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Journal of Money Laundering Control/2012/Volume 15/Issue 1, 1 January/Articles/An analysis of money laundering and terrorism financing typologies - (2012) JMLC 15(1), 85-111 Journal of Money Laundering Control (2012) JMLC 15(1), 85-111 1 January 2012

An analysis of money laundering and terrorism financing typologies


Angela Samantha Maitland Irwin is currently a PhD candidate of Professor Jill Slay at the University of South Australia. Her PhD is on the topic of Money Laundering and Terrorism Financing in Virtual Environments. Angela Samantha Maitland Irwin is the corresponding author and can be contacted at: irwas001@mymail.unisa.edu.au Kim-Kwang Raymond Choo is a Senior Lecturer at the University of South Australia, and has (co-)authored a number of publications in information security, cyber crime and anti-money laundering including a book published in Springer's Advances in Information Security book series, three Australian Government Australian Institute of Criminology (AIC) refereed monographs, and several book chapters. Information Assurance Group & Forensic Computing Lab, University of South Australia, Mawson Lakes, Australia Lin Liu School of Computer and Information Science, University of South Australia, Mawson Lakes, Australia received the B.Eng and M.Eng degrees in Electronic Engineering from Xidian University, China in 1991 and 1994, respectively, and a PhD degree in Computer Systems Engineering from the University of South Australia (UniSA) in 2006. Currently she is a Lecturer at the School of Computer and Information Science, UniSA. Her research interests include Petri nets and their applications to protocol verification and network security analysis, as well as data mining and its applications to biological data analysis. She has published more than 20 refereed journal and conference papers in the aforementioned research fields. Emerald Insight 2012 Abstract Purpose -- The purpose of this paper is to measure the size of the money laundering and terrorism financing problem, identify threats and trends, the techniques employed and the amount of funds involved to determine whether the information obtained about money laundering and terrorism financing in real-world environments can be transferred to virtual environments such as Second Life and World of Warcraft. Design/methodology/approach -- Analysis of 184 Typologies obtained from a number of anti-money laundering and counter-terrorism financing (AML/CTF) bodies to: determine whether trends and/or patterns

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can be identified in the different phases of money laundering or terrorism financing, namely, the placement, layering and integration phases; and to establish whether trends and/or behaviours are ubiquitous to a particular money laundering or terrorism financing Type. Findings -- Money launderers and terrorism financers appeared to have slightly different preferences for the placement, layering and integration techniques. The more techniques that are used, the more cash can be successfully laundered or concealed. Although terrorism financers use similar channels to money launderers, they do not utilise as many of the placement, layering and integration techniques. Rather, they prefer to use a few techniques which maintain high levels of anonymity and appear innocuous. The sums of monies involved in money laundering and terrorism financing vary significantly. For example, the average maximum sum involved in money laundering cases was AUD 68.5M, as compared to AUD 4.8 for terrorism financing cases. Originality/value -- This paper provides some insight into the relationship between predicate offence, the predominant techniques utilised in carrying out that offence and the sums of money involved. Keywords Money laundering, Terrorism, Financing, Typologies, Anti-money laundering/counter terrorism financing, Virtual environments Paper type Research paper Money Laundering

1. Introduction
Considerable progress has been made in fighting money laundering and terrorism financing in real-world financial environments, particularly with the introduction of stronger anti-money laundering/counter-terrorism financing (AML/CTF) regimes and increased levels of inter-agency co-operation and support. However, money laundering and terrorism financing in virtual environments is an area that is currently under researched and not as well understood as its real-world counterpart. (2012) JMLC 15(1), 85-111 at 86 In recent years there has been much debate about the risks posed by virtual environments. Concern is growing about the ease in which massively multiplayer online games (MMOGs) such as Second Life and World of Warcraft can be used for economic crimes such as money laundering, fraud and terrorism financing (Tefft, 2007; Rijock, 2007; Sullivan, 2008; Sanders, 2009) and the potential and opportunity they offer for allowing large sums of money to be moved across national borders without restriction and with little risk of being detected (Lee, 2005; Leapman, 2007; BBC, 2008; Heeks, 2008). The overall aim of our three-year research project is to determine whether money laundering and/or terrorism financing can be carried out inside virtual environments such as Second Life and World of Warcraft and, if so, how can it be done? However, to answer these fundamental questions, one must know what money laundering and terrorism financing might look like inside these environments. Since this information does not currently exist, we must look to existing sources of data to inform our research, namely real-world money laundering and terrorism financing data. It is believed that knowledge gained from real-world environments will provide valuable insight into how money may be laundered and funds may be raised in virtual environments to assist criminals to produce clean funds and further the political cause of terrorist organisations. Therefore, this paper focuses on the first phase of our research which attempts to measure the size of the real-world money laundering and terrorism financing problem, identify potential threats and trends, the techniques employed and the amount of funds involved.

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Over the years, a number of attempts have been made to determine the magnitude and scope of the money laundering and terrorism financing problem (Schott, 2006; Biagioli, 2008; Zdanowicz, 2009; Walker and Unger, 2009) and investigate how money is being laundered (Unger et al., 2006; Unger, 2007) and terrorism is being financed (Roth et al., 2004). However, the inherently secretive nature of money laundering and terrorism financing make these very difficult tasks to achieve. Many of the attempts to measure the size of the problem have produced a number of largely varied estimates, none of which can be irrefutably proven (Biagioli, 2008). Attempts to define how money laundering and terrorism financing can be carried out have been low level and superficial and generally do not discuss in detail the actors, financial flows and behaviours involved in carrying out these activities. On the other hand, various international organisations produce excellent reference works on money laundering methods and techniques in the form of annual reports and annual typology reports. These reports, which contain details of sanitised, successfully detected money laundering and terrorism financing cases, provide a wealth of information on current threats and trends, techniques employed and, in many cases, the amount of funds involved. By mining annual and typology reports published by international intelligence units and AML/CTF organisations, this research aims to determine whether trends and/or patterns can be identified in the different phases of money laundering or terrorism financing, namely, the placement, layering and integration phases[1] and establish whether trends and/or behaviours are ubiquitous to a particular money laundering or terrorism financing type. This paper provides some insight into the relationship between predicate offence, the predominant techniques utilised in carrying out that offence and the sums of money involved. (2012) JMLC 15(1), 85-111 at 87 The rest of the paper is structured as follows: Section 2 introduces money laundering and terrorism financing; Section 3 examines the various methodological approaches available for analysing money laundering and terrorism financing data, considering the strengths and weaknesses of each. It then discusses the approach selected for analysing the typologies[2] used in this project and provides an overview of data quality; Section 4 provides the results of statistical analysis performed on the real-world money laundering and terrorism financing typologies and a discussion that elaborates on the most important issues presented in the paper; Section 5 concludes the paper and looks at future work related to the research project.

2. Background
Although there are many definitions for money laundering, depending on whether you are looking at it from a legal, economic or social perspective, the definition applied to this project is the one used by the Australian Institute of Criminology which states that:

[...] money laundering is the process by which the proceeds of crime are put through a series of transactions, which disguise their illicit origins, and make them appear to have come from a legitimate source (Graycar and Grabosky, 1996).

