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Money Laundering AwarenessHandbook for Tax Examiners

and Tax Auditors

2009

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ORGANISATION FOR ECONOMIC CO-OPERATIONAND DEVELOPMENT

The OECD is a unique forum where the governments of 30 democracies work together toaddress the economic, social and environmental challenges of globalisation. The OECD is alsoat the forefront of efforts to understand and to help governments respond to new developmentsand concerns, such as corporate governance, the information economy and the challenges of anageing population. The Organisation provides a sett ing where governments can compare policyexperiences, seek answers to common problems, identify good practice and work to co-ordinatedomestic and international policies.

The OECD member countries are: Australia, Austria, Belgium, Canada, the Czech Republic,Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea,Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic,Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The Commissionof the European Communities takes part in the work of the OECD.

Cover image phil ipus - Fotolia.com

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Preface

OECD 2009 5

Preface

The purpose of this handbook is to raise the awareness level of tax examiners and auditorson money laundering. It provides guidance in identifying money laundering during theconduct of normal tax audits. It also describes the resources and tools that are available foreffective detection and deterrence. While the handbook does not detail criminal investigationmethods, it does describe the nature and context of money laundering activities so that taxexaminers and auditors can better understand how their contribution can assist criminalinvestigators in countering money laundering.

Tax administrations can adapt the handbook to suit their particular circumstances andto take into account the varying roles that tax administrations have in relation to reportingunusual or suspicious transactions, receiving suspicious transaction reports and investigatingmoney laundering offences. To aid this adaptation key areas of the handbook have beenhighlighted for Country Specic Insertions.

While the aim of this handbook is to raise the awareness of tax examiners and tax auditorsabout the possible implications of transactions or activities related to money laundering andtax crimes, the handbook is not meant to replace domestic policies and procedures.

This handbook is available on the CTPA website www.oecd.org/ctp /taxcrimes. Versionsin different languages will also be available here.

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Table of Contents

OECD 2009 7

Table of Contents

Introduction 9

Money Laundering 11Role of Tax Examiners and Auditors 15

Money Laundering Indicators for Individuals 19

Tax Return Examination and Pre-Audit Indicators 23

Audit Indicators 27

Specic Indicators on Real Estate 31

Specic Indicators on Cash 35

Specic Indicators on International Trade 39

Specic Indicators on Loans 43

Specic Indicators on Professional Service Providers 47

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Money Laundering

OECD 2009 11

Money Laundering

DenitionThe Financial Action Task Force (FATF) is an inter-governmental body whose purpose

is the development and promotion of policies to combat money laundering and terroristnancing. It is the body that sets and monitors international standards for anti-moneylaundering regulations. The FATF has dened money laundering as the processing ofcriminal proceeds to disguise their illegal origin in order to legitimise the ill-gotten gainsof crime.

PLACEMENT LAYERING INTEGRATIONPLACEMENT LAYERING INTEGRATION INTEGRATIONINTEGRATION

INVESTMENTJUSTIFICATION

Change of Currency

Change of Denominations

Transportation of Cash

Cash Deposits

Wire Transfers

Withdrawals in Cash

Cash Deposits in Other Bank Accounts

Split and Merge Between

Bank Accounts

Creating Fictitious Loans, Turnover/Sales, Capital Gains, Deeds, Contracts, Financial Statements

Disguise Ownership

of Assets

Criminal Funds Used In Third Party Transactions

Liquidity - Cash at Hand

Consumption

Investments

SOURCES

OF

INCOME

OVERVIEW OF MONEY LAUNDERING

GOAL

Deposit CriminalProceeds Into

Financial System

GOAL

Conceal theCriminal Origin

of Proceeds

GOAL

Create an ApparentLegal Origin for

Criminal Proceeds

GOAL

Use CriminalProceeds for

Personal Benefit

Tax Crimes

Fraud

Embezzlement

Drugs

Theft

Bribery

Corruption

Why combat money laundering?

Criminals accumulate signicant sums of money by committing crimes such as drugtrafcking, human trafcking, theft, investment fraud, extortion, corruption, embezzlement

and tax fraud. Money laundering is a serious threat to the legal economy and affects theintegrity of nancial institutions. It also changes the economic power in certain sectors. Ifleft unchecked, it will corrupt society as a whole. Fighting money laundering serves severalpurposes.

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Money Laundering Awareness Handbook for Tax Examiners and Tax Auditors 2009

12 OECD 2009

The social importance

Crime causes tangible and intangible damage to third parties, individuals and societyas a whole. Money laundering can result in reducing the publics condence in certain

professions such as lawyers, accountants and notaries and economic sectors such as realestate, hospitality and banks and other nancial institutions. Investing the proceeds of crimemay also distort competition between businesses and entrepreneurs. Money launderingallows the criminal to start, continue and expand activities in legitimate sectors of theeconomy. It may create a perception that crime pays and may also have a stimulating effecton our youth starting a criminal career.

To identify tax crimes

Unusual transactions can be an indication of tax crimes in the past and can lead to theidentication of those involved.

