Loan Back Method of Money Laundering Definition
Money laundering refers to the process by which individuals disguise the original ownership and control of proceeds through making such proceeds appear to be legitimately owned/acquired. Money laundering involves concealing the act of transforming profits earned from corruption and illegal activities into “legitimate” assets. The transfer of the concealed property, concealing the nature of the proceeds, the possession of property, or acquisition of the proceedings amidst knowing that the proceedings have been acquired through criminal activity is referred to as money laundering. Lone back method of money laundering involves “cleaning” of money obtained from criminal activities such as insider trading, extortion, illegal gambling, and drug trafficking to appear to have been derived from legal activities in order for financial institutions to deal with it without any suspicion. Money can be laundered using various methods which vary in terms of sophistication and complexity. Loans and mortgages are usually taken as a cover to launder money proceedings, and lump sum cash repayments are used to repay the loans or mortgages.
A Little More on What is Loan Back Method of Money Laundering
The process of money laundering involves three stages: placement, layering, and integration.
This is the first stage of money laundering where the source of cash is easily misrepresented or disguised. It involves the movement of cash from the source followed by placing it into circulation locally or abroad through casinos, financial institutions, shops, bureaus and other businesses. The process entails:
- Currency smuggling
- Bank complicity
- Currency exchanges
- Securities brokers
- Blending of funds
- Purchase of assets
On the second stage, money launderers make it more difficult to uncover or detect the laundering activity. This is meant to make it difficult for enforcement agencies to uncover or trail the illegal proceeds. The methods of layering include:
- Cash is converted into monetary instruments
- Material assets that have been bought with the laundered cash is the sold
The third stage of money laundering, integration, involves the movement of previously laundered money into the economy through the banking system. This makes the illegitimate money to appear in the normal business earnings. The methods involves in this stage include:
- Property dealing
- Front companies and false loans
- Foreign bank complicity
- False import or export invoices
Historically, money laundering methods have included smurfing, often spread out across different accounts to avoid detection, or the use of wire transfers, currency exchanges, cash smugglers, or “mules”, to move money across borders. Other methods of laundering including:
- Investing in movable commodities like gold and gems
- Investing in selling valuable assets such as real estate discretely
- Creating shell companies
Although these methods are still currently being used, any money laundering approach always includes modern methods like the internet which helps to create a new spin on the old crime. With internet, money launderers are able to avoid detection. With the rise of online bank institutions, online payment services from unknown sources, peer-to-peer transfers using mobile phones, and virtual currencies like Botcoin, detecting money laundry or illegal cash transfer has become more challenging.
Most often, the money launderer establishes an apparent legal origin of money through fabrication of transactions like agreements, bookkeeping, and invoices, deeds, reports, and spoken/written statements. The common methods used to justify money laundering is “fabricating a loan,” also referred to as back-to-back or loan-back.
The most popular loan-back form of laundering money is when criminals borrow their own criminal money. This is usually done through the creation of a loan agreement between the criminal and a third party. Most used third parties are offshore corporations who are controlled by the criminals. Although back-to-back loans are the common ways that money can be washed, banks like Griffon Bank advertise them openly.
Back-to-back loan refers to a loan that is arm’s-length i.e. the cash may originate from Amsterdam, but is fully collateralized by a previously deposited cash in, say, a Curacao bank. Due to the strict compartmentalization, it is difficult to observe that the Amsterdam borrow is the same lender in Curacao.
References for Loan Back Method of Money Laundering
Academic Research on Loan Back Method of Money Laundering
- Financial havens, banking secrecy and money–laundering, Blum, J. A., Levi, M., Naylor, R. T., & Williams, P. (1999). This article highlights the concepts of financial havens, banking secrecy, and money laundering. In particular, it focuses on understanding the role of money-laundering on the economic development of a country and the potential impacts in the banking sector.
- Money laundering policy, Van Duyne, P. C. (2003). Fears and facts i van Duyne, PC, 67-104.
- This article discusses the facts and fears of money laundering policy. The author describes different components of money laundering crime which include: the conversion of property knowing that the property is proceeds, for the purpose of disguising the illicit source of the property; the disguise of the true source, nature, disposition, or location of an ownership of a property amidst being aware of the fact that the property is a proceed; acquiring or possessing a property amidst knowing that it was a proceed at the time of receipt; and participating in an attempt to commit of facilitate the commission of any offence that is in accordance with 1990 Council of Europe Convention on Laundering article. The author further describes the concept of a “canned” laundering process wit has been witnessed in the EU.
- Money laundering: some facts, Schneider, F., & Windischbauer, U. (2008). European Journal of Law and Economics, 26(3), 387-404. This article addresses the topic of money laundering, describing the common methods adopted by criminals to launder money. The three stages (processes) of money laundering have also been discussed including placement, layering, and integration. The author question and estimates the volume and development of activities associated with money laundering. The author also investigates the national and international measurements that are used to fight the crime of money laundering and the effects on macroeconomics. Based on the author’s findings, the turnover in organized crime has had a value of $800 billion in 2001 and increased in 2007 to $1.7 billion. The author considers these figures very preliminary with a large error although they clearly indicate the significance of money laundering and the turnover of organized crime in the modern society.