When a criminal activity generates substantial profits, the individual or group involved must find a way to control the funds without attracting attention to the underlying activity or the persons involved. Criminals do this by disguising the sources, changing the form, or moving the funds to a place where they are less likely to

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attract attention (FSC, 2009). There are three phases to money laundering: placement, layering and integration (Buchanan, 2004). In the placement stage, the cash generated from crime is brought into the financial system. At this point the proceeds of crime are most apparent and at highest risk of detection. Money launderers "place" the illegal funds using a variety of techniques, which include the deposit of cash into bank accounts and the use of cash to purchase high value assets such as land, property and luxury items. Once the proceeds of crime have been placed into the financial system, there is an attempt to conceal or disguise the source or ownership of the funds by creating complex layers of financial transactions. The purpose of this is to disassociate the illegal monies from the source of the crime by purposefully creating a complex web of financial transactions aimed at concealing any audit it trail and the source and ownership of funds. Integration of the cleaned money into the economy is the final stage of the process, and is accomplished by the launderer making it appear to have been legally earned. It is extremely difficult to discern between legal and illegal wealth at the integration stage. Terrorism financing, on the other hand, occurs when the primary motivation is not financial gain but, rather, the use of funds to "encourage, plan, assist or engage in" acts of terrorism (The WorldBank.org, 2003). Funds are often transferred using tactics that are progressively more complex. Terrorist financing networks operate globally and are able to gain access to the financial systems of both developing and developed countries. There are three terrorism financing models: the traditional terrorism financing model (FINTRAC, 2009), the reverse terrorism financing model (AUSTRAC, 2009) and the alternative terrorism financing model (FINTRAC, 2009). They differ from the money laundering model in that terrorism financing funds can be from legitimate sources, not just criminal acts. (2012) JMLC 15(1), 85-111 at 88 Although there can be a number of different motivators and drivers for money laundering and terrorism financing activity, they are inextricably linked. Terrorist groups usually have non-financial goals: publicity, dissemination of an ideology, the destruction of a society or regime and simply spreading terror and intimidation. However, in practice, terrorists need finances and are often profit-oriented groups in addition to their ideological motivations (Hardouin, 2009). Financial crime is a category which can generically encompass many others, like money laundering or terrorism financing or corruption or fraud. Clear links exist between terrorism financing, money laundering, cybercrime and traditional criminal activity (Nardo, 2006). The lines between fraud, money laundering and terrorist financing are blurred, and they should not be treated as separate events (Palmer, 2005). However, it is important to note that not all terrorism financing comes from illegal means; significant funds can be raised through legitimate businesses, fund raising efforts and donations. Equally, it must also be noted that money laundering and terrorism financing do not necessarily go hand-in-hand as a great deal of money laundering activity is for private profiteering only and not for political purpose[3] (Choo and Smith, 2008). There has been a noted convergence between terrorism and organised crime since 9/11 (Choo, 2008). The FBI, for example, noted that "international organised criminals provide logistical and other support to terrorists, foreign intelligence services, and foreign governments, all with interests acutely adverse to those of U.S. national security" (FBI, 2008).

3. Review of existing methodological approaches for measuring or analysing money laundering and terrorism financing
This section examines the various methodological approaches available for measuring money laundering and terrorism financing. It considers the strengths and weaknesses of each approach and discusses the approach selected for analysing the typologies in this project. Existing methods to measure money laundering and terrorism financing can be categorised under micro- and

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macro-economic approaches. Micro-economic approaches include: multi-source/multi-method approaches drawing on administrative crime data and probability sample crime victimisation surveys, probability and non-probability sample expert opinion perception surveys and analysis of suspicious activity reports (SARs) to suggest volumes/values of money laundering and analysis of samples of offenders or of law enforcement case information. Macro-economic approaches include: models based on country-by-country estimations, import/export pricing anomalies and use of proxy variables and currency demand. The following paragraphs provide a brief outline of some works which utilise these approaches. The multi-source/multi-method approach used by (Unger et al., 2006; Walker, 1997; Walker, 1999; Stamp and Walker, 2007) utilised crime data and data from victimisation surveys to determine the proceeds of crime dependent upon crime type. Unger et al. (2006) used the "attractiveness model" and "distance deterrence model", developed by Walker (1997), to estimate the percentage and amounts of criminal proceeds that were laundered within a specific jurisdiction or sent elsewhere. Both of these models were then used together to estimate the proportion of money flowing from one jurisdiction to another (Unger et al., 2006). Expert opinion perception surveys were used by Stamp and Walker (2007) to investigate the perception of Australian law enforcement agencies, Australian (2012) JMLC 15(1), 85-111 at 89 Transaction Reports and Analysis Centre (AUSTRAC), worldwide financial intelligence units (FIUs) and criminologists (Stamp and Walker, 2007). Participants in the survey completed a questionnaire which aimed to determine: what the main crime types were and how big they were, how much proceeds/profit of crime was generated from these crimes, how were and what percentage of the proceeds were laundered, where were the funds laundered, what impact did this have on society and the financing of terrorism. Analysis of SARs, also known as suspicious transaction reports are used by Stamp and Walker (2007) to determine trends by filing sector, values of transactions and the nature of behaviour as assessed by FIU analysts. A number of authors measured terrorist organisation membership (Kane and Wall, 2005) and terrorism financing (Roth et al., 2004) using law enforcement case information. Kane and Wall (2005) used information gathered from convicted offenders/law enforcement case data to study the modus operandi of suspected terrorists and members of a terrorist organisation. Roth et al. (2004) used a number of sources to provide a high-level summary of al Qaeda-related terrorism financing; these used raw and finished intelligence, as well as law enforcement and other sources of data. The main aim of research carried out by Schneider and Enste (2000) was to provide a comprehensive summary of available micro and macro data on the size of the shadow economy. They provided estimates of the underground economy for 21 Organisation for Economic Cooperation and Development countries based on the currency-demand approach. TABLE I explores the advantages and disadvantages of each approach. The methods discussed in Table I are classified under the micro- or macro-economic approach. TABLE II provides details of the advantages and disadvantages of using these approaches for measuring money laundering and terrorism financing. Both of these approaches have produced a number of largely varied estimates; none of which can be irrefutably proven. Also, the quantitative issues that have been raised by AML and the fight against terrorism financing have yet to be definitively answered (Biagioli, 2008) and no broadly approved measurement methodology has yet been developed (Fleming, 2009). Unger et al. (2006) investigated how money was being laundered from a Netherlands perspective. Data were obtained from a number of sources in the form of interviews with experts from the Dutch National Bank and the Department on Trust Offices. Each participant was presented with a list of potential forms of money laundering and asked which were specific to The Netherlands. From this investigation, a taxonomy of methods and techniques employed by Dutch money launderers was produced. A modified version of this

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taxonomy has been used in this project (Table IV).

