Financial crime and money laundering threats and methodologies

AUSTRAC's vision is to have an Australian community that is hostile to money laundering and the financing of terrorism. It is also important for the agency, its partner agencies and reporting entities to understand the evolving nature of financial crime, which is often the source of the illicit funds involved in money laundering.

Financial crimes can include a wide range of activities, from fraud against potential investors to active manipulation of the stock market. The modern globalised economy and new technologies have created additional opportunities for fraud. They have also presented criminals with new ways to commit existing crimes.

While the current global economic crisis has prompted a more cautious international financial market, there are always opportunities for criminals