To identify other crimes and criminals

Taxing the income of criminals according to tax rules alone will not lead to theidentication of potential money laundering. It will not stop crime from happening or frombeing protable. The detection of unusual transactions may assist in identifying criminalsand their illegal activities. Sharing information with law enforcement authorities can leadto the start of a criminal investigation.

To locate and conscate criminal assets

Identifying unusual transactions can provide insight into the ow of money and thedestination of laundered criminal proceeds into assets such as real estate, vehicles, yachtsand bank accounts. This will assist law enforcement authorities in seizing those assetsduring a criminal investigation.

Legal context

In the vast majority of countries there is a legal framework for combating money launderingand it is a separate criminal offence in the penal code. The penal code states which activitiesin relation to proceeds of crime are forbidden and lists the relevant crimes covered, knownas predicate offences to money laundering. Predicate offences can be dened as all offencesnamed in the penal code or can be limited to serious crime offences or a threshold relatedto the penalty of imprisonment or a combination of these approaches.

The legislation may include tax crimes as a predicate offence to money laundering. Itis also possible that tax crimes are not mentioned as a predicate offence. This means thattransactions with money solely derived from a tax crime (e.g. non reported sales) might notbe considered as money laundering offences. This does not mean that the tax administrationsin those countries have no role in combating money laundering. Money derived from crimesmentioned as a predicate offence could still be identied by tax examiners or auditors andthere may also be tax implications.

It may be appropriate to insert here country specic detail on the legal context.

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Money Laundering

OECD 2009 13

The money laundering process

The objective of tax fraudsters and of those involved in a wide range of criminal activitiesis to disguise the source of money and to convert the dirty money and wash it into a form

that will be difcult to retrace its origins such as placing the dirty money in bank accounts,real estate, stocks, insurance premiums and other assets, which can be used later withoutraising suspicion. Whether the crime is a tax crime or is related to trafcking in narcotics,illegal sales of weapons, corruption or any of a vast range of criminal activities, the basicprocess that money launderers use to turn illicit proceeds into apparently legal monies orassets is globally accepted as having three stages: placement, layering and integration. Theseare the three phases of money laundering. The integration phase may be further dividedinto two sub-phases: justication and investment.

Placement

The goal in this stage is to deposit criminal proceeds, generally cash, into a bank accountat home or abroad. For this purpose, cash could be switched into other valuables like tradegoods, diamonds, gold bars or cheques. It could also be exchanged into other currencies,in larger denominations and/or split up in smaller sums which allow easy transportationby cash couriers. The cash or other valuables can be transported abroad, away from thecountry where the crime was committed, to the country of residence of the criminal or aspecic country where cash can be easily deposited or invested. Transportation can be bycar, plane (passengers or cargo) or by using an underground banking system. For all of theseacts, criminals can use third parties, either individuals or corporations. Money derived fromfraud, like tax fraud or investment fraud, could easily be money held in a bank account andcapable of being exchanged electronically. Not all criminal proceeds are in the form of cashor even money. Goods from theft can be exchanged for other valuables.

Layering

The goal in this stage is the concealment of the criminal origin of the proceeds. Therefore,money can be transferred and split frequently between bank accounts, countries, individualsand/or corporations. Money can also be withdrawn in cash and deposited into bank accountswith other banks. It is common to use bank accounts in countries with strict banking secrecylaws and to nominate offshore corporations as the bank account holders.

Integration: Justication

The goal in this stage is to create an apparent legal origin for the criminal proceeds.This can be done by:

Doing business with yourself (falsifying sources of income, capital gains and/orloans);

Disguising the ownership of assets, and

Using criminal proceeds in transactions with third parties.The money launderer creates an apparent legal origin of the money by fabricating

transactions (invoices, bookkeeping and agreements), with the use of false and fabricated

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14 OECD 2009

documents such as invoices, reports, contracts, agreements, deeds as well as written orspoken statements. Common justication methods used are:

Fabricating a loan: loan-back or back to back;

Fabricating a rise in net worth: buying and selling real estate and other items, fabricatingcasino winnings, lottery prizes, inheritance, etc.;

Disguising the ownership of assets and interest in businesses (constructions withforeign legal entities, e.g. offshore companies or relatives as legal owner);

Price-manipulating (over- and under-invoicing);

Manipulating turnover/sales by commingling illicit and legal sources of income.

Integration: Investment

The goal in this nal stage is to use criminal proceeds for personal benet. Cash orelectronic money can be used for:

Safekeeping: cash on hand;

Consumption: day to day expenditures, lifestyle, jewellery, vehicles, yachts, art;

Investing: bank accounts, real estate, stocks, securities, receivables, funding of legaland illegal business activities.

Criminals may want to display their wealth and wealthy lifestyle by acquiring badges ofwealth such as luxury homes, vehicles, boats, jewellery, etc. Criminals will seek to launderthe proceeds from their crimes to pay for these in order to avoid detection by the tax or lawenforcement authorities.

Money laundering trends

The traditional methods of money laundering have centred on the use of cash basedbusinesses and this remains an important area. However, criminals will continue to seekout innovative methods to exploit weaknesses in nancial systems and to try to keep ahead

of the investigators. Real estate, loans and trade based money laundering are preferredmethods for criminals to launder the proceeds of crime and tax fraud. These are describedlater. The use of credit cards issued by offshore banks has increased and can expect criminalsto explore the vulnerabilities of new technology based products such as electronic moneyand internet-based trading and gambling.