3.1 Methodological approach used in this research


The following paragraphs discuss the methodological approach used to gain an understanding of the scope of money laundering and terrorism financing, learn how money laundering and terrorism financing might be carried out and discover the behaviours that may be exhibited when carrying out these activities. This research draws on the work of Unger et al. (2006), Unger (2007) and Stamp and Walker (2007) to answer these questions. While the taxonomy of Unger (2007) is a great starting point for our research; it offers a superficial representation of how money laundering and terrorism financing (2012) JMLC 15(1), 85-111 at 90

Table I. Methods used to measure money laundering and terrorism financing Methodological approach Advantages Disadvantages Analysis of SARs (Stamp and Hold some promise as they Only high-level statistics may be Walker, 2007) resemble and represent presented (Micro-economic approach) underlying trends Data need to be manipulated Can contribute to an prior to analysis to take into understanding of the scale and account multiple individuals or nature of predicate offence one individual/multiple events/ Owing to standardised reporting one event) instruments, data are easily aggregated and allow for careful comparison between and within regulated sectors Multi-source/multi-method Data are plentiful May experience data quality drawing on crime data and Closely represents population issues probability sample crime No conscious or unconscious Method requires vast amounts victimisation surveys (Walker, selection of data, the quality of which may 1997, 1999; Unger et al., 2006; Results are more reliable not meet requisite standards Stamp and Walker, 2007) (Micro-economic approach) Samples of offenders or of law Allows for an understanding of It is challenging to generalise enforcement case information the criminal behaviour and from this data to the larger (Roth et al., 2004; Kane and laundering activity of a sample population of offenders Wall, 2005) of prosecuted/convicted (Micro-economic approach) offenders Activity of convicted launderers may be little different to those that have not been caught so findings may not be biased In situations where there is a lack of data, these measurements may provide value -- particularly those deriving quantitative trends from an otherwise qualitative base of information Calculations based on Precise enough to provide a Currency-demand approach "sensitive" factors such as reasonable upper-bound assumes that the underground currency demand (Tanzi, 1996; estimate of total money economy consists of only cash

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Schneider and Enste, 2000) (Micro- and macro-economic approach) Probability and non-probability expert opinion perception surveys (Stamp and Walker, 2007) (Micro-economic approach)

laundered

transactions

Informative Data may be skewed due to In some cases represent the only personal bias rather than information available responses being founded in fact Low response rates may affect data accuracy Levels of understanding of the current situation may vary widely Cannot offer figures with any level of precision (2012) JMLC 15(1), 85-111 at 91

Table II. Advantages and disadvantages of micro- and macro-economic approaches for measuring money laundering and terrorism financing Methodological approach Advantages Disadvantages Micro-economic estimates/ Such figures are useful to Do not include the informal analysis (focuses on different confirm that the phenomenon of economy or activities that, types of crimes and on money laundering is of sufficient though legal, are not reported in estimating incomes from each) scale to warrant public policy order to evade taxes attention Produces estimates of the Complement the macroeconomic volume of laundered money that approach can be considered nothing more than an indicative order of magnitude Availability and reliability of data are poor The quality of information is not good enough to provide guidance for policy Available estimates lack credible empirical foundations When measurements are based on predicate crimes, the estimates are crude Macro-economic estimates Such figures are useful to Expected to produce a rough (based on a broad definition that confirm that the phenomenon of upper bound of how much assumes that any revenue on money laundering is of sufficient money is laundered because it is which no tax is paid -- be it from scale to warrant public policy impossible to make fine legal or illegal activity -- must attention distinctions in these studies be laundered in some way) Produces estimates of the Underground, shadow or hidden volume of laundered money that economy can be considered nothing more than an indicative order of magnitude Quality of information is not good enough to provide guidance for policy Estimates are methodologically flawed When measurements are based

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on predicate crimes, the estimates are crude might occur. Therefore, an analysis of SARs was carried out in this research. Even though there are a number of disadvantages associated with using this approach (Table I), these have no impact on our research as only benchmark figures are required in order to test the viability of conducting money laundering and terrorism financing activities inside Second Life and World of Warcraft. In addition, the data collected from the SARs need to go through a series of manipulations prior to use to make them suitable for modelling and this research does not need to take into account the frequency of events as we are more interested in the fine detail of how money laundering and terrorism financing is carried out, rather than obtain an overall total of how much is laundered or concealed for terrorism financing. As discussed in Table I, SARs offer the advantages that they resemble and represent underlying trends; they contribute to an understanding of the scale and (2012) JMLC 15(1), 85-111 at 92 nature of predicate offences and, due to standardised reporting procedures, relevant, time-specific data can easily be collected. About 300 typologies, with dates ranging from 1996 to 2009, were obtained from a number of AML/CTF bodies, namely, AUSTRAC, the Egmont Group, Financial Action Task Force (FATF), the Belgian Financial Intelligence Unit (CTIF CFI) and Moneyval. Experts in these AML/CTF bodies have a thorough understanding of the pertinent issues and concerns related to money laundering and terrorism financing in their own jurisdiction and the wider international community. Typologies were collected from a number of international jurisdictions in order to gain a wide spread of money laundering and terrorism financing methods and behaviours. Since one of the objectives of this research is to discover whether it is practical to use Second Life or World of Warcraft to carry out money laundering or terrorism financing over other more traditional methods, it is believed that a major factor in this decision may be the sums of money which are capable of being laundered or distributed to terrorism organisations using these mediums. As the funds required to carry out these two activities are significantly different, the money laundering and terrorism financing typologies were analysed separately. The typologies were grouped into types to ease analysis and determine the common patterns and themes present in the cases involved. Typologies that had commonality in the type(s) of predicate offence[4] were grouped together. For the purpose of this research, the Australian definition of predicate offence is adopted and all of the offences discussed in this paper are considered predicate offences. Money laundering offences are criminalised at a commonwealth level in Division 400 of the Criminal Code Act 1995 (Cth). The definition of money laundering in the Criminal Code Act 1995 (Cth) is broad and the predicate offences are those with a minimum sentence of at least one year's imprisonment. Some difficulty was experienced in classifying the terrorism financing typologies as a predicate offence was not always present or reported. However, it is important to note that in its Second Special Recommendation on Terrorist Financing (FATF-GAFI.org, 2004), FATF recommended that terrorism financing be listed as one of the predicate offences to money laundering. Nevertheless, using this approach would add little value to the analysis process, therefore, where a specific predicate offence was not indicated, the technique used to conceal the funds was used to classify the typology. Table III shows how the typologies were classified and the number of money laundering and terrorism financing typologies that were collected and subsequently utilised in the research. Although 300 typologies were collected, 116 of them were considered unsuitable for analysis and subsequent modelling as they contained a large degree of ambiguity or did not contain enough information on financial flows, transactions or interactions between entities to provide value to the research. This number also included the typologies that were not considered unique, for example, if five typologies in a type had a large degree of correlation, the typology was analysed only once. In addition, some of the typologies could be classified under more than one category as they incorporated a number of predicate crimes. When this

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occurred, the typology was classified under the primary predicate offence that took place. In the money laundering types, only types that contained more than six typologies were included in the statistical analysis phase of research. However, the sample sizes for most of the terrorism financing typologies were small, with a number of the types (2012) JMLC 15(1), 85-111 at 93

