How to Conduct a Risk Assessment to Avoid the Consequences of Money Laundering

When preparing to hire an executive, form a partnership, acquire another company, or even hire a vendor, you need to do a full risk assessment so you know what potential dangers your company faces. This allows you to make an informed decision about whether the rewards are worth the risks. Make no mistake: while some deals may appear to be risk-free, very few actually are. In most cases, there are some risks, but they’re negligible. However, just because many executives, vendors, and partner companies are legit and pose little risk, that doesn’t mean there aren’t people out there who engage in criminal behaviors to make more money. 


One of the most common ways these companies make their money is through illegal methods such as bribery, forgery, drug sales, weapon sales, and even human trafficking. Many of the people and companies involved keep this part of their income hidden behind what appears to be a legitimate business. They use various money laundering operations to make the funds gained via illegal activity appear to come from legal sources. 


How can you learn whether or not someone you’re considering for an executive position or a company you want to acquire has participated in money laundering schemes? The best way is to conduct a risk assessment analysis that includes doing deep dive due diligence. Infortal’s methods of due diligence do more than just basic public records searches—we do a deep dive of open source intelligence records, information from other states and countries, and much more. With this information on hand, you’ll be better able to assess the potential risks and decide if you should move forward. 


Let’s take a further look at what money laundering is, how risk assessment can help protect you from its consequences, and what Infortal can do to assist you.


What is Money Laundering?


While the above definition of money laundering gives you a good idea of what it is, it’s also fairly basic. In theory, money laundering is fairly basic: money gained from criminal activity is passed off as legitimate funds earned legally. In practice, however, money laundering operations are often a little more complex. Money may be run through multiple shell companies and businesses. Online banking and third-party money transfer options such as PayPal made money laundering easier, as has the recent growth of cryptocurrency. 


It's also become easier to transfer money between countries and into other currencies. This makes getting money out of countries where bribery and other crimes are commonplace fairly simple. Individuals, companies, or even entire countries that have been sanctioned and cannot easily do business with the U.S. now have even more ways of filtering money in and out due to how easily money can be moved and converted. 


Most money laundering operations work in three ways. First, the money gained from criminal activities, called “dirty money,” is quietly and carefully injected into a legitimate business. Second, that money is moved through various companies and individuals via financial transactions and careful records manipulation. This is the “laundering” process in which the dirty money is made to appear to be clean, much like dirty laundry becomes clean after washing it. Finally, the cash is placed in a legitimate account where the criminals are able to use it however they want without worrying about being caught. 


Sometimes this process does involve businesses, but other times, it involves buying and selling real estate, using casinos, passing money through bank accounts, and more. Simple laundering operations may only use one of these options, but complex money laundering often has several layers. The criminals may invest their money in real estate, then sell the properties and convert the money into another currency before using it at a casino. This type of layering makes it much harder to track down the origin of the dirty money. 


How Risk Assessment Protects Against Money Laundering


When we discuss anti-money laundering methods, we’re typically talking about risk assessment and due diligence. Unfortunately, there are businesses that don’t take the time to do so. They only do a basic background check on executives or only check a business against a global watch list rather than doing a deep dive into their background and business activities. This reveals such a small part of what the business has done or the executive has been involved in. Typically, these quick and cheap searches only reveal what’s happened in the state in the past seven years. They don’t look at other names the executive or company has used, consider what business partnerships they have, or really dig into where their funding comes from.


Here are a few of the ways risk assessment highlights money laundering issues or uncovers hidden corruption.


We look into aliases, DBAs, shell companies, and subsidiaries

Executives could have used aliases when doing business with illegitimate businesses, while companies may use a DBA (Doing Business As), a shell company, or a subsidiary to funnel dirty money through other companies. Infortal will dig deep into any other name or subsidiary an executive or business used to find information about what they have done under that name. Shell companies are often used to move money around from state to state or country to country, while aliases can be used to avoid disclosing conflicts of interest or bribery. You need to know about any other name someone is using so you can fully vet them.


We consider established relationships

Sometimes money laundering is done by hiding relationships between individuals or companies. Funds gained illegally through a known mobster could be passed through a company owned by a cousin who has a different name. The two may be very careful about never being seen together or being linked in any way. Without looking into a person’s family and their connections, this link could be missed. 


We pay special attention to offshore companies

Because they’re based in other countries, offshore companies are often used for hiding assets and laundering money. In this case, “offshore” simply means the company is located in another country and is subject to that country’s laws rather than U.S. law. Many people use offshore banks located in the Bahamas, Switzerland, or other locations, for example. The famed Swiss bank accounts, for example, originally didn’t even have names attached to them. This made it very easy to hide money in the country.  


In addition to offshore bank accounts, some criminals invest money in offshore companies or other countries as a way of supporting terrorists. For example, the island nation of Nauru was known as a money laundering hotspot during the 80s. Russian criminals made use of the country’s incredibly tight privacy laws to move money to the terrorist organization al-Qaida. 


Where is the company’s headquarters?

It’s not always easy to determine where a company’s headquarters is, especially if they have various subsidiaries and shell companies. You may believe you’re working with a U.S. company only to find out that the company is owned by another company that’s owned by a large corporation based in China. Doing basic due diligence may not be enough to discover this, which is why you need to do a deep dive. Don’t trust what you find on sources such as a company website or other online sources. Some companies don’t even have a website, so doing research on them isn’t that easy.


Free resources are just a start

While resources such as Transparency International do provide information about money laundering and companies that have been involved in corruption, they don’t provide deep due diligence. Yes, you can see that specific countries are ranked as high corruption risks, but how do you know that the business you’re considering working with doesn’t do business there? You can’t without doing your due diligence. Free resources and even low-cost paid resources typically don’t provide enough information to make a truly informed decision. 


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Risks of Working with a Company that Launders Money


Working with any company that’s engaged in illegal activity, whether it’s money laundering, bribery, trafficking, or anything else, always poses a serious risk. With money laundering, it’s possible any company you partner with could funnel dirty money through you. This could make you an accomplice, especially if you didn’t do any due diligence. If you merge or form any type of partnership that involves co-mingling funds or signing off on contracts, you may find that you’re laundering money and approved of the whole thing. 


Even if you aren’t merging with a company, hiring an executive in any sort of financial role can lead to the same outcome. They may approve a contract with a company they know has brought in dirty money and use your company to move that money into or out of the U.S. Once this information comes to light, your entire company is likely to be investigated. Even if you can prove that the executive was the only one involved, it’s still going to damage your reputation and likely result in fines and other penalties. The Benex scandal in the late 1990s involved several executives at Benex International and Becs International and resulted in fines and jail time.


If you’re in the financial sector, being embroiled in a money laundering scandal can end your business. Without a strong reputation, many of your customers may abandon you. There are many cases where banks and other financial companies had to close following money laundering charges. The Bank of Credit and Commerce International, for example, was invested in 1990 for falsifying transactions and hiding deposits. By 1991, the Bank of England determined that there was so much fraud and corruption that BCCI couldn’t be salvaged. 


Contact Infortal Today to Learn More About Anti-Money Laundering and Risk Assessment


Infortal uses open source intelligence, court records, financial information, dark web information, and more to dive into the executive or company in question. Our goal is to triangulate data we find in order to highlight anything—real estate investments, subsidiaries, aliases, etc.—that could indicate corruption such as money laundering. Without this information, you can’t truly know what kind of risk you’re taking. Contact us today to learn more.


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