Money laundering is a serious crime that can have significant, long-term consequences for you and your business. The unfortunate reality is that small businesses are often victims of organized money laundering schemes, and one reason for this is because small business owners may lack understanding about their risk in this area.
The basic concept of money laundering involves transforming dirty money into clean money. Dirty money has been used for illegal purposes, such as with a major drug deal. This dirty money is placed into the financial system in any number of ways, and these placements usually involve small deposits that do not garner much attention. The second stage in a money laundering scheme is to layer or distribute the money. The final stage involves bringing the money back into the financial system. This is commonly accomplished through large purchases, such as buying a business or real estate.
You may not think that your small business would play any role in this type of illegal scheme, but it may be more common than you might think. By learning how to identify risky situations, you can protect yourself and your business.
1. Know your customers
Small businesses that have large transactions or numerous cash transactions may be more at risk. This may include equipment or real estate sales, restaurant cash sales and more. It is important to understand who your customer is and what drew him or her to your establishment. Ask if the customer is completing a typical transaction or if there is something unusual about it.
For large purchases, you should document the source of cash. You also should understand who all of the investors are. For both larger and smaller transactions, pay attention to unique circumstances that may make you uncomfortable. Some business owners are so excited to have a profitable deal in front of them that they are willing to overlook unusual conditions or instructions. Avoid falling into this trap.
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2. Educate yourself and your team on money laundering schemes
Unfortunately, there are hundreds of techniques that criminals may use to launder money. Therefore, it can be challenging to educate yourself and your team about all potential tactics. Nonetheless, when you are educated about some of the more common tactics, you may be able to spot variations or trends as well. Some of the more common techniques involve paying for goods with dirty money or using wire transfers and other financial instruments to layer or hide the money. Overbilling, fudging invoices and other efforts may be used to hide dirty money as well.
A great resource to use is the website for the US Treasury's Financial Crimes Enforcement Network. This website provides you with the latest information about money laundering. Review the website periodically to stay up-to-date, and encourage your team to review it as well.
3. Be extra careful with prepaid credit cards
The use of prepaid credit cards is common. Many people even give them to others as gifts, and the cards are then used for restaurant purchases, at the grocery store and in many other locations. Many criminals use prepaid cards to hide dirty money because they are not currently monitored and are anonymous. If you notice the same customers visiting your establishment and making purchases with prepaid credit cards, consider this a red flag. Remember that you can report suspicious activity to the authorities yourself even if the banking system does not actively monitor prepaid credit card usage.
4. Investigate anyone
If you notice any suspicious signs, do not be afraid to ask a few questions. Some people may make a large cash purchase for legitimate reasons. For example, some people hate banks, and they prefer to keep "mattress money" at home. However, vague answers to your questions should raise your suspicion. In addition, ask yourself why this person has a need or desire to make a large cash purchase with your company. For example, do they have a legitimate need for your products or services?
When you are dealing with a large cash transaction, some due diligence may be in order. For example, do the individuals have a clean background? Is the company properly registered and in good standing? A smart deal is one that has clean participants and where both sides will legally benefit.
5. Establish a formal anti-money laundering culture
While you could simply advise your employees to educate themselves about money laundering, you could also take a more proactive role. For example, you may develop a specific anti-money laundering policy as well as an appointed officer who spearheads your company's efforts. This individual may be responsible for creating an internal educational program, devising money handling procedures and monitoring deals to identify risky or suspicious situations.
6. Beware of cybersecurity risks
While live transactions that use cash or prepaid credit cards in your establishment could be suspicious, cyberactivity must also be monitored. Related cyberactivity may be completed through the criminal’s creation of multiple online identities. Another way is through the use of virtual currency. When you are dealing with large online transactions, it is important to research the purchaser or investor in the same way that you would with in-person transactions.
To further protect your business, avoid sharing financial information with any person or entity that you are not very familiar with. Invest in top-notch security practices, including changing passwords regularly. Some companies use anti-money laundering software programs. Some programs may be customizable or scalable so that they are appropriate for your small business.
Money laundering is a true risk for small businesses today. In addition to facing potential criminal changes and monetary fines, your business's reputation may be damaged. Your cost of insurance could also skyrocket. These penalties may be in place regardless of whether your involvement was accidental or intentional. With this in mind, you must be proactive about protecting yourself against money laundering risks.