Table III. Classification of typologies collected and modelled Money laundering Primary predicate typologies Primary predicate offence or offence in ML cases Collected Utilised techniquea employed in TF cases Corruption 9 4 Collection of donations Fraudb 91 56 Use of unlicensed money transmitters/remittance agentsc Gambling 4 2 Purchase of high value assetsd Sex trade 3 1 Intimidation and extortion Trafficking Trafficking Commoditye 31 14 Human Human 12 8 Diamond Drug 62 40 Counterfeit goods Tax evasion 25 13 Tax evasion Theft 15 7 Use of NPOs Purchase of cheques or money orders Use of front companies Early cancellation of insurance policies Concealment within business structures Total 252 146

Terrorism financing typologies Collected Utilised 5 4 5 3 2 1 1 1 4 12 2 4 2 6 48 3 3 1 1 1 1 2 12 2 2 2 4 38

Notes: aA predicate offence was not always reported in the terrorism financing typologies collected, therefore, in such cases, the technique used to conceal the funds was used to classify the typology; bfraud includes corporate, investment scheme and bankruptcy fraud; cthis includes the predicate offence of a business or individual operating as unlicensed money transmitters/remittance agents to facilitate the movement of funds to terrorist organisations; it also includes individuals who use unlicensed money transmitters/remittance agents to send funds to a terrorist organisation; dthis refers to the purchase of high value assets, such as property, to conceal funds raised for terrorism financing; these funds may be from legal (such as fund raising) or illegal (such as the proceeds of criminal activity) means; ecommodity trafficking includes arms, gold, counterfeit cheques and designer items, illegal hormones, diamonds, stolen vehicles and cigarettes and alcohol smuggling containing only one typology each, therefore, to make the results more meaningful, all terrorism financing types were combined and analysed together. Using the money laundering techniques taxonomy, shown in TABLE IV as a guide, a matrix was created which was used as the starting point to extract information from each of the typologies. Any observations that were made which were not covered by the matrix were recorded separately. In order to determine whether any relationship could be drawn between the types of crime committed, the techniques employed by money launderers and terrorism financers, and the sum of monies involved, the figures disclosed in each typology were recorded and minimum, maximum and mean figures were calculated. A statistical analysis was performed on the typologies collected to determine whether any additional

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information could be learned that could inform the next phases of research. It is important to note that the results of the statistical analysis are merely a representation of the data collected and thus may not accurately represent the money (2012) JMLC 15(1), 85-111 at 94

Table IV. Money laundering techniques in placement, layering and integration phases Placement Layering Integration Smurfing and Correspondent banking Capital market investments structuring Bank cheques/bank drafts Derivatives Camouflage Collective accounts Real estate acquisition Currency smuggling Payable-through accounts The catering industry Travellers' cheques Loan low/no interest rate The gold market Gambling or casinos Back-to-back loans The diamond market Money exchange offices Buying jewels Money transfer offices Purchase consumer goods for export Insurance market Acquisition of luxury goods Fictitious sales/purchases Cash-intensive business Fake invoicing Using currency to supplement an apparently Shell/front companies legitimate transaction Trust offices Export/import business SPEs Acquisition and smuggling of arms Underground banking Black market of foreign currency Source: Unger (2007) laundering and terrorism financing population as a whole or represent all of the techniques that may be employed by money launderers or terrorism financers to conceal their funds or activity. Rather, the authors acknowledge that there are potentially many more ways in which a particular typology may be carried out that have not been discussed in this paper.

4. Analysis of money laundering and terrorism financing typologies


This section discusses the main findings to emerge from statistical analysis of the money laundering and terrorism financing typologies.

4.1 Money laundering typologies


Placement phase. The first set of results look at the techniques used by money launderers to initially place illegal funds into financial system As shown in TABLE V, smurfing and structuring techniques were the most popular method of placing funds into the financial system. Smurfing and structuring techniques were used by all money laundering types, apart from thieves. Of the 146 money laundering typologies, 22 per cent examined used this method of placement.

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Table V. Laundering techniques present in the placement phase Drug Human Fraud trafficking Tax evasion trafficking n 56 % 40 % 13 % 8 % Smurfing and structuring 6 11 20 50 2 15 1 13 Camouflage 14 25 6 15 0 0 Currency smuggling 0 - 6 15 1 8 0 Gambling and casinos 6 11 1 3 1 8 0 -

Commodity trafficking Theft Overall (%) 14 % 7 % 1 2 0 2 0 14 0 22 1 14 15 14 0 7 0 6 (2012) JMLC 15(1), 85-111 at 95

Three types used camouflage[5], currency smuggling and gambling or casinos represent 15, 7 and 6 per cent of all money laundering typologies examined, respectively. Currency smuggling experienced low levels of utilisation among money launderers in our sample. This may be due to the difficulty in smuggling large sums of money between jurisdictions as large sums of money can be very heavy and, therefore, restrictive. This may also be due to the difficulty in detecting currency smuggling activity as some jurisdictions, such as Hong Kong, do not require incoming visitors to declare the amount of cash they are bringing into the jurisdiction. In addition, the low levels of use of gambling and casinos to launder money fit in with the findings of Unger et al. (2006) which state that casinos are too tightly controlled and regulated to be fully utilised. The purchase of travellers' cheques was not favoured as a placement technique by any of the money launderers in the sample. This may be due to individuals requiring some form of identification to purchase and cash out travellers' cheques. In many countries, including Australia, money service businesses such as remittance providers and issuers of travellers' cheques are considered as financial services and hence, subject to exacting AML/CTF requirements. When examining the preferred placement technique by type; drug traffickers were most likely to use smurfing and structuring techniques (50 per cent), fraudsters were most likely to use camouflage (25 per cent), tax evaders favoured smurfing and structuring (15 per cent), human traffickers used smurfing and structuring as their only placement technique (13 per cent), whereas equal numbers of commodity traffickers preferred smurfing and structuring (14 per cent) and currency smuggling (14 per cent). Camouflage was the only method of placement used by thieves, used by only 14 per cent. It is apparent from Table V that either other placements techniques were used by some of the money launderers in the sample that may not have been uncovered during the original investigation, or the funds were not placed into the financial system in preference for other concealment techniques such as using the funds to finance other crimes. Layering phase. The favoured layering technique, employed by 22 per cent of the money launderers in our sample, was the use of a shell or front company (TABLE VI). This method was used by all money laundering types. This was followed by the use of fake invoices, used in 10 per cent of typologies; fictitious sales and purchases, used in 9 per cent of typologies; the use of money transfer offices and money exchange offices, both used in 8 per cent of typologies and the use of bank cheques and bank drafts, used in 7 per cent of typologies in the sample. The least preferred methods employed by money launderers were back-to-back loans, used by 5 per cent overall; underground banking, used by 4 per cent overall; loans at low or no interest rates and use of the insurance market, used by 2 per cent of typologies each and the use of collective accounts, used by only 1 per cent of the total sample. The use of shell/front companies was the preferred layering technique employed by thieves (57 per cent), commodity traffickers (36 per cent), tax evaders (31 per cent) and fraudsters (21 per cent). Tax evaders also favoured fake invoicing (31 per cent) as a layering technique. The use of bank cheques and bank drafts were