- The impact of Switzerland’s money laundering law on capital flows through abnormal pricing in international trade, De Boyrie, M. E., Pak*, S. J., & Zdanowicz, J. S. (2005). Applied Financial Economics, 15(4), 217-230. This paper assesses the possible impact of money laundering law on the capital flows through abnormal pricing in the international market using a case study of Switzerland. The specific objective of the paper is to investigate the impact of money laundering law in Switzerland on the movement of money through false invoicing in the international trade. The paper values very import and export transaction reported between the US and Switzerland from 1995 to 2000. Based on the findings, the authors reveal that significant changes in the degree of abnormal international trade pricing were significant subsequent to the enactment of the anti-money laundering law. The study also supports the fact that companies and individuals find substitute techniques to launder money once authorities enact legislation.
- Money laundering techniques with electronic payment systems, Krzysztof, W. O. D. A. (2006). International&Security. An International Journal, 27-47. This journal provides an overview of money laundering techniques used by electronic payment systems. According to the author, during a terrorist act, the financial aspect i.e. transfers, collection, and withdrawal of money from the payer to the payee, plays a key role in the preparation of the terrorist actions. Also, money laundering techniques are usually used to disguise and conceal the origin, source, nature, disposition, and location of asset financing the terrorism acts. Several typologies and activities used for money laundering or financing of terrorists have been identified by the Financial Action Task Force (FATF). According to FATF, most of these activities are always carried out by means of electronic payment systems which transfer monetary values over networks of telecommunication. The paper also assumes that payment systems differ with regard to their suitability for single money laundering phase.
- Money‐Laundering: Pavlov’s Dog and Beyond, Van Duyne, P. C. (1998). The Howard Journal of Criminal Justice, 37(4), 359-374. This paper investigates the money-laundering phenomenon as a form of criminal money-management. The authors elaborate on some of the common pitfalls of the official approach set out by the Financial Action Task Force (FATF) and lost opportunities regarding the understanding of the cross-border money-flows witnessed in northwest Europe. The relationship between crime-money and the upper world are described while magnitude of the financial institution is questioned. In addition, examples of criminal funds and how these are used positively have been asked. The last section of the paper describes the role of a financial investor in assessing money laundering.
- Money laundering: emerging threats and trends, Simser, J. (2012). Journal of Money Laundering Control, 16(1), 41-54. The purpose of this paper is to explore typologies as well as emerging trends and threats in money laundering. The authors discuss the recent trends and emerging threats in money laundering in terms of both techniques/typologies and predicate activities such as fraud and drugs. The findings reveal that the challenges and risks that money laundering poses to financial institutions and macroeconomics persist.
- Money laundering and financial means of organised crime: some preliminary empirical findings, Schneider, F. (2008). Global Business and Economics Review, 10(3), 309-330. This article highlights the preliminary empirical findings regarding money laundering and financial means of organized crime. Schneider (2008) attempts to quantify the volume of money laundering activities through the MIMIC estimations procedure between 1995 and 2006 for 20 OECD countries considered to be highly developed. According to the author, the volume of money laundered in 1995 was $273 billion for the 20 countries and increased to $603 billion in 2006. The turnover of organized crime was valued at $595 billion in 2001 and $790 billion in 2006. These figures indicate how money laundering can greatly impact macroeconomics and the rising turnover of organized crime.
- Money laundering and asset cloaking techniques, Simser, J. (2008). Journal of Money Laundering Control, 11(1), 15-24. The purpose of this paper is to explore the various typologies and methods used to cloak assets following the placement stage of money laundering. Simser (2008) adopts techniques that hide assets and cloak ownership to investigate the study including simple nominee arrangements via complex financial transactions. The findings reveal that there are several methods for money launderers to cloak their property and laundered assets.
- The amounts and the effects of money laundering, Unger, B., Siegel, M., Ferwerda, J., de Kruijf, W., Busuioic, M., Wokke, K., & Rawlings, G. (2006). Report for the Ministry of Finance, 9-21. This article covers several concepts and ideologies of money laundering. In the introduction section, the author explores how money laundering has grown over the years and how the concept is underrated. In addition, a longer impact of money laundering as well as the acute danger it poses in the Netherlands has been discussed. The author then defines the term ‘money laundering’ where the subject, activity, goal, and problematic legal aspects of money laundering definition are explored. The author further uses the ‘Walker Model’ to estimate the amount of money that is laundered in every country. The comments about money laundering by every country are explored.
- An analysis of money laundering and terrorism financing typologies, Samantha Maitland Irwin, A., Raymond Choo, K. K., & Liu, L. (2011). Journal of Money Laundering Control, 15(1), 85-111. This paper measures the size of problems associated with money laundering and terrorism financing. In particular, the threats and trends of money laundering are identified including the techniques employed as well as the amount of funds used to determine whether information obtained in real world about money laundering can be transferred to virtual environments like World of Warcraft and Second Like.
- Money laundering: some preliminary empirical findings, Schneider, F., & Windischbauer, U. (2007). Tackling Money Laundering, Utrecht, 2. This paper provides an overview of money laundering implications based on empirical findings. It quantifies the turnover of organized crime through the use of MIMIC model. The estimations used include 20 countries in the OECD, and data used are dated between 1995 and 2006. According to the authors, the volume of money laundered in 1995 was $273 billion for the 20 countries and increased to $603 billion in 2006. The turnover of organized crime was valued at $595 billion in 2001 and $790 billion in 2006. These figures indicate how money laundering can greatly impact macroeconomics and the rising turnover of organized crime.