Money Laundering Risks in Cash-Intensive Businesses

Cash-intensive businesses are those businesses which heavily rely on cash-based revenue. These cash-intensive businesses are highly prone to being exploited by money launderers due to their nature of relying on cash instead of banking channels. This blog discusses the money laundering risks in cash-intensive businesses and the inter-relationship between the two.

What Is a Cash-Intensive Business?

Cash-intensive businesses are those businesses that experience a heavy inflow of cash. Cash-intensive businesses are spread across sectors, where customers generally pay for goods, services, or products with cash.

What Is Money Laundering?

Money laundering is a criminal offence that involves disguising or concealing the illegal source of income to give it an appearance of having earned or gained such income or funds through legitimate sources of income or profits. Money laundering takes place in three stages:

• Placement: At this stage, illegally acquired funds are introduced for the first time in the financial system.
• Layering: At this stage, a series of fake or bogus transactions are layered to conceal the actual illegal origin of funds.
• Integration: At this stage, layered funds are introduced or integrated into the economy, appearing to be legitimately earned.

Inter-Relationship between Cash-Intensive Businesses and Money Laundering

Cash-intensive businesses and money laundering are closely inter-linked because cash-intensive businesses are preferred among money launderers as it enables them to commingle, blend, layer, and integrate illegally acquired funds with cash actually earned or generated by the cash-intensive business.

A cash-intensive business provides a perfect front for money launderers to carry out the placement, layering, and integration behind the facade of a seemingly legitimate business.

Examples of Cash-Intensive Businesses

Examples of cash-intensive businesses are many, ranging from restaurants, laundromats, candy shops, casinos, pawnbrokers, retail stores, and vending machines, to name a few.

Why Are Cash-Intensive Businesses Vulnerable to Money Laundering?

Cash-intensive businesses are vulnerable to money laundering due to the following reasons:

1. High-Volume of Cash Transactions

Cash-intensive businesses usually deal with high-volume cash transactions, which attracts money launderers to misuse cash-intensive businesses to layer and launder their illicit proceeds as it is easy to commingle or merge illicit proceeds with actual profits earned by the cash-intensive businesses and make illicit proceeds look as if they were earned legitimately.

2. Poor Enforcement of Money Laundering and Terrorism Financing (ML/TF) Controls

Except for well-regulated countries imposing restrictions and Anti-Money Laundering (AML) compliance obligations on regulated entities or businesses that ensure implementation of ML/TF controls, most of the cash-intensive businesses across the world largely remain unregulated or are beyond the scope of regulatory controls. Even when certain cash-intensive sectors such as casinos, the hospitality industry, and the art and luxury goods industry do fulfil AML obligations, they often fail to enforce ML/TF controls in an effective manner, enabling launderers to misuse cash-intensive businesses to further their motives.

3. Concealment of Revenue

When it comes to cash-intensive businesses, it is very easy for launderers to conceal actual revenue by maintaining two or multiple books of accounts as cash transactions do not leave a transaction trail like bank transfers, wire transfers, and online payments, making cash-intensive businesses a sought after mode for conducting money laundering activities by concealment of actual revenue made through the business and illicit funds laundered through the business.

4. Financial Records Manipulation

Many cash-intensive businesses such as food stalls, laundromats, and small retail outlets usually don’t maintain proper financial records and often maintain records that are cooked up or manipulated and carefully crafted by deviant accountants, enabling tax evasion and money laundering. The very fact that it is easily possible to manipulate and craft fictitious books of accounts makes cash-intensive businesses vulnerable to money laundering.

Money Laundering Methods in Cash-Intensive Businesses

Money launderers achieve their motives through cash-intensive businesses by indulging in the following methods:

• Structuring: Money launderers conduct structuring to avoid triggering currency reporting thresholds set by dividing large sums of money into smaller chunks and making two or more deposits or withdrawals, which total the original large amount. Cash-intensive businesses facilitate this process, as detecting structuring attempts by a cash-intensive business is hard.
• Smurfing: When relying on smurfing in cash-intensive business, money launderers depend on involving multiple people and transactions for making small purchases to evade reporting thresholds. The individuals engaged in making small deposits or purchases are called ‘smurfs’.
• Cash Smuggling: Cash smuggling is facilitated by a cash-intensive business as large amounts of cash are being transported in the guise of the profits earned and keeping illicit proceeds away from regulatory scrutiny. As the word suggests, smuggling of cash is done by hiding or conveying cash by stealth.
• Inflated Sales and Invoices: Cash-intensive businesses facilitate launderers to funnel illicit proceeds through the business by inflating or over-invoicing actual sales that include illegal funds. This makes the financial records and books of accounts look as if the illicit fund is revenue earned, making it very difficult to trace back the illicit origin of funds.
• Commingling Legitimate and Illicit Proceeds: Cash-intensive businesses also launder money through commingling, meaning blending or mixing legitimate profits or revenue with illicit proceeds.
• Shell Companies: Many cash-intensive businesses merely exist as ‘shells’, where no real business, such as the exchange of goods or services for cash, takes place; the company exists in name only. Shell companies exist on paper only or may even have registered head offices, which, in reality, would be lying shut and vacant. Such shell companies provide a legitimate excuse to have books of account and financial records, which are entirely fictional, indicating sales and revenue, where in reality, no goods or services have been given or revenue generated.
• Ghost Employees: This is a type of payroll fraud in which the cash-intensive business does not hire employees but has them on its payroll, known as ghost employees. Such ghost employees exist on paper only. Wages or salaries are given to such ghosts, whereas in reality, the expense of salary or wages is collected or utilised by launderers.