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the preferred layering techniques of drug traffickers (15 per cent each). Human traffickers preferred to use money transfer offices (38 per cent). Payable through accounts, correspondent banking, the use of special purpose entities (SPEs)[6]. and the use of black market of foreign currency were not utilised at all by (2012) JMLC 15(1), 85-111 at 96

Table VI. Laundering techniques present in the layering phase Drug Tax Human Fraud trafficking evasion trafficking n 56 % 40 % 13 % 8 % Bank cheques and bank drafts 2 4 6 15 1 8 0 Collective accounts 0 - 0 0 0 Loan with low or no interest rates 2 4 1 3 0 0 Back-to-back loans 3 5 2 5 1 7 0 Money exchange offices 4 7 4 10 0 1 13 Money transfer offices 2 4 6 15 0 3 38 Insurance market 1 2 0 0 1 13 Fictitious sales and purchases 7 13 1 3 2 15 0 Fake invoicing 7 13 1 3 4 31 0 Shell/front companies 12 21 4 10 4 31 1 13 Underground bankinga 2 4 1 3 1 8 0 Note: aUnlicensed money transmitters, Hawala, Hundi

Commodity trafficking Theft 14 % 7 % 0 1 0 0 2 0 1 3 2 5 1 7 14 7 21 14 36 7 0 0 0 1 0 0 0 0 0 4 0 14 57 -

Overall (%) 7 1 2 5 8 8 2 9 10 22 4

money launderers in our sample. SPEs are off-balance sheet, bankruptcy remote and private and, therefore, can easily be used for both legitimate and illegitimate means. They lend themselves very well to money laundering as loans can be disguised as revenue to misstate earnings, losses can be concealed and other accounting improprieties can be exploited (Unger et al., 2006). Despite this, they are not utilised by any of the money launderers in our sample. Integration phase. The favoured integration technique, employed by 17 per cent of the money launderers in our sample, was real estate acquisition (TABLE VII).This method

Table VII. Laundering techniques present in the integration phase Drug Tax Human n Capital market investments Derivatives Real estate acquisition Precious metals and stonesa Purchase consumer goods for export Acquisition of luxury goods Cash-intensive business Fraud trafficking evasion 56 % 40 % 13 % 10 1 11 0 0 3 2 18 2 20 5 4 3 1 7 1 1 2 3 8 3 18 3 3 5 8 2 0 3 0 0 0 0 15 23 -

Commodity trafficking trafficking Theft 8 % 14 % 7 % Overall (%) 0 0 0 0 25 3 0 1 5 0 0 0 21 36 21 1 0 1 0 0 1 1 14 14 14 1 17 4

0 0 2

- 1 14 4 14 6

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Using currency to supplement apparently legitimate transactions Import/export business Acquisition and smuggling of arms

3 2 0

5 4 -

6 7 0

15 18 -

0 3 0

23 -

0 0 0

2 5 0

14 36 -

0 0 1

8 12

14 1

Note: aGold, diamonds and jewels (2012) JMLC 15(1), 85-111 at 97 was employed by all types except by human traffickers. This was followed by investments in capital markets (14 per cent), the establishment of an import/export business (12 per cent), using currency to supplement apparently legitimate transactions (8 per cent) and the establishment or use of a cash-intensive business (6 per cent). Of money launderers, 4 per cent used the acquisition of luxury goods and 4 per cent dealt in precious metals and stones to integrate funds into the legitimate economic and financial system. Of the money laundering sample, 1 per cent or less (rounding used) utilised investments in derivatives, the purchase of consumer goods for export and acquisition and smuggling of arms as integration techniques. The catering industry was utilised by none of the money launderers in the sample. Real estate acquisition was the preferred integration technique for tax evaders (23 per cent), fraudsters (20 per cent) and drug traffickers (18 per cent). The establishment of an import/export business (23 per cent) and (18 per cent) were equally preferred by tax evaders and drug traffickers, respectively. Of commodity traffickers, 36 per cent also preferred to use import/export business to integrate funds. However, large amounts also utilised the gold market (29 per cent) and capital market investments (21 per cent). Thieves had no clear preference of integration method, equal numbers (14 per cent) used capital market investments, real estate acquisition, acquisition of luxury goods, purchase of cash-intensive business and acquisition and smuggling of arms. On the other hand, human traffickers preferred to use only one method of integration, the purchase or use of cash-intensive businesses (25 per cent). 4.1.2 General observations. During the analysis of the money laundering typologies, a number of interesting general observations were recorded (TABLE VIII). The suspicions of reporting entities were raised by all types because transactions were inconsistent with the customer profile, representing 21 per cent of all typologies analysed. Inconsistent transactions were most frequently detected in the drug trafficking type (30 per cent), closely followed by those involved in theft (28 per cent), human trafficking (25 per cent), tax evasion (23 per cent) and commodity trafficking (21 per cent). The suspicions of reporting entities were also raised for most types when the reporting entities believed that there was no justification for transactions to occur in their

Table VIII. General observations across money laundering typologies Drug Tax Human Commodity Fraud trafficking evasion trafficking trafficking n 56 % 40 % 13 % 8 % 14 % Transactions inconsistent with customer profile 7 13 12 30 3 23 2 25 3 21 No justification for transaction to occur in reporting jurisdiction 7 13 1 3 1 8 1 13 2 14 Transactions economically unjustifiable 7 13 3 8 1 8 2 25 0 Atypical or uneconomical

Theft 7 % Overall (%) 2 0 1 28 21 9

14 10

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funds transfers to or from a foreign jurisdiction 6 Use of transit accounts 7 Ties to terrorist organisation 0

11 4 13 0 - 0

10 -

0 4 0

31 -

1 2 1

13 25 13

2 1 1

14 4 57 12 7 2 28 12 7 0 - 1 (2012) JMLC 15(1), 85-111 at 98

jurisdiction (9 per cent), transactions were economically unjustifiable (10 per cent) and funds transfers to or from a foreign jurisdiction were seen as atypical for the customer or uneconomical (12 per cent). Human traffickers (13 per cent) and fraudsters (13 per cent) were most likely to perform transactions that had no justification to occur in the reporting jurisdiction. Human traffickers were most likely to perform transactions that were economically unjustifiable (25 per cent) and thieves were most likely to perform transactions to or from a foreign jurisdiction that were atypical or uneconomical (57 per cent). All but one of the types made use of transit accounts. However, transit accounts were used by only 12 per cent of the typologies analysed. Those most likely to use transit accounts to confuse the audit it trail were tax evaders (31 per cent), thieves (28 per cent) and human traffickers (25 per cent). Interestingly, only 1 per cent of the money laundering typologies investigated was found to have connections to terrorist organisations; one commodity trafficker (13 per cent) and one human trafficker (13 per cent). 4.1.3 Value of funds entered into the legitimate economy by type. Each typology was examined in detail to determine the value of illegal funds entered into the legitimate economy. These figures were then allocated to their relevant type and used to calculate a minimum, average and maximum figure[7] for that type. Unfortunately, a sufficient number of typologies did not disclose the figures involved in the case to make them truly representative of the typologies analysed or for the money laundering population as a whole. TABLE IX shows the minimum, maximum and average sums laundered for each type. The figures collected for the fraud and drug trafficking types fell into two categories those that involved only a small to medium amount of funds (low level) and those that involved a very large amount of funds (high level). It is likely that the typologies that involved smaller amounts (AUD 85,000 to 17.5Mand AUD 90,000 to 2.8M, respectively) were related to small operations or individuals working on their own, compared to the larger amounts (AUD 58M to 541M and AUD 4.5M to 93M, respectively) that were more likely related to organised crime. Theft (AUD 36,000), followed by gambling (AUD 49,000), fraud (AUD 85,000) and low-level drug trafficking (AUD 90,000) had the lowest sums laundered. High-level fraud (AUD 541M) and high-level drug trafficking(AUD 93M) had the highest sums laundered, this is in line with the findings of the 2006 survey carried out by Unger et al. (2006) who found that most money generated for laundering comes from drugs and fraud.

