FINTRAC Releases New Indicators of Underground Banking Money Laundering

The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) has released a follow-up operational alert to its 2019 original concerning money laundering (ML) in underground banking. The initial alert particularly focused on the casino sector. 

The new alert, published in July 2023, broadens the focus, adding more underground banking risk indicators to help firms identify ML in additional sectors – including securities, real estate, and the automotive industry. Both advisories support project ATHENA, a public-private information-sharing initiative dedicated to combatting money laundering in Canada. The initiative seeks to create “systemic and operational enhancements and…better detection, prevention and disruption of criminal activity.”

According to the report, the most frequent type of underground banking occurs in the form of informal value transfer systems (IVTS).

IVTS Operators and Money Laundering

According to the United States Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), IVTS operators are traditional informal money transfer systems. They have historically been used for trustworthy purposes, but due to their potential for anonymity, they can easily be used to facilitate money laundering and terrorist financing. IVTS operators are often firms outside formal banking or even money services.

According to FinCEN, most IVTS transactions occur in at least five steps.

1. The originating individual sends funds to the IVTS operator in their country.
2. That operator provides a private code to the individual and an IVTS counterparty in the intended recipient’s country.
3. The individual provides the code to the recipient.
4. The recipient provides the code to their local IVTS operator.
5. The IVTS operator provides the requested funds to the recipient.

Funds obtained through IVTS are not usually transferred between countries. Instead, each operator creates a fund from payments received, which they then use any time they must forward money to a recipient in their own country. IVTS operators settle accounts between one another separately, making it very difficult to trace funds sent or received via IVTS.

Key Typologies

The July 2023 advisory also outlined five other common underground banking ML typologies and associated indicators. 

1. Money Muling

This was observed to involve large incoming deposits or transfers quickly drafted to pay recipients in the legal, automotive, securities, and real estate sectors.

2. Real Estate Abuse 

According to FINTRAC’s investigation, individuals in the sector received funds – often in the form of draft purchases using funds from China that followed structuring patterns. Indicators specific to this typology included:

• Real estate-related transfers from China using known structuring techniques.
• Funds deposited in cash are transferred into the real estate industry.
• Customer accounts receive money from China labeled for personal or educational use, but the subsequent spending appears to be real estate related.

3. Securities Abuse 

Financial planners, investors, and investment firms were seen to purchase Guaranteed Investment Certificates using funds from unknown Chinese sources. These certificates were then sold, and the funds were transferred to clients in various ways. Indicators specific to this typology included:

• Funds are received from China and used to purchase and then sell short-term investment products, especially if incurring penalties for selling before the term date.
• Soon after cash deposits are received, they are transferred to trust, holding, or investment firms.

4. Automotive Industry Abuse 

Purchases were made with luxury car dealerships from individuals that had received funds transferred from China. These “straw buyers” typically had occupations that did not align with high-end spending, and the fund transfer patterns between the dealerships and import/export services were frequently circular, involving China at some stage. Indicators specific to this typology included:

• Cash deposits are quickly transferred to automotive import/export firms, especially in China.
• Funds from China are used to pay automotive industry firms with virtually no online presence, more recent profiles, or who are listed at residential addresses.

5. Legal sector abuse 

Legal firms involved in real estate were noted to receive bank drafts or checks from China without the continued spending that would have been associated with maintaining a property. Indicators specific to this typology included:

• Repeated funds transfers originating in China sent to a legal entity without a clear reason.
• Customer account mainly receives funds from legal entities on which virtually no public information can be found.

Key Takeaways

Although IVTS payments occur outside the formal banking system, they often concern banks at the level of accounts held by involved parties. For this reason, banks should be aware of the red flags to spot abuse of customer accounts for IVTS money laundering. 

Savvy compliance staff may choose to study FINTRAC’s operational alerts to familiarize themselves with key underground banking ML typologies. It may also be useful to read FinCEN’s detailed treatment of IVTS for additional background.

FINTRAC urges firms to report transactions suspected of money laundering with the tag #ProjectAthena or #Athena on the suspicious transaction report in Part G-Description of suspicious activity.