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16 OECD 2009

To draw conclusions based on their knowledge of the techniques used by moneylaunderers and tax criminals.

The importance of detecting unusual transactionsThe proceeds of a crime may become apparent to tax examiners or auditors. Such

visibility is related to:

Cash movements such as transporting, exchanging, depositing or spending; The use of known money laundering methods or processes; The increase in income and/or capital gains; Unusual possessions (e.g. works of art, expensive vehicles), unusual loan arrangements

and increased prosperity that is not proportionate to legitimate income.

Detection of dirty money focuses primarily on unusual transactions that indicatepossible money laundering. Unusual means that a transaction differs from the norms of acertain industry or the habits of an individual, taking into account their background, normalactivities or declared income. Deviation from normal or expected behaviour may indicaterisk. The greater the deviation in behaviour and the more frequent the occurrence of unusualsituations, the greater the risk for money laundering. Subsequent assessment is required.

In general, unusual transactions have certain characteristics, to make it possible to

conceal and to justify the illegal origin of the money, the ow of money, the possession ofthe money or assets derived from it:

The fact that the origin of the funds is not clear; The fact that the identities of the parties are not clear; The transaction does not t the persons background or legal income, and The fact that there is no economical or logical explanation for the transaction.

To identify unusual transactions, these general characteristics are transformed into

money laundering indicators: Money laundering indicators for individuals Tax return examination and pre-audit indicators Audit indicators Specic indicators on real estate Specic indicators on cash Specic indicators on international trade Specic indicators on loans Specic indicators on professional service providers.

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Role of Tax Examiners and Auditors

OECD 2009 17

The reporting of unusual transactions

The reporting of unusual transactions by tax examiners or auditors will differ within jurisdictions and the requirement to report will be either mandatory or discretionary. All

tax examiners and auditors should make themselves aware of these requirements so thatappropriate action is swiftly taken.

Completing or referring the audit

Tax examiners or auditors should adhere to their countrys legislation, policies andprocedures when considering whether any further audit steps can or should be undertaken. Ifappropriate, the audit should be referred to the appropriate body for a criminal investigationeither on the predicate offence or money laundering. Many tax administrations may conducttheir own criminal investigation related to tax crimes and money laundering.

International exchange of information

Tax examiners or auditors should be aware of the international ows of money relatedto national and international crime. Exchange of information between tax administrationsof countries, sometimes referred to as mutual assistance, is of great importance in the ghtagainst tax crimes and money laundering. Where there are legal instruments for exchangeof information in place, tax examiners or auditors should consider passing on informationspontaneously to another country regarding unusual transactions that are relevant for thatcountry, through the competent authority for exchange of information.

For example, a citizen of the one country owns real estate property in another country.The latter supplies the home country of the citizen with all the relevant data, like the notarialdeed, the value of the property and information about the mortgage. This enables the homecountry of the citizen to judge the taxpayers scal and nancial position, especially regardingthe origin of the capital.

Tax auditors should also consider making a request for information from a foreign tax

administration if there are issues about cross border activities or transactions. Here is anexample:

A citizen of a country has been granted a loan by a private individual from anothercountry without paying interest or repayments. This is unusual and the home country ofthe citizen could ask questions about the scal and nancial position of the lender abroad,to establish the existence of the loan and the origin of the money.

It may be appropriate to insert here country specic detail on reporting of unusual transactions.

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Money Laundering Indicators for Individuals

OECD 2009 19


Introduction

When performing the audit or examining the tax return there are factors to consider thatwill assist in identifying possible cases of money laundering. These factors or indicators mayrequire simple observation skills as well as the examination of the taxpayers documentation.When individuals spend their criminal proceeds on the acquisition or use of assets anddo not have enough legitimate income to explain their expenditures, this is regarded asunusual use or unusual possession of assets. This in turn raises suspicion. Some criminalswill attempt to conceal the origin of the funds by creating an apparently legitimate origin.Pretending that the origin of the funds is legitimate can be done by using criminal moneyto carry out business transactions with oneself or with third parties.

Indicators

Unusual incomeNo income or low income compared to normal cost of livingTaxpayer appears to be living beyond their means

Unusual rise in net worthInheritance from a criminal family memberFictitious inheritanceVoluntary disclosure by known criminals or their relativesGambling and lottery gains

Unusual possession or use of assetsA person with low income owns or uses expensive assets (car, boat, real estate)A person owns assets located abroad, not declared in their tax return

Unusual debt

Obtaining a mortgage on a relatively low incomeObtaining a loan from unidentied part ies

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20 OECD 2009

Examples

Taxpayer appears to be living beyond their means

A low family income usually indicates that there are limited opportunities for buying,owning or consuming expensive assets. Perhaps the expensive items were bought withadditional income from crime. The following are examples of such discrepancies:

A shareholders nancial contributions to a business are not in line with the individualstax returns;

There is an accumulation of personal wealth when the only known source of fundsis from a business source that cannot support it;

An examination of personal bank records does not show funds available to supportthe life style;

A taxpayer uses offshore credit/debit cards and the source of funds to support theaccount cannot be identied.

