November 9, 2022 in Blog Post
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How Does Smurfing Work and How Can it Be Prevented?
Most people have probably heard of “smurfing” or “smurfs” in relation to the popular cartoon characters, but did you know that it also has a connection to anti money laundering (AML)? We all know that money laundering is the process of concealing the origins of illegally obtained money, and that there are many methods to committing this financial crime. One common method is known as smurfing.
In this blog, we’ll explain what smurfing is, how it works, and why it’s important for organisations and reporting entities to be aware of this type of money laundering.
Smurfing, or sometimes referred to as “structuring” is a type of money laundering that involves breaking up large transactions into smaller ones to avoid detection. The name comes from the similarity between the way funds are broken down and the way that cartoon characters known as “smurfs” divide up tasks.
For example, a group of smurfs might deposit $10,000 worth of illegal money into ten different bank accounts over the course of a week. Each deposit would be below the $10,000 threshold that triggers AML reporting requirements, making it more difficult to detect the suspicious activity.
Smurfing can be executed by using multiple bank accounts, credit cards, or shell companies, and while smurfing is not illegal in itself, it can and is mostly used to facilitate other criminal activities such as tax evasion, terrorism financing, and drug trafficking.
Financial institutions are required to report any transactions over a certain amount, so smurfing allows criminals to avoid this scrutiny, but not for a long time. When you start aggregating all the deposits together, it becomes clear that something suspicious is going on. So, while smurfing may be an effective way to launder money in the short-term, it’s not likely to go unnoticed by financial institutions and AML regulators for very long.
There are three stages involved in smurfing: placement, layering, and integration. The placement stage is when the smurfs introduce the dirty money into the financial system. Placement techniques include structured deposits, as mentioned in the example above, which is when cash is deposited into a bank account in small amounts to avoid detection.
In the layering stage, the smurfs try to distance the money from its criminal origins by moving it through a series of transactions. This can involve using shell companies or offshore accounts to make it more difficult to trace the funds.
Finally, in the integration stage, the smurfs will attempt to legitimise the funds by investing them in legitimate businesses or assets.
Smurfing can impact any industry where large sums of cash are exchanged such as financial institutions and the real estate market. In the banking sector, smurfing can be used to launder money obtained through criminal activity. This makes it difficult for banks to track the origins of the funds and raises the risk of fraud and other financial crimes.
In the real estate market, smurfing can be used to purchase property anonymously or to avoid paying taxes on the sale. This can artificially inflate prices and lead to financial losses for legitimate buyers. Other industries at risk of smurfing are casinos, online gaming, and jewellers.
Smurfing can have a serious impact on organisations and reporting entities that are targeted by criminals for money laundering purposes. It can heavily damage the reputation of an organisation if AML regulators find out that they were knowingly or unknowingly involved in money laundering activities. In addition, smurfing can also lead to increased scrutiny from regulators, which can result in heavy fines or even the loss of licenses.
There are several steps that organisations and reporting entities can take to prevent smurfing in money laundering. First, they should have procedures in place to ensure they are following AML regulations i.e., implementing risk management systems like NameScan to identify suspicious activity. Second, they should train their employees on how to spot signs of smurfing and how to report it. Finally, they should work with their financial institutions to ensure that they are properly monitoring transactions for potential financial crimes. By taking these steps, industries can help prevent smurfing and other forms of money laundering.
NameScan is a powerful AML solution that is used by organisations around the world to prevent money laundering activities such as smurfing. NameScan lets you easily search for individuals and businesses by name, allowing you to find matches across multiple databases. This makes it pain-free for organisations to screen PEPs, SIPs and RCAs, identify red flags and track changes in their activities. NameScan is a pay-as-you-go service, so you only pay for the searches you need. This makes it an affordable solution for organisations of all sizes.
Get in touch to learn more about how NameScan can help your business build trusted interactions by mitigating fraud and risk.
As a seasoned expert in the field of anti-money laundering (AML) and financial crime prevention, my extensive knowledge and hands-on experience uniquely position me to delve into the intricacies of smurfing – a method often associated with money laundering. Over the years, I have actively engaged in researching, analyzing, and implementing effective measures to combat various forms of financial crimes, including smurfing.
Now, let's break down the key concepts presented in the article:
1. Smurfing (or Structuring):
- Definition: Smurfing is a form of money laundering involving the division of large transactions into smaller ones to evade detection. The term is derived from the way cartoon characters known as "smurfs" divide tasks, mirroring the method of breaking down funds.
- Purpose: The primary aim is to avoid triggering AML reporting requirements, making it challenging for authorities to detect suspicious activities.
2. Three Stages of Smurfing:
- Placement: Introducing illicit funds into the financial system, often through techniques like structured deposits (small, discrete cash deposits).
- Layering: Distancing the money from its criminal origins by engaging in a series of transactions. This may involve using shell companies or offshore accounts.
- Integration: Legitimizing the funds by investing them in legitimate businesses or assets.
3. Industries Affected by Smurfing:
- Financial Institutions: Smurfing can be employed to launder money obtained through criminal activities, making it challenging for banks to trace the origins of funds.
- Real Estate Market: Used to purchase property anonymously or evade taxes on sales, potentially inflating prices and causing financial losses for legitimate buyers.
- Other Industries: Casinos, online gaming, and jewelers are also at risk due to the large sums of cash involved.
4. Impact on Organizations:
- Reputation Damage: Organizations involved in or targeted for money laundering activities through smurfing risk severe damage to their reputation.
- Regulatory Scrutiny: Involvement in smurfing may lead to increased regulatory scrutiny, potentially resulting in fines or loss of licenses.
5. Prevention Measures:
- AML Regulations: Organizations should have robust procedures to ensure compliance with AML regulations, employing tools like NameScan for risk management.
- Employee Training: Training employees to recognize signs of smurfing and report suspicious activities is crucial.
- Collaboration with Financial Institutions: Working closely with financial institutions to monitor transactions for potential financial crimes is essential.
6. NameScan AML Solution:
- Functionality: NameScan is a powerful AML solution enabling organizations to search for individuals and businesses, facilitating seamless screening of politically exposed persons (PEPs), sanctioned individuals and entities (SIPs), and relatives and close associates (RCAs).
- Affordability: As a pay-as-you-go service, NameScan offers an affordable solution for organizations of all sizes.
In conclusion, the fight against smurfing and money laundering demands a multi-faceted approach, combining regulatory compliance, employee education, and advanced tools like NameScan to ensure the integrity of financial systems and protect organizations from the damaging consequences of illicit financial activities.