AML Compliance Measures for Cash-Intensive businesses

Cash-intensive businesses need to have in place AML compliance measures to protect their business from being victimised by money launderers. Though AML compliance measures vary from jurisdiction to jurisdiction, the fundamental elements of AML compliance are elaborated below:

• AML/CFT Program: An Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) program of a cash-intensive business encompasses a structure containing various set processes, procedures, standard operating procedures (SOPs), workflows, and tools aimed at combating ML/TF risks. The AML/CFT program of a cash-intensive business usually comprises of:
  1. The AML/CFT policy details procedures that the cash-intensive business shall follow while onboarding a new customer and the due diligence measures it shall implement to monitor them.
  2. Appointment of a dedicated AML Compliance Officer (AML CO) or Money Laundering Reporting Officer (MLRO) to oversee the implementation of the AML/CFT compliance measures and suspicious activity or suspicious transaction reporting.
  3. The timing and responsibility of conducting an independent audit of the AML/CFT program.
• AML Software: A cash-intensive business should ideally invest in AML software that takes care of major AML compliances, from the beginning of the customer life-cycle to termination of business and its record-keeping of prescribed duration. AML software helps with Customer Due Diligence (CDD), Enhanced Due Diligence (EDD), case management, and record-keeping.
• KYC/KYB: A cash-intensive business can have in place a methodology to identify and verify their customers and business associates; doing so will help them mitigate risks associated with onboarding a customer whose credentials seem questionable.
• Sanctions Screening: A cash-intensive business should implement a sanctions screening mechanism, which will help them identify if any sanctioned individual or sanctioned entity is trying to commence a business relationship with them, putting their business at risk of being used as a channel for money laundering.
• Transaction Monitoring: A cash-intensive business should set up a transaction monitoring system. This will help it identify any suspicious patterns emerging out of cash transactions that take place throughout its business.
• Regulatory Reporting: A cash-intensive business should have a regulatory reporting mechanism and workflow in place that takes care of immediate reporting of any suspicious activity or transaction to the relevant regulatory authority. The AML CO or MLRO must take responsibility for such reporting.
• Independent AML Audit: A cash-intensive business, upon having in place an AML/CFT program, must ensure that the AML/CFT program is adequately audited in a timely manner to identify gaps. The independence of the AML audit function is necessary to ensure unbiased outcomes and remedying of the problem areas identified.
• AML Training: Cash-intensive businesses with AML/CFT programs and other AML measures must have in place the methodology, frequency, and medium determined for conducting AML Training for employees, such as online or on-premises to equip the employees with the know-how required to implement the AML/CFT program and measures appropriately.

Importance of AML Compliance in Cash-Intensive Businesses

The importance of AML Compliance in cash-intensive business needs to be understood from two angles, such as:

1. Cash-intensive businesses, by default, are highly vulnerable to being used as a vehicle for conducting money laundering by criminals. This vulnerability exists due to the high probability of cash-intensive businesses being preferred and targeted by criminals to further their motives due to the variety of methods and means available to launderers for conducting money laundering through the cash-intensive business, requiring cash-intensive businesses to have in place, adequate AML compliance measures to safeguard itself from the threat of money laundering.
2. Cash-intensive businesses worldwide need to assess the risk posed by money laundering to their business. They can do so by referring to the National Risk Assessment (NRA) for money laundering, published by the relevant regulator in their country, usually in alignment with the outcomes of the Mutual Evaluation Report (MER) derived by their country and the Financial Action Task Force (FATF), the global AML watchdog.
3. The MER and the NRA would help the cash-intensive business identify and understand whether its sector comes under high-vulnerability to money laundering crimes and devise appropriate and sufficient AML compliance measures to mitigate money laundering risks effectively.

ML/TF Red Flags in Cash-Intensive businesses

To identify the possibility of money laundering involved in any business relationship, it is essential to understand what red flags are associated with such instances. Some of the common red flags encountered within cash-intensive businesses are:

• Repetitive or Excessive Transactions: When a cash-intensive business observes any pattern of transactions where there are unusually high numbers of repetitive transactions or transactions that are excessive in nature, then such transactions indicate some or the other form of underlying unusual activity or motive behind such transactions, which need to be reported to the relevant regulator.
• Unusual Cash Flow: When a cash-intensive business encounters cash flow in terms of revenue that is unnatural or unusual according to its relevant industry, practices, goods, or services in its particular country and line of business, the cash-intensive business must investigate and report, if necessary to relevant regulatory authorities.
• Non-Resident UBOs: If a cash-intensive business comes across legal entity or legal arrangement customers whose UBOs are non-residents or belong to a nationality other than where the cash-intensive business is operating within, then it must become cautious, as such non-resident UBOs might be responsible for funnelling illicit cash through the cash-intensive business.
• Elements of Structuring or Smurfing: When a cash-intensive business comes across the elements of structuring or smurfing, such as the influx of multiple transactions in small denominations adding up to a perfect large sum or large number of customers making purchases in a similar fashion or manner that could indicate layering, then such elements must be treated as red-flags necessitating additional measures.
• Transactions with No Economic Rationale: Whenever a cash-intensive business comes across a transaction or business that is being performed by the customer, which isn’t aligned with their actual profile or indicates that there is no economic rationale behind such transaction, that is a clear red-flag indicator highlighting the need for further investigation regarding money laundering.

Conclusion

Cash-intensive businesses, despite being inherently vulnerable to money laundering offences, can evade the risk of being misused by launderers if they deploy sufficient AML compliance measures designed to meet their specific needs and address their specific money laundering risks.

Cash-intensive businesses can achieve complete AML compliance by having in place an adequate and efficient AML program that provides measures to identify, report, and curb money laundering activities, along with provision for employee training regarding their individual roles in AML compliance workflow while enhancing their knowledge about money laundering red-flags.