Table IX. Sums laundered in money laundering operations Money laundering type Minimum (AUD) Average (AUD) Corruption 1.2M 3.4M General fraud -- low level 85,000 3M General fraud -- high level 58M 204.5M Gambling 49,000 287,000 Sex trade No figures provided in typology Commodity trafficking 500,000 6.3M Human trafficking 176,000 418,000 Drug trafficking -- low level 90,000 750,000 Drug trafficking -- high level 4.5M 23.5M Tax evasion 176,000 2M Theft 36,000 474,000

Maximum (AUD) 5M 17.5M 541M 525,000 15M 711,000 2.8M 93M 7.8M 1.5M (2012) JMLC 15(1), 85-111 at 99

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FIGURE 1 shows the distribution of monies laundered for all types. To take into account the large sums laundered in some cases, the chart has two Y-axis, the primary axis, on the left-hand vertical of the chart, deals with amounts laundered from AUD 0 to 50 (millions) the secondary Y-axis, on the right-hand vertical of the chart, deals with the amounts laundered up to AUD 600 millions. The values highlighted with arrows belong to the secondary axis. As can be seen from Figure 1, most of the amounts laundered are concentrated at the lower end of the spectrum, that is, below AUD 5M. To determine if there was any relationship between the number of placement techniques employed by each of the money laundering types and the sums of money that they laundered, a cross-comparison was conducted on the data. No clear relationship could be found. However, there was a high degree of correlation between the number of layering techniques utilised and the sums of money that were laundered. Only those involved in human trafficking and theft challenged this trend. Data analysis of the samples indicated a significant correlation between the number of layering techniques employed and the average amount laundered (Spearman's r test for correlation between these two variables produced an Rs value of 0.943, which is indicative of a strong positive correlation at the 0.01 level). The types were ranked in order of the number of techniques utilised and the average amount of money laundered, 1 being the highest rank and 6 being the lowest rank. As shown in TABLE X, fraudsters used the most layering techniques (ten out of a potential 15) and laundered the most amount of money (average of AUD 204.5M), followed by drug traffickers (nine out of 15 and AUD 23.5M, respectively). By using a broad selection of layering techniques, these launderers are spreading their risk and/or reducing their chances of detection. Figure 1. Distribution of amounts laundered by type (AUD) Click here to view image (2012) JMLC 15(1), 85-111 at 100 4.1.4 Characteristics of techniques utilised by money launderers. In an attempt to understand why money launderers might choose the layering techniques they utilise; each technique was examined in detail to determine its predominant characteristics that might make it attractive to a money launderer. TABLE XI outlines the findings of this exercise. The techniques are split into three environments: technology, which denotes the transfer of funds using electronic payment systems such as virtual currencies used in MMOGs, prepaid/stored value cards and mobile remittance; the domestic regulatory framework, which refers to how local criminal groups may exploit the lack of AML/CTF regulation in a particular industry sector within a country and the international environment, which refers to the lack of harmonisation or consistency in AML/CTF regimes between different jurisdictions and/or law enforcement agencies. Fraudsters, drug traffickers and tax evaders exploited all three environments, whilst human traffickers preferred to exploit the international environment. The same exercise was conducted for the integration techniques employed. TABLE XII outlines the findings.

Table X. Ranking by number of layering techniques employed and sums of money laundered Number of layering Type techniques employed Ranking Average amount laundered Ranking Fraud 10 1 204.5M 1 Drug trafficking 9 2 23.5M 2 Commodity trafficking 7 3 6.3M 3 Tax evasion 6 4 2M 4 Human trafficking 4 5 418,000 6 Theft 2 6 474,000 5

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Table XI. Layering technique characteristics and main predicate offences that exploit them Top three predicate offences/ Environment Technique Characteristics types that exploit technique Technology Use of electronic Ease of using/transferring Fraud funds transfers money across borders Drug trafficking Money transfer Anonymity Tax evasion offices Domestic Correspondent Lack of/easily circumvented Fraud regulatory banking know your customer (KYC) Drug trafficking framework Collective accounts and customer due diligence Tax evasion Use of shell/front procedures companies Payable through accounts International Bank cheques and Transfers between Fraud environment bank drafts jurisdictions not reportable Drug trafficking Underground No need to submit to foreign Human trafficking bankinga countries banking Tax evasion regulations Self-regulating Note: Alternative remittance systems, informal value transfer systems such as Hawala and Hundi (2012) JMLC 15(1), 85-111 at 101

Table XII. Integration technique characteristics and main predicate offences that exploit them Top three predicate offences/ Environment Technique Characteristics types that exploit technique Domestic Real estate acquisition Low risk Fraud regulatory Using currency to High liquidity Drug trafficking framework supplement apparently Non-depreciating Commodity trafficking legitimate transactions Co-mingling of Fraud Capital market investments funds Drug trafficking Create tax liability Commodity trafficking Move liability Fraud onto someone else Drug trafficking Low risk Commodity trafficking High liquidity Fraud International Purchase of precious metals Low risk Drug trafficking environment and stones High liquidity Commodity trafficking Non-depreciating High intrinsic value Compact form Easily traded internationally Easily transported Trade-based money laundering (TBML) Purchase of consumer goods Easily transported Drug trafficking for export Easily traded Commodity trafficking Cash-intensive business internationally Fraud Establishment or use of Co-mingling of Drug trafficking

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Import/export business

funds Co-mingling of funds Complex and hard to detect Utilise normal banking services

Commodity trafficking Human trafficking Fraud Drug trafficking Commodity trafficking

The techniques are split into two environments: the domestic regulatory framework, which refers to how local criminal groups may exploit the lack of AML/CTF regulation in a particular industry sector within a country; the international environment, which refers to the lack of harmonisation or consistency in AML/CTF regimes between different jurisdictions. TBML is one money laundering activity that typically exploits the international environment. TBML involves an exchange of goods between exporter and importer and a corresponding financial transaction. However, trade in intangibles, such as information and services, is emerging as a significant new TBML frontier -- also known as service-based money laundering (Lormel, 2009). TBML is a significant concern for countries such as Australia that rely heavily on trade and foreign investment. A 2010 report by FATF, for example, indicated that:

[...] [t]he volume of trade not only has the potential to hide individual transactions, but makes oversight and enforcement difficult. The complexity of international trade also makes it difficult to match payments to value. The various means used to physically move goods -- for example by boat, plane, road and rail -- enable criminals to diversify their delivery channels and thus evade detection (FATF, 2010).

