Money laundering risks and threats

This list is designed to help solicitors and law firms understand current and emerging money laundering risks and threats. You can use this information to help keep your client, matter and practice-wide risk assessments up to date.

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Artificial intelligence (AI)

AI technology continues to fuel the expansion of deepfake use, transforming the cybersecurity landscape.

A deepfake is a video or sound recording that replaces a person’s face and/or voice with that of someone or something else, in a way that appears real.

Deepfake tools allows manipulated audio, imagery or text to flourish, leading to rising data leakage, financial losses, regulatory risks and reputational damage.

The use of malicious deepfake technology is highly likely to present a long-term fraud risk. This could result in organisations and customers being increasingly exposed to multiple fraud and insider risks.

The rising market for “deepfakes as a service” highlights that criminals are taking advantage and monetising this technology.

There are reports that customers are asked on impersonation calls to repeat specific phrases. These requests could be linked to deepfake schemes that use audio samples for account takeover fraud.

As technology develops, it is likely that smaller voice samples may be sufficient to ‘train’ AI models for real-time impersonations.

Learn more about generative AI

Cash-based money laundering

It is highly likely that some organised crime groups are changing their cash-based money laundering methods in response to law enforcement activity.

It is a realistic possibility that some groups are moving away from using car washes and nail bars towards nighttime economy businesses.

Chinese underground banking (daigou)

The demand for money laundering services from Chinese underground banking networks is highly likely increasing.

This is likely exacerbated by tightening Chinese Communist Party capital flight controls and economic uncertainty in China.

In August 2023, China experienced capital outflows of £38.5b – the largest monthly outflow since December 2016.

In the UK, Chinese organised crime groups launder money using a range of methods.

Intelligence indicates Chinese underground banking groups are continuing to find new ways for UK-based Chinese students to launder cash.

Learn more about Chinese underground banking

Conveyancing fraud

Criminals actively target property purchases, with the aim of tricking clients into transferring property deposits and/or the balance of purchase monies to them.

These schemes can be highly sophisticated, and almost always involve impersonation of conveyancers to convince clients to send payments to a criminal-controlled account.

Payment diversion fraud is where criminals target a specific individual, impersonate others, create or amend invoices and divert payments to criminal-controlled bank accounts.

It affects everyone, though small and medium-sized businesses are particularly vulnerable.

Make sure team members in finance, payroll and other departments that make payments are aware of the risk.

When year-end approaches, increased payments and workload make businesses more vulnerable.

Read our joint guidance on conveyancing fraud and payment diversion fraud to learn what preventative steps you and your clients can take.

Corporate structures

Circular ownership structures can be used to mask the true beneficial ownership of a company.

It can be difficult to identify the ultimate beneficial owner when multiple entities part-own each other in a circular fashion.

A beneficial owner is not just an individual who directly or indirectly owns more than 25% of the shares or voting rights. It also includes any individual who:

  • controls the entity
  • has ultimate control over the management of the company

You cannot solely rely on the Persons with Significant Control or Companies House registers to identify a beneficial owner.

Circular ownership can create the appearance of lower ownership percentages that do not trigger regulatory thresholds for beneficial ownership disclosure or enhanced due diligence.

However, the circular structure can result in a higher level of control or ownership than what is visible on paper.

Circular ownership structures can also be used to facilitate fraudulent transactions, such as false invoicing, by obscuring the true parties involved.

The complexity makes it harder to follow the money trail and identify suspicious activity.

Cryptocurrency

Despite an identified drop in value received by known illicit cryptocurrency addresses in 2023, the overall scale of money laundering using cryptocurrency is unlikely to have dropped.

The opportunities to pay for goods and services with cryptocurrency appear to be increasing.

Open-source reporting indicates a high-end London estate agent has set up a partnership with an overseas cryptocurrency exchange for customers to pay tenancy fees.

The use of cryptocurrency in the legal sector remains low.

The challenge is around obligations in identifying source of funds and source of wealth in relation to client funds (for example, conveyancing and corporate services).

Solicitors are obliged to carry out the same level of customer due diligence whether funds originate from traditional financial institutions or newer cryptocurrency.

In the context of legal services, it is quite common for cryptocurrency funds to be converted to traditional bank currency before engaging solicitors' services.

However, this does not negate solicitors from making sure they are satisfied on the origins of the funds and potential money laundering.

Money mules

Money muling involves criminals employing others to move the proceeds of crime on their behalf. It can take many different forms.

The most common typology is when a criminal offers cash in exchange for the use of a person’s bank account. The funds are moved through a complex network of mule accounts.