Unusual transactionsBuying assets (e.g. a house) on a relatively low incomeBuying assets (e.g. a house) far below market valueGetting a mortgage on a relatively low incomeParty in property ipping transaction with no real estate background(see Specic Indicators on Real Estate, Example)Cash transaction with an unknown person (ctitious sale)Information from external sources (e.g. law enforcement, media)

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OECD 2009 21

In this example, the illegal proceeds are deposited into a domestic bank account whichhas not been declared to the tax authorities. These funds are then transferred to an offshorebank account where the money can be withdrawn and used to fund a further offshore bankaccount which is linked to a credit or debit card. The credit card can be used anywhere tomake use of the criminal proceeds.

PLACEMENT LAYERING INTEGRATIONPLACEMENT LAYERING INTEGRATION INTEGRATIONINTEGRATIONINVESTMENTJUSTIFICATION

CashWithdrawal

or

Wire Transfer

OFFSHOREBANK

ACCOUNT

DOMESTICBANK

ACCOUNT

PAID BYFOREIGN BANK

ACCOUNT

PAID BYFOREIGN BANK

ACCOUNT

CREDIT/DEBITCARD

SPENDING

CREDIT/DEBITCARD

SPENDING

SOURCEOF

INCOME

Investment

Schemes

Embezzlement

MERCHANDISE MART

FOREIGN CREDIT/DEBIT CARDS

OFFSHOREBANK

CREDIT/DEBITCARD

C r e d i t C a r

d

1 2 3 4 5 6 7 8

9 0 1 2 3 4 5 6

C r e d i t C a r

d

1 2 3 4 5 6 7 8

9 0 1 2 3 4 5 6

C r e d i t C a r

d

1 2 3 4 5 6 7 8

9 0 1 2 3 4 5 6

C r e d i t C a r

d

1 2 3 4 5 6 7 8

9 0 1 2 3 4 5 6

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Tax Return Examination and Pre-Audit Indicators

OECD 2009 23

Tax Return Examinationand Pre-Audit Indicators

Introduction

This section reviews the main indicators in the context of planning for the audit as thereare many questions that cannot be answered until the auditor actually begins the audit.There is potential for tax examiners or auditors to identify money laundering indicators atthe start of the audit process. These indicators might be built into the initial checks thatare carried out to conrm the scope of the audit and the issues to be audited. Some of thesepreliminary indicators can relate to tax crimes as well as to other criminal activities. Whencarrying out an audit of an enterprise, the auditors may also audit the individual tax affairsof the business owners. Money linked to tax crimes (e.g. by unrecorded sales) may becomevisible at some time in the future, for instance, through a personal loan to the company ordetected in an unreported personal capital gain on the disposal of an asset acquired withquestionable funds by the owner of the company. Other money laundering indicators forindividuals can be found under Money Laundering Indicators for Individuals above.

Indicators

Unusual off-balance itemsNon-transparent ownership (see Examples below)

Ownership by relations/partners of criminalsInternational structure with no apparent commercial, legal or tax benetsPurchase or sale of the companies' shares at a price far above or below estimated value(see Examples below)Companies/directors registered at a foreign company service provider's addressInformation from external sources

Unusual balance sheet itemsOwnership contributions of capital are not supported by previous tax returns

Interest accumulating on loans receivable or loans payableLarge cash holdings which are excessive for the business

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24 OECD 2009

Examples

Non-transparent ownership

When shareholder relationships are transparent, the true benecial owner is visible. Thisbenecial owner will also declare their shares and any income earned from the business ontheir income tax return. If transparency is absent, the identity of the true benecial owneris hidden. Criminals conceal the assets of criminal origin in this way so they can continueto use or enjoy the assets or obtain a return on their illegal money. The lack of transparencyin a shareholder relationship is an indicator for the concealment of assets with a criminalorigin.

An important tool for the concealment of the true benecial owner is the use of offshoreentities, such as trusts or offshore corporations. An offshore corporation is a legal entityincorporated in a foreign jurisdiction and usually only conducts economic activities outsidethe country in which it was incorporated. Such companies play an important role in theconcealment, shifting and investment of criminal proceeds as well as in the concealment of

the true benecial owners. An offshore corporation can be quickly established and managedby a local company service provider also acting as a nominee director, often located in a taxhaven or strict bank secrecy jurisdiction and with no obligations for publication of annualaccounts. This case illustrates the techniques used:

Unusual prot and loss itemsHigh rise in turnover/salesHigh rise in prot marginBusiness ratio of costs and sales not in line with industry

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Tax Return Examination and Pre-Audit Indicators

OECD 2009 25

In the case illustrated, the criminal wants to launder $200 000 of illicit income. Thesefunds are deposited in an offshore bank account controlled by offshore company A whichis owned by the criminal. The criminal wants to have these funds available to them in theirhome country. The funds are subsequently wired to a domestic bank account by companyA for the purchase of shares in company B which is also owned by the criminal. Aninated value of $200 000 is placed on the shares of company B. Company B now has$200 000 in its account available to the criminal. These funds are now laundered and canbe integrated as seen above.