(2012) JMLC 15(1), 85-111 at 102 Commodity traffickers exploited all three environments, they choose integration techniques that are low risk, provide a high degree of liquidity and are non-depreciating. This is evident in their significant use of capital market investments, derivatives, acquisition of real estate and investments in precious metals and stones. Drug traffickers and fraudsters also exploited all three environments; they choose integration techniques that provide high degrees of liquidity, and to a lesser extent, are low risk. These findings are consistent with the findings of the FATF report on money laundering typologies 2002-2003 which states that most money laundering activities involving precious metals (e.g. gold) are linked to illegal narcotics trafficking, organised crime activities and the illegal trade in goods and merchandise (FATF, 2003). Although drug traffickers and fraudsters utilise integration techniques that afford them high degrees of liquidity and are low risk, they predominantly utilise integration techniques that allow them the ability to co-mingle funds, this is apparent due to their extensive use of cash-intensive businesses, use of currency to supplement apparently legitimate transactions, purchase of consumer goods for export and the use or establishment of import/export businesses. Drug traffickers may favour these techniques as they are frequently used to conceal and develop their drug operations. Human traffickers only exploited TBML by utilising cash-intensive businesses. Unlike the other types investigated, they exclusively use techniques that offer this capability. It is likely that human traffickers utilise cash-intensive businesses because they already have contact with these businesses in the capacity of providing them with illegal labour.

4.2 Terrorism financing typologies

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As shown in TABLE III, the sample sizes for most of the terrorism financing typologies were small, with a number of the types containing only one typology each. Therefore, to make the results more meaningful, all terrorism financing types were combined and analysed together. Placement phase. The preferred method of placing funds into the financial system was using smurfing techniques and structuring of deposits, used by 11 per cent, followed by camouflage (5 per cent) and currency smuggling (3 per cent). The purchase of travellers' cheques and the use of gambling or casinos were not used by terrorism financers in the sample population. Layering phase. Correspondent banking, collective accounts, payable through accounts, loans at low or no interest rates, fictitious sales and purchases, fake invoicing, the use of SPEs, underground banking and black market of foreign currency were not utilised at all by any of the terrorism financers in the sample population. The preferred method of layering funds was the use of money transfer offices, used by 16 per cent of terrorism financers, followed by the use of shell or front companies, used in 8 per cent of cases. The purchase and early cancellation of insurance policies and the use of money exchange offices were used in 5 per cent of cases each. Back-to-back loans and the purchase of bank cheques and bank drafts were the least preferred methods of layering funds, used 3 per cent of terrorism financers (TABLE XIII). Integration phase. The purchase of derivatives, the use of the catering industry, investment in the gold market, purchasing of jewels, purchasing consumer goods for export, the acquisition of luxury goods, investment or purchase of a cash-intensive business and acquisition and smuggling of arms were not utilised at all by terrorism financers in the sample population. Real estate acquisition was the preferred method of (2012) JMLC 15(1), 85-111 at 103 integration of funds, which was used by 13 per cent of typologies. Investments in capital markets, investment in the gold market, using currency to supplement apparently legitimate transactions and investment or purchase of an import/export business were used in one (3 per cent) typology each (TABLE XIV). 4.2.1 General observations. A large number of suspects that drew the suspicions of their financial institution had known ties to terrorist organisations (76 per cent). Just over half of this amount being a national of a country associated with terrorist activity (39 per cent) (TABLE XV). Of cases, 34 per cent reviewed, used not-for-profit organisations (NPOs) to raise and/or forward funds to terrorist organisations. Suspicion was raised at a number of financial institutions because they believed that transactions were inconsistent with their customer's profile (24 per cent). In most of these cases, lots of transactions were being performed through these customers' accounts, some of them for large sums, even though the customer claimed to have no profession or were in receipt of social benefits. In three cases, there were clear links to organised crime gangs. One of the aims of the analysis was to provide a direct comparison between types when the same types existed in both money laundering and terrorism financing categories, however, it was difficult to make any real comparisons due to the very small number of human trafficking (1) and tax evasion (2) typologies in the terrorism financing type.

Table XIII. Layering techniques used by terrorism financers Bank cheques and bank drafts Back-to-back loans Money exchange offices Money transfer offices Insurance market Shell/front companies

1 (3%) 1 (3%) 2 (5%) 6 (16%) 2 (5%) 3 (8%)

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Note: n = 38

Table XIV. Integration techniques used by terrorism financers Capital market investments Real estate acquisition The diamond market Using currency to supplement apparently legitimate transactions Import/export business Note: n = 38

1 (3%) 5 (13%) 1 (3%) 1 (3%) 1 (3%)

Table XV. General observations recorded from terrorism financing typologies Ties to designated terrorist organisation 29 (76%) Nationals of countries associated with terrorist activity 15 (39%) Use of NPO 13 (34%) Transactions inconsistent with customer profile 9 (24%) Links to organised crime 3 (8%) (2012) JMLC 15(1), 85-111 at 104 4.2.2 Value of funds concealed by type. The sums of money concealed in each of the terrorism financing typologies were collected. Table XVI shows the minimum, maximum and average sums concealed for each type. A number of the typologies did not disclose the sums involved in the case, therefore, the figures detailed above may not be truly representative for the typologies analysed or for the terrorism financing population as a whole. It should also be noted that the figures discussed in this section are representative only of the typologies examined in the sample and they, again, may not be representative of the terrorism financing population as a whole. For example, in 1998 the Colombian Government estimated that the revenue of Columbia's guerrilla and parliamentary organisations totalled USD 311M from extortion (Fleming, 2009), far greater than the sums shown in this study. In addition, results may be skewed towards typologies that involve a significant amount of funds as these are the cases that reporting entities are most likely to include in their annual typological reports. As shown in TABLE XVI, only the details of the amount raised and concealed could be obtained from one each of the use of unlicensed money transmitters/remittance agents, purchase of high value assets and use of front companies typologies so only an average figure could be calculated. No figures were provided for any of the trafficking typologies, the tax evasion typologies or the early cancellation of insurance policy typologies. Figures were provided for only two typologies that used the purchase of cheques or money orders to fund terrorism, therefore, no average could be calculated as doing so would have artificially inflated the potential sums involved in this type. The fact that no figures could be reported for any of the trafficking typologies related to terrorism financing may be indicative of the use of cash couriers by terrorist organisations to transport funds to various jurisdictions, thereby, obfuscating the tracing of funds.

