How Criminals Launder Money

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Moving large amounts of money around at once is sure to draw attention. In fact, many countries have AML regulations where financial transactions worth more than a certain amount must be reported to authorities as being potentially suspicious.

This is exactly the kind of attention that criminals trying to move around the proceeds of crime don’t want. So one of the ways they try to keep a lower profile is to break up large money moves into smaller transactions that won’t trigger mandatory AML reports. This is a technique known as smurfing.

This article will explain smurfing’s meaning in terms of how it relates to money laundering.

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What is Smurfing in Money Laundering?

Smurfing, in the context of money laundering, is the process of breaking up a large sum of money into smaller amounts, and then depositing each amount separately. The goal is to avoid financial institutions reporting these transactions to authorities as suspicious, as per AML/CFT/CPF regulations.

Smurfing is a financial crime, as it’s related to money laundering in its intent to disguise the criminal origin of funds.

Why is it Called Smurfing?

The term “smurfing” is thought to have come from the cartoon characters “The Smurfs”: a tribe of similar-looking diminutive blue elves who typically break bigger projects down into smaller tasks that are manageable for each tribe member. Similarly, “smurfing” is the process of moving large amounts of money around in smaller denominations (and often between multiple people), with the greater objective of hiding the fact the money was illegally sourced.

The term is first thought to have been used in the context of illegal drug manufacturing. It referred to manufacturers hiring several accomplices to each buy a limited quantity of chemical components from multiple vendors. The intent was to bypass the legal limits on purchasing significant quantities of these chemicals at once from a single vendor.

The Difference Between Smurfing and Structuring

The terms “smurfing” and “structuring” are sometimes used interchangeably in the context of money laundering. In some ways, they refer to the same action: dividing up large amounts of money before depositing or moving them in order to avoid regulatory reporting on them. The term “structuring” refers to transactions being “structured” to move as much money as possible at one time, but not so much money as to trigger mandatory suspicious activity reporting.

Both structuring and smurfing are illegal. The main difference between structuring and smurfing, though, is that structuring can be done with legitimate funds. The depositor may not be trying to hide the origin of their funds (as they may not need to), but they are trying to avoid regulatory reporting for other reasons. With smurfing, however, the intention to avoid regulatory reporting is precisely because the perpetrators need to hide the fact that the money comes from illegal sources.

In another sense, “structuring” is another name for the second phase of money laundering. Also referred to as “layering”, it’s where criminals are moving around illicit money they’ve snuck into a financial system to build up a transaction history for it, thereby making it difficult to trace back to illegal activity. In this context, “smurfing” can be thought of as a specific tactic for layering/structuring. In fact, smurfing can be used at any stage of money laundering.

How Smurfing Works

Many countries have a regulatory value threshold for financial transactions (usually around $10,000 US). So financial institutions (FIs) are legally required to report any transaction with value equal to or greater than the threshold to authorities as being potentially suspicious. Smurfing aims to get around this regulation in order to avoid drawing attention to the illegal source(s) of the funds.

Criminals can use a number of techniques to try to disguise the fact that they’re smurfing. For instance, they may make small deposits to several different accounts (as opposed to the same account repeatedly) to make it look like they’re sending money to unique entities. In reality, each of these accounts may be controlled by fellow criminals. And they may then funnel the money to one or more central accounts, likely also using smurfing to avoid regulatory scrutiny.

Another popular smurfing tactic is smuggling illegal money into a foreign country that has looser financial regulations. Criminals can then smurf by investing small sums in various enterprises, such as gambling, foreign currency exchange, crypto trading, and stock markets.

Then they can transfer legitimate money back to their domestic accounts through assets such as foreign currencies, crypto, or high-value property (including houses, jewelry, artwork, or luxury vehicles). Again, they can use smurfing so FIs and authorities don’t get suspicious or become legally required to report on asset movements.

Examples of Smurfing

A specific type of smurfing, often used to launder money across international borders, is known as “cuckoo smurfing”. This is where criminals collude with corrupt financial employees to move small amounts of illegal money at a time by depositing them into the accounts of unsuspecting transaction recipients. Meanwhile, they get to keep the legitimate original funds for themselves.

Here’s a summary of how a basic version of it works:

  1. A person wants to send money to someone, usually overseas. They go to a bank, credit union, or other money services business to transfer the money.
  2. A corrupt FI or MSB employee gives the transfer details to a criminal.
  3. The criminal arranges to have illicit money, equal to the value of what the sender intended to give, deposited into the receiver’s account through accomplices and intermediaries. These parties will often use smurfing (i.e. make small deposits over time) to avoid suspicion and regulatory transaction reporting requirements.
  4. Once the illicit money is deposited, the corrupt FI/MSB employee gives the original amount of legitimate funds to the criminal.

In some cases, there are criminals operating on both the sender and receiver’s ends, and one owes money to the other. In a situation like this, the corrupt FI/MSB employee on the sender’s side may simply instruct the criminal on the receiving end to transfer money into the receiving person’s account through smurfing. Then they take the money from the sending person and deposit it into accounts held by the criminal on the sending end.

The bottom line is a criminal ends up giving away dirty money and getting back clean money. Meanwhile, the receiving party is usually unaware the money they get came from an illegal source. And neither the sender or receiver are typically aware that no money has moved directly between them. It simply looks like one has paid money, and the other has received the money.

9 Smurfing Red Flags to Look For

Smurfing can be difficult to detect because its whole purpose is to avoid closer examination of transactions by FIs and authorities. However, it commonly leaves its own set of clues that can point to its occurrence. Here are some patterns that may indicate smurfing is happening:

  • Repeated small deposits: A person makes a series of deposits, usually in cash, with values just below the AML reporting threshold.
  • Sequential deposits at different locations: A person (or several people) make a series of deposits to the same account, each at different bank branches or ATMs.
  • Oddly increased account activity: An account that previously had little transaction activity is suddenly involved in a series of small-value transactions.
  • Exceeding total deposit limits: A series of small deposits that individually don’t trigger AML reporting, but collectively exceed an account or FI’s daily limit on deposit values.
  • Multiple similar account creations: A series of accounts are opened by the same customer—or by customers using similar identity traits (address, country, device fingerprint, etc.)—that show little activity other than a series of small transactions.
  • Various account users: The same account is used by multiple different users to move small amounts of money, especially at similar intervals and/or for similar-value transactions.
  • Rapid transaction velocity: Small amounts of money are moved rapidly between accounts, especially across borders and through FIs in high-risk jurisdictions.
  • Inconsistent business reasoning: A person’s financial transactions suddenly become starkly different from their normal business activity. Alternatively, their logic for initiating transactions or opening accounts is inconsistent, is non-specific, or lacks sense.
  • Transaction overcomplication: A person insists on moving small amounts of money through multiple intermediaries and/or advanced financial products, despite several simpler and less expensive options being available.

How to Detect and Prevent Smurfing

So how does a financial institution reliably pick up on the cues that smurfing is going on, or stop smurfing from happening at all? Here are some strategies to implement:

Train Employees Thoroughly

Stopping smurfing starts with FI employees understanding what it is and why it’s dangerous. They should be taught to identify red flags for smurfing—ideally, through case study scenarios—and how to properly report them via SARs. Employees should also be kept up to date on new variations of smurfing or other financial crimes, as well as any regulatory additions or amendments that affect what they have to monitor for.

Adopt Robust Know Your Customer (KYC) Controls 

The surest way to prevent smurfing is to not let criminals into the financial system to begin with. An FI should have adequate client identity verification and risk assessment systems in place, both for onboarding and ongoing monitoring. It should be able to tell if a new client is who they claim to be, and judge from their past activity how risky it is to take or keep them on as a client. It should also be able to determine what is (or isn’t) typical financial activity for the client.

Monitor Transactions and Related Data with the Help of Technology

FIs have to investigate transactions to know if there’s anything suspicious about them. The conundrum with smurfing, though, is that the whole point of it is to make individual transactions not look suspicious. So FIs need to take a more holistic approach to catching smurfs: analyzing data-enriched groups of transactions.

AML systems, especially those that employ machine learning and other artificial intelligence technology, can be calibrated to spot unusual patterns in transactions based on multiple data points. These data points include:

  • How much transactions are valued at
  • Where transactions are being initiated
  • How rapidly transactions are being initiated
  • Who is using an account (or accounts), and on which devices
  • How transactions are being facilitated
  • How closely transactions fit a user’s previous financial activity

With a more wide-angle view of a transaction ecosystem, it’s easier to spot signs that smurfing may be going on.

Collaborate on Other Anti-Smurfing Efforts

An FI can find it easier to detect and prevent smurfing by working together with law enforcement agencies and other FIs. It should share details about known smurfing activities, participate in research to develop anti-smurfing best practices, and cooperate with authorities in anti-smurfing investigations. This helps protect not just the FI itself, but the entire financial system from smurfing and other forms of money laundering.

Organizations can also work together, sharing data that allows each organization to better detect and prevent fraud. Our Fraud DAO is just that, a fraud consortium that empowers organizations to collaborate to actually stamp out fraudsters.

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Stop Smurfs in Their Tracks with Help from Unit21’s Risk & Compliance Infrastructure

Smurfing is a money laundering technique designed to draw suspicion away from illegal money moves. So to counter smurfing in AML, financial institutions need to look beyond individual transactions and study larger patterns of money movement for anomalies.

Fortunately, Unit21’s Transaction Monitoring and Case Management solutions are designed to help FIs do just that. The former analyzes not just transactions themselves, but a broad set of related data points to reveal hidden connections. And the latter allows for centralized visual investigation to more quickly and easily spot suspicious activity and report it to authorities.

Get in touch with our team for a demo of how our products can work together to keep your financial institution safe from smurfing and other money laundering tactics.