Purchase or sale of the companies shares at a price far above or below estimated value

Criminals also invest their money in legitimate corporations. They may be interested ina legitimate corporation to earn a return on their criminal proceeds, or because they wantto decrease their exposure to risk from their other activities. A legitimate corporation canalso be used for criminal activities and criminals do attempt to launder money in the buying,nancing and running of legitimate companies. An indicator is the buying of shares at a priceway below estimated value, or net worth of the company. The balance of the true price maybe paid under the table. Another indicator is a relatively high capital gain compared to thelength of time the company was owned. This may indicate the use of criminal proceeds at

the time of purchase. In this situation a simulated capital gain is being bought by askingthe buyer to pay an inated price while refunding the inated portion of the price to thebuyer with the proceeds of crime.



SALARY OR

DIVIDENDS

TOOWNER

LAUNDERED

PROCEEDS

LAUNDERED

PROCEEDS

OFFSHORE

BANK

ACCOUNT

Offshore

Company

A

ILLICIT

SOURCE

OF

INCOME

200,000

200,000

200,000

INFLATEDSHARES

NON-TRANSPARENT OWNERSHIP

DOMESTIC

BANK

ACCOUNT

Domestic

Company

B

SAME OWNER

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OECD 2009 27

Audit Indicators

Audit Indicators

Introduction

In the course of conducting the pre-audit review and developing the audit plan, it is

not uncommon to identify unusual indicators which should be examined during the audit.During the audit, the examination of individual transactions may disclose tax risks as wellas money laundering indicators.

Indicators

Unusual transactions and partiesEntrepreneur demonstrates poor knowledge about their business

Transaction in goods or services not tting company's proleTransaction without an evident commercial basisTransaction or agreements without relevant supporting documentsTransactions with offshore companiesTransaction with suspected criminals or their partnersNon-transparent / non-identiable customers, creditors or lendersTransactions with business associates or customers that share a common addressTransactions identied as asset sales but assets cannot be substantiated

Unusual money owsPayments to or from third parties who are not involved in the transactionPayments to or from unrelated offshore companies or accountsCompany bank account used as a cash ow-through accountNon-transparent or non-veriable origin of the moneyDenominations and currency not the norm in the industryBank deposits not declared as turnover (sales)Money ows without apparent economic reason or supporting documentation

Unusual use of credit cards or debt instruments

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OECD 2009 29

Audit Indicators

In this scheme the proceeds of crime are recorded as sales. Because the proceeds of crimeare mostly cash, in many cases cash sales are fabricated so that clients and the origin of themoney cannot be identied. In the example illustrated above, a supercial examination ofthe information and records available may appear very straightforward and may not raise

suspicion that money is being laundered.



LAUNDERED

PROCEEDS

BUSINESS

BANKACCOUNTS

TAX

RETURN

LAUNDERED

PROCEEDS

FINANCIAL

STATEMENT

BOOKS AND

RECORDS

SOURCES

OF

INCOME

Illicit

Sales

and Cash

Deposits

Legal and Illicit

Income

SALES

OPERATING

BUSINESS

Account

F I N A N C I A L

S T A T E M E N T

T A X F O R M

Sources:Legal and

IllicitCombined

FABRICATED SALES

What is actually happening is that the criminal is depositing the illicit funds into thebusiness bank account along with funds from genuine sales. The illicit funds are recordedin the books and records as if the money came from genuine turnover and the overstatedincome is reported in their tax returns. The company may not have to pay tax on thisincreased income if the company has trading losses available or where false deductionsare also created.

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OECD 2009 31

Specic Indicators on Real Estate


Introduction

Real estate has long been the preferred choice of criminals for hiding ill-gotten gains,

and manipulating property prices is one of the oldest known ways to transfer proceedsillegally between parties to a deal. Beyond the emotional appeal there are other factors:the relatively high monetary value, the likelihood that the value will appreciate over timeand the opportunities to conceal ownership. The following techniques of money launderingare identied.

The purchase

In purchasing a property the criminal will seek to launder proceeds by providing a portionof the purchase price (from criminal proceeds) in cash under the table, with the formalsale documents showing the balance of the purchasing price. The purchase of real estateby offshore companies, where the shareholder and the origin of the money is concealed, isalso a way of using criminal proceeds.

Financing

A popular form of money laundering is by nancing through loan back. This is whena criminal borrows their own criminal money. This is simply done by creating a loanagreement between the criminal or their representative and an apparent third party.Foreign offshore corporations controlled by the criminal are most commonly used as thethird party lender.

Renovations and use of real estate

The owner of the property has it altered and pays for renovations with criminal money.Another possibility is where the criminal rents a home and pays for it in cash with theproceeds of crime.

Selling

Selling real estate property to an offshore corporation, for a price that is much higher

than the real market price, creates a seemingly legitimate capital gain. Selling real estateproperty to a third party for a price above market value, while giving a cash rebate at thesame time, will also create a seemingly legitimate capital gain.