Table XVI. Funds involved in terrorism financing operations Terrorism financing type Use of unlicensed money transmitters/ remittance agents Minimum (AUD) Average (AUD) 17.4Ma Maximum (AUD) -

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Purchase of high value assets Intimidation and extortion Human trafficking Diamond trafficking Trafficking of counterfeit goods Tax evasion Use of NPOs Purchase of cheques or money ordersc Use of front companies Early cancellation of insurance policies Concealment with business structures Collection of donations

650,000pa No figures provided in typologies No figures provided in typologies No figures provided in typologies No figures provided in typologies 1.6Mb 92,000 No figures provided in typologies 911,000 285

354,000 760,000pa

870,000pa

6.5M 5M 2.1M 1,900

9M 7M 3.3M 3,500

Notes: aFigures recorded in only one typology; ba number of typologies claimed that small amounts of funds were collected daily from donors but no overall figures of the total amounts laundered were provided; cfigures recorded for only two typologies, no average could be calculated (2012) JMLC 15(1), 85-111 at 105 Analysis of the amounts concealed in the terrorism financing typologies was made difficult due to the lack of proper description provided by reporting entities. In many typologies, especially those connected to the use of NPOs and the collection of donations, descriptions such as "small amounts" were used rather than actual figures. Typologies that used the collection of donations to fund terrorism activities were found to involve the lowest sums; the minimum amount was AUD 285 and the maximum amount was AUD 3,500. Typologies that utilised organisational structures such as concealment within business structures, the use of NPOs and use of front companies were able to raise and conceal a lot more funds: AUD 911,000 to 3.3M, 1.6M to 9M and 5M, respectively. In the terrorism financing typologies investigated, the most money was raised and concealed using unlicensed money transmitters/remittance agents (AUD 17.4M), NPOs (AUD 9M) and purchase of cheques and money orders (AUD 7M). Figure 2 shows the distribution of monies used for terrorism financing for all types. As can be seen from Figure 2 most of the values fall below AUD 3M. A comparison of the sums involved in human trafficking and tax evasion, which are present in both money laundering and terrorism financing, might have provided interesting results; however, this was not possible as no figures were provided for human trafficking or tax evasion in the terrorism financing types. When comparing the sums involved in terrorism financing against those involved in money laundering, the sums involved in terrorism financing are significantly lower. This is consistent with the belief that only small sums of money are required to fund terrorist acts. Case in point being the 7 July 2005 attacks on the London transport system which is estimated to have had an overall cost of less than 8,000 (approximately AUD 12,500) (Fleming, 2009). It is evident that terrorism financing detection rates are lower than money laundering detection rates; this is supported by the small number of terrorism financing cases found for this study. This may be due to the relatively small amount of funds involved in terrorism financing operations and schemes as larger sums would undoubtedly attract more attention and suspicion from financial institutions. Terrorism financers use similar channels and exploit the same weaknesses in the financial system as money launderers to disguise their activity. However, they do not utilise as many of the placement, layering and integration techniques as money launderers.

5. Conclusions
The results of this statistical analysis show that money launderers and terrorism financers have preference

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for the placement, layering and integration techniques that they employ. However, our research also shows that the more techniques that are used, the more cash can be successfully laundered or concealed. Although terrorism financers use similar channels as money launderers, they do not utilise as many of the placement, layering and placement techniques. Rather, they prefer to use a few techniques which maintain high levels of anonymity and appear innocuous. Although money launderers and terrorism financers both liked to use structuring and smurfing to enter cash into the financial system, their choice of individuals to carry out this activity usually contributed to the detection of their illegal activity, as suspicions were raised in many cases due to the financial activity being inconsistent with the profile of the customer. However, since amounts are normally (2012) JMLC 15(1), 85-111 at 106 Figure 2. Distribution of terrorism financing amounts by type (AUD) Click here to view image under the reporting limit of AUD 10,000, this is an amount that the intended recipients are willing to risk in order to distance themselves from the transactions. The sums of monies involved in money laundering and terrorism financing vary significantly. The average, maximum sum laundered or concealed by money launderers was AUD 68.5M, compared to AUD 4.8 for terrorism financers. Could this be due to the number of placement, layering and integration techniques employed by each group? The results obtained from this statistical analysis will prove valuable as we move into the next phases of research.

6. Future work
Our three-year research project is split into six distinct phases (FIGURE 3). This paper discusses phase 1 of research which details the results of statistical analysis performed (2012) JMLC 15(1), 85-111 at 107 Figure 3. Phases of research Click here to view image on (real-world) money laundering and terrorism financing typologies. During the analysis phase, each typology was examined in fine detail in order to extract the following information: The individuals and/or entities involved in the ML/TF scheme. The type of transaction(s) involved in the ML/TF scheme. For example, cash, cheque or electronic funds transfer. The interactions, financial and otherwise, that took place between the individuals and entities involved in the ML/TF scheme. The suspicious behaviours and red flag indicators detected by the reporting Entity During phase 2, this information will be modelled to provide an easy to follow, visual representation of the important aspects of each money laundering and terrorism financing type, which will be used as a starting point for determining whether that type can be carried out inside Second Life or World of Warcraft in phase 3. During phase 3, it will also be established whether there are any additional money laundering and terrorism financing types that have not been uncovered during analysis of the real-world money laundering and

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terrorism financing typologies because they are unique to Second Life and World of Warcraft. During phase 4, the in-world participation phase, there will be an attempt to replicate the types deemed as possible in virtual environments. This will be done by creating the conditions necessary to carry out the behaviours and patterns identified for each type. Phase 5, model analysis and verification, will be conducted to provide a scientific and measurable approach to the research. All of the money laundering (2012) JMLC 15(1), 85-111 at 108 and terrorism financing types that are successfully replicated inside Second Life and World of Warcraft will be modelled and analysed using formal methods, such as coloured petri nets (University of Aarhus, 2011), which have been used successfully to verify human behavioural patterns in virtual environments (Kohler et al., 2001; Piccard, 2008; Chang et al., 2009) and script the complex behavioural sequences of virtual actors within virtual environments (Blackwell et al., 2001). The final phase of research investigates the legal environment for the detection and prosecution of money laundering and terrorism financing in virtual environments, such as Second Life and World of Warcraft, and discusses the implications this might have on government policy.

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(The) WorldBank.org (2003), "Money laundering and terrorist financing: definitions and explanations", Chapter 1, 30 March, available at: www1.worldbank.org/finance/assets/images/01-chap01-f.qxd.pdf (accessed 25 May 2011). Zdanowicz, J.S. (2009), "Trade-based money laundering and terrorist financing", Review of Law & Economics, Vol. 5 No. 2, p. 3. Notes
1 The alternative terrorism financing model has five stages: acquisition, aggregation, transmission to terrorist organisation, transmission to terrorist cell and conversion. 2 The various techniques used to launder money or finance terrorism are generally referred to as methods or typologies.

3 Although many organised crime groups now aim at making money, several traditional ones (e.g. Japanese Yakuza, and Italian and Italian American Mafia) may still aim at exercising political power as well. 4 There are a number of predicate offences that were not present in the random sample for this survey; however, it is believed that the information obtained is sufficient for this project. 5 Camouflage is the use of stolen identity documents to open accounts and/or place funds into the financial system.

6 An SPE is a legal entity (usually a limited company or limited partnership) created to fulfill narrow, specific or temporary objectives. SPEs are typically used by companies to isolate the firm from financial risk. A company will transfer assets to the SPE for management or use the SPE to finance a large project thereby achieving a narrow set of goals without putting the entire firm at risk. SPEs are also commonly used in complex financings to separate different layers of equity infusion. 7 Figures converted from USD, GBP, BEF and EUR to AUD.