank X
3) Bank X believes that because of this license, Bank Y is in legitimate standing, as the bank has been approved and accredited by the foreign national
4) Bank X believes that for this reason, screening is not necessary
5) Bank Y is content with this relationship, they are a corrupt shell bank set up primarily for the filtration of illicit funds
6) Bank X negates the use of implementation of AML industry standards, AML AI software regulation intelligence programs, and other methods of screening the foreign bank
This relationship is inherently cyclic; it only grows as the trust between the two banks becomes increasingly robust. As a side note, it is important to realize in this portion of the article the mentality of banks, what their end goals are. Banks are just like every other business organization, legitimate or not, they desire to acquire more funds. For this reason, one has to questions whether AML standards are implemented not because of ignorance, but because of desired business results. Often times this is lost on the general population who believe that banks are just there as a “safe” that is not located in their residence.
However, we must explore the other end of this argument for a complete realization of the impact of correspondent laundering (which from here on, and in other articles, will be referred to as CML). Although difficult to accept and take as true, it has been proven that several established US banks had little or no understanding of their relationships that were set up with correspondent banking accounts. Beyond this, several US banking institution had, and still have no idea what a correspondent account even is. It is daunting often times when you take this into consideration. A US banking account doesn’t know the methodology of CML, however they in accordance with US law should adhere to some very strict AML regulations, in some ways, we can see how this system is quite faulty!
In conclusion, correspondent banking is a pivotal action for launderers and for the filtration and transformation of dirty monies. It is one of the crutches that is still dependent upon because of legal gradient, and poor regulation. In the next article in this series, I will briefly examine why these loopholes exist.