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32 OECD 2009

Concealment of ownership

The criminal will attempt to conceal their assets, wealth or the origin of the funds usedto nance the purchase. Examples include:

Straw man/ straw men or nominees, perhaps a relative of the criminal or a corporation,often offshore, is used as the registered owner of the real estate property. The criminalis therefore able to remain anonymous.

Third party bank accounts or trust accounts, administered by notaries or lawyers,are used to conceal the origin of money to acquire the property.

Rental of real estate

Luxury homes can be rented and the lease can be in the name of a third party or in thename of the criminal. The rent is paid in cash, out of criminal proceeds. This may be moreapparent in new real estate developments.

Indicators

Unusual transactions and parties

Unusual possession

Non-transparent ownershipLack of income in relation to purchase pricePersons with criminal records or backgroundSocial network of a criminal personFast-growing portfolio

Unusual transactionsUnusual parties to the transactionUnusual transaction pricesUnusual transaction results

Unusual nancingUnusual origin of the fundsUnusual lenderUnusual borrowerUnusual loan agreementUnusual nancing result

Unusual occupant or user

Unusual statements given

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OECD 2009 33


Example

Property ipping

Property ipping means that two or more transactions relating to the same propertytake place within a relatively short period of time. Property ipping can be used to laundercriminal proceeds. The buyer pays more than the price which is documented in the purchaseagreement and the notarial deed. When the buyer subsequently resells the property forthe same price that they actually paid, it appears that they have made a prot. As a resultof this transaction, the criminal proceeds have been converted to a seemingly legitimateamount of deposit money.


DRUGDEALER

B 200,000

Sale Proceeds

PROPERTY FLIPPING

SOURCESOF

INCOME

Illicit

PropertySeller

A

PropertySeller

A

DRUGDEALER

B

500,000BANK

200,000CASH

(UNRECORDED)

200,000

700,000BANK

PropertyBuyer

C

In this example the criminal seeks to launder $200 000 with the apparent legitimatepurchase and subsequent sale of a property. The property seller receives full market value(e.g. $700 000) for the property, but agrees to receive an under-the-table cash payment of$200 000 and a formal payment of $500 000 along with notarial documents listing the saleas $500 000. When the buyer subsequently resells the property for the same price that they

actually paid ($700 000), it appears that they have made a prot.

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OECD 2009 35

Specic Indicators on Cash


Introduction

It is common knowledge that drug trafcking generates large amounts of cash in

small denominations and, depending on the country where the sales are made, in certaincurrencies. The proceeds of other types of crime like theft, investment fraud and tax fraudcan also generate large amounts of cash. Payments between criminals will be largely incash. As a result the criminal is left with the problem of having to clean all this dirty money.Consequently, focusing on the cash can lead to the detection of criminals, their proceeds,their criminal activities and their money laundering activities.

The possession of cash has advantages for the criminal. These are its anonymityregarding origin, possession and use. For criminals, the anonymity of the origin gives themthe opportunity to create the appearance that the money was derived from an apparentlegitimate source. For example, ctitious loans can be set up or illicit funds can be comingledwith legitimate sales receipts where taxes may even be paid. Furthermore, possession ofcash and its use does not usually leave a connecting paper trail and the owners identity isnot recorded.

Cash also has disadvantages. It is common knowledge that the possession and the useof large sums of cash or its possession and the use of large denominations of a currencycan point to proceeds of crime. Also, the particular currency used could point to a speciccountry of origin where the bearer of the money does not have any economic presence. Asignicant problem with regard to cash is its limited spending and investing possibilities.Due to the risk of counterfeit, theft and the high cost of handling cash, businesses are not

willing to accept large payments in cash. Also, anti-money laundering regulations wherethe identication and reporting of transactions is required make it risky for the criminal tospend the money carelessly.

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36 OECD 2009

Indicators

Unusual origin of the funds

Cash received from countries with a high level of corruption or political instabilityCountries with a well-developed nancial system

Unusual possessionAmount, denomination, currency do not t the bearers' background

Unusual method of transportationConcealed transportation of cashClear safety risk in method of transportationCosts of transportation compared to alternative methods of transport

Unusual explanations givenNo explanation given for the origin of the cash, incomplete, unlikely or partly incorrectexplanationNo correspondence or supporting documentation in relation to the origin or owner

Unusual destination and spendingCountries of risk (drug producing, ineffective anti-money laundering regulation, strictbanking secrecy)

Cash received in countries which do not t bearers' backgroundCash spent on luxury items

Unusual cash ows within corporationsCash turnover/sales not to be expected in industryLarge increase in cash turnover/sales from non-identiable customersLarge increase in turnover/sales combined with costs of sale paid by bankDeposits or drafts in cash in denominations or currency not to be expected in theindustry

Cash deposits which are not registered as turnover/salesForeign loans received in cash and in local currencyHigh cash investment by foreign owner of lenderAn occasional high cash transaction (turnover/sales, cost invoice)

Examples

The laundering of cash consists of:

Converting the cash into other denominations or currencies using exchange ofces,banks, the black market and through the use of cash driven businesses;

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OECD 2009 37


Physical movement and transportation by car or plane using couriers, specializedvalue transportation companies;

Depositing money in the banking system through the use of straw men (nominees),

the use of cash driven businesses or the use of the smurng technique; Creating an appearance of a legitimate origin by creating ctitious loans or fabricating

cash turnover;

Making cash purchases.


LOAN

AGREEMENT

LAUNDERED

PROCEEDS

FOREIGN

BANK

ACCOUNT

DOMESTIC

BANK

ACCOUNT

LAUNDERED

PROCEEDS

ILLICIT

SOURCE

OF

INCOME

STRUCTURING SMURFING

BANK

ACCOUNT

1

BANK

ACCOUNT

2

BANK

ACCOUNT

3

BANK

ACCOUNT

4

9,000

9,000

9,000

9,000

In this example illicit funds are smurfed into domestic bank accounts in amounts belowthe threshold where the bank would make a report of an unusual or suspicious transaction.From there the money is transferred to off-shore bank accounts where the funds are usedto make a loan to the criminal. All these acts can be committed by the criminal or by athird-party, domestically and/or abroad.

Countries of risk

Certain countries are considered to be attractive to criminals for their criminal activitiesand/or money laundering purposes. These are countries that are known for the productionand exportation of illegal drugs; cash will ow back to the criminal organisations in thedrug-producing countries. The list will also include countries where effective anti-money

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38 OECD 2009

laundering controls are not yet in place and which the criminal will consider attractivefor depositing money as well as countries geographically close to the illegal activity withstrict banking secrecy laws and a lack of transparency. Having a bank account in such a riskcountry may indicate money laundering. Cash in small denominations or cash in currencies

of countries where individuals or corporations do not have registered legal activities canindicate that the proceeds are from the sale of drugs. The amount of cash, the denominationsand currencies can lead to problems with transportation, issues relating to an apparentlegal origin or for spending the money. For these reasons illicit money will be exchangedinto larger denominations and/or into another currency. Normally such a transaction maybe identied as suspicious by the customs agent or the bank receiving the deposit, but thetax auditors may also detect money laundering here by seeing a pattern of transactionsover a period of time.

Here is an example based on a real case. A person is travelling from Colombia, thecountry of risk, to Paris declaring EUR 125 000 in notes of 500. The story the traveller told isthat the amount is from legitimate foreign exchange activities in Colombia. He said that hewas transporting cash in Euros from Colombia to Europe; he deposits the money into hisbank account in Europe, ies back to Colombia and withdraws the cash from ATM machines(automated teller) in the local currency. The local currency is then exchanged on the localblack market for Euros at a protable rate. Once again, the individual ies back to Europe anddeposits the money into his bank account. All the while, cash is being declared at customs,prots are being declared and taxes are paid.

From a scal point of view, there are no issues but the excessive amount of currencyexchanged and physically transported, the large denominations and the country of origin,Colombia, should raise suspicion. Because the real story is that this person was helping a largedrug organisation in Colombia to change their proceeds, paid in Euros, into local currencyto make payments possible (production, transport, security, investing) in Colombia.

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OECD 2009 39

Specic Indicators on International Trade


Introduction

In international literature, money laundering through trade is known as Trade Based

Money Laundering. It is seen by various organisations, such as the FATF and the WorldCustoms Organization as a key method to move and/or launder large amounts of moneyderived from crime. The movement of money can be visible through the payment ofexpenses and visible or not, by moving money via air transportation, road transportationor by smuggling with goods.

Criminal proceeds often need to be transferred to another country, a criminal transactionmust be settled or funds must at some time come back to the criminal. These are reasons forcriminals to move capital with the capabilities and constructed legitimacy of internationaltrade. The techniques are discussed hereafter.

Over- and under-invoicing

By making over- or under-valuations of imports or exports, capital can be moved andlaundered in the form of goods or money ows. Over- and under valuation may take theform of adjustments to price, quantity, quality or a combination thereof.

Method Qualication Shifting of value

Import Over-invoicing Expensive imports In money abroad

Under-invoicing Lucrative imports In goods to the homelandExport Over-invoicing Lucrative exports In money to the homeland

Under-invoicing Cheap exports In goods abroad

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40 OECD 2009

False descriptions

The goods identied on the invoice may not be the goods actually imported or exported.The documents can contain a price that corresponds to the specied goods but the actualmarket value of the goods imported or exported may be many times higher or lower. Physicalobservation is necessary in order to conrm that the goods shipped are the same as thegoods invoiced. Goods shipped may actually be strategic goods, goods with restrictions(quotas), goods with a higher import duty or prohibited goods such as raw materials fordrugs, weapons and ctitious goods.

Multiple Billing

Multiple billing (or multiple invoicing) is a technique where multiple invoices are createdfor the same goods. This technique is used to evade import duties or to launder the proceedsof crime.

Fictitious transactions

Finally, transactions can be ctitious. The goods are never delivered or the services arenever performed. Yet, with an invoice on hand, funds can be transferred or received. Thisserves to move money safely through corporate accounts, to falsify prots, to cover up or


Domestic

Company

C

LAUNDERED

PROCEEDS

LAUNDERED

PROCEEDS

Foreign

Company

A

ILLICIT

SOURCE

OF

INCOME

MARKETVALUE:

900,000

GOODS ATDEFLATED PRICE

STOLENGOODS

GOODS ATMARKET

PRICE

TRADE-BASED MONEY LAUNDERING -

UNDER-INVOICING

Domestic

Company

B

SAME OWNER

900,000

300,000

600,000

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OECD 2009 41


settle possible illegal activities. With current technology, it is easy to modify existing invoicesor produce ctitious invoices. Information on corporations that is needed to create an invoiceis readily available. It is also easy to set up a foreign corporation to deliver or receive goodsor services when, in fact, they are neither delivered nor received.

Indicators

Unusual origin or destination of goodsCountry is not known for importing or exporting that type of goodsRisk countries

Unusual supplier or buyerNewly formed corporations with large imports and exportsVolume or type of goods does not t suppliers' or buyers' proleOffshore companies as supplier or buyer

Unusual transportation of goodsHigh costs of transportation compared to the value of the goodsSize or nature of goods does not t in the method of transportation

Unusual description of goodsMajor differences between customs lings and invoicesMajor differences between description of goods on the invoice and the actual goodstransportedRisky goods: high value goods

Unusual pricingMajor difference between declared value and market valueMajor difference between insured value and invoice

Unusual nancing/paymentsA difference between the origin of the goods and the destination of the money (viceversa)A difference between the amount of money paid and the amount invoicedA payment made by an offshore company or from an offshore accountCommission payments to a third party without supporting documentation or economic justication.

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44 OECD 2009

In this example the criminal is holding large sums of cash they wish to launder. Thiscash is deposited in various bank accounts in amounts that will not attract the attention ofregulators. These amounts are then wired to a foreign bank where they are consolidated inan account controlled by foreign company A which is in turn controlled by the criminal.These funds are loaned back to the criminals domestic company B for use by the criminal.The source of these funds appears on the books of company B as a loan payable to A.

Back-to-back loan

A back-to-back loan is a loan where pre-existing collateral, such as a foreign bankbalance, a cash deposit of a sum of cash, is the security for the lender. If the security consistsof assets that are acquired directly or indirectly from any crime, there is money laundering.In contrast to the loan back, the lender is an independent third party.

Criminal interference

In addition to the real involvement of one party (loan-back) or two parties (back-to-back) there may also be a criminal third party - in the background - that plays a role. Thiscriminal interference achieves the nancing of legitimate business activities through loans,supply of capital or comingling of illegal funds and legal funds. For example a criminal withcash proceeds of crime makes it available to legal entity A, with the request to provide a



BANK

ACCOUNT

1

BANK

ACCOUNT

2

BANK

ACCOUNT

3

BANK

ACCOUNT

4

LAUNDERED

PROCEEDS

FOREIGN

BANK

ACCOUNT

DOMESTIC

BANK

ACCOUNTS

DOMESTIC

COMPANY

BFOREIGN

COMPANY

A

LAUNDERED

PROCEEDS

ILLICIT

SOURCE

OF

INCOME

9,000

9,000

9,000

9,000

LOAN BACK MONEY LAUNDERING

LOAN

36,000

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46 OECD 2009

Unusual occupant or user of what is fundedLack of income in relation to rent at market ratePersons with criminal records or backgroundSocial network of criminals

Unusual statementsNo explanation given, incomplete, unlikely or partly incorrectExplanation given is not easily veriable

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OECD 2009 47

Specic Indicators on Professional Service Providers

Specic Indicators on ProfessionalService Providers

Introduction

Professional service providers are corporations or individuals (entrepreneurs) whoprovide specialised services, which can include:

Legal service providers:

Legal advice;

Legal assistance.

Financial service providers:

Advice in tax matters;

Completion of tax returns;

Bookkeeping, preparing and auditing the company accounts.

Trust or company service providers:

Forming and selling corporations or other legal persons;

Acting or arranging for another person to act as a director or secretary of acompany;

Providing a registered ofce, business address, correspondence or administrativeaddress;

Acting as a trustee or a similar legal arrangement;

Acting as a nominee company director, secretary or shareholder for the ultimate

benecial owner.A criminal will at some stage require the expertise of a professional service provider. The

involvement of a professional service provider is legally required in certain transactions, for

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48 OECD 2009

instance, the services of a notary when completing a real estate transaction. The involvementof a professional service provider in a transaction is attractive for criminals because of:

The nature of the services rendered which might assist in the money laundering

process; The name and reputation of an industry or group of professionals which raises

condence and gives the transaction a certain appearance of legitimacy;

The condentiality maintained by certain professional service providers;

The third party trust accounts available from certain professional serviceproviders.

Criminals may request services from unsuspecting professional service providers. Thereare, on the other hand, professional service providers who will knowingly provide servicesfor criminals to help them conceal the ow of criminal money.

Indicators

Unusual service provided by a professional service provider

Unusual professional service provider chosen for service

Unusual reward for a professional service provider

Unusual transaction, income or assets of the professional service provider

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For more information

Financial Action Task Force (FATF)www.fatf-ga.org

Centre for Tax Policy and Administration work on tax crimesand money laundering www.oecd.org/ctp/taxcrimes

Documents

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