Some money mules may be willingly complicit in money laundering. Others may be vulnerable people who have been exploited.

The UK government reports that children as young as 11 have been recruited to move funds.

Estimates suggest 37,000 bank accounts in the UK showed mule behaviour in 2023, equating to £10 billion laundered a year.

Around 23% of money mules are under the age of 21 and 65% are under 30.

Read the UK government’s money mule and financial exploitation action plan

Pension liberation fraud

A rising trend in pension fraud is individuals being targeted by websites online.

These scams often prey on vulnerable people who may require the financial help of early pension release.

Red flags include malicious websites:

  • promoting early pension release (or pension liberation)
  • offering loans against an individual’s pension
  • offering pension consolidation, mis-sold pensions and pension scam assessments – where data harvesting often leads to secondary victimisation

Threat actors are using Google ad services to maximise impact.

Often, victims are contacted by ‘lead generators’ who operate across multiple websites to contact prospective victims, whose details are distributed to wider criminal networks.

The scale of pension scams enabled by social media is a growing concern.

Postal interception

Customers have their bank account taken over by organised crime groups that obtain account details by intercepting post.

The same mobile phone number has been used in several instances of account takeover and calls are made by the same individual.

The organised crime group also appears to use the same email address format when taking over an account: title forename surname @gmail.com.

An example email address is mrjohndoe@gmail.com.

Proliferation financing

Proliferation financing risks are constantly evolving.

It is broadly defined in regulation 16A(9) of the Money Laundering Regulations 2017 as:

“the act of providing funds or financial services for use, in whole or in part, in the manufacture, acquisition, development, export, trans-shipment, brokering, transport, transfer, stockpiling of, or otherwise in connection with the possession or use of, chemical, biological, radiological or nuclear weapons, including the provision of funds or financial services in connection with the means of delivery of such weapons and other CBRN-related goods and technology, in contravention of a relevant financial sanctions obligation.”

Under the regulations, regulated entities must carry out proliferation financing risk assessments.

You need to factor into your risk assessment processes that proliferation financing risks are connected to more countries than just North Korea and Iran.

As global concerns on the proliferation of weapons of mass destruction evolve, it is vital to broaden the risk assessment process to make sure your firm is not caught out.

Learn more about proliferation financing

Sham litigation

There are two main typologies for sham litigation:

  • using a client account to add a layer of transaction to disguise dirty money
  • using the court to give an alibi for the movement of money

In the first example, a client instructs a solicitor to recover a debt, pays a sum on account, then early in the transaction – often after the first letter to the debtor – the debtor remits the amount due to the client account and the money is passed on to the client, often with a refund of the monies on account.

In the second example, the client’s case goes quite far – if not all the way to final hearing – and a court orders the movement of money from one person to another.

Sham litigation adds an air of legitimacy to the source of those funds.

The claimant and defendant are likely linked and rely on the connection between the two being missed in customer due diligence.

Smurfing

Smurfing is where a large sum of dirty cash is split into numerous, much smaller accounts.

Each sum is given to a different low-level financial criminal (or 'smurf') and deposited into separate bank accounts.

These sums are likely to then be consolidated to some extent into fewer, higher value accounts, but still across multiple accounts, which then follow separate money laundering journeys.

Smurfing can be as simple as depositing cash at a high street bank through to international money mules moving sums of cash across borders to deposit in foreign banking systems.

Identification of potential smurfing around source of funds would be a potential red flag, indicating a need for greater due diligence.

Structuring

Structuring is where a larger sum of dirty cash is split into smaller sums and deposited into the banking system by an individual.

The deposits are kept under the threshold of suspicion, but the individual may not try to hide the source of funds or send the cash through the other stages of money laundering.

This is a popular method of money laundering by individuals trying to engage in tax avoidance.

It is similar to smurfing, which is carried out by a wide criminal network, rather than a single individual.

Identification of potential structuring around source of funds would be a potential red flag, indicating a need for greater due diligence.

Trade-based money laundering

Trade-based money laundering uses the trading of seemingly innocent goods such as flowers, used cars, precious metals, electronics or textiles to launder money.

Sectors at higher risk include:

  • minerals and precious metals
  • vehicle and car parts
  • food and agricultural products
  • textiles and clothing
  • potable electronics

Red flags include:

  • a firm in one line of business (such as cars) trades in something else (fridges)
  • importer transfer payment exceeding the value of what they’re importing
  • an exporter receives payments inconsistent with the value of its registered exports
  • an unrelated third party pays on behalf of a buyer and/or payment appear circular
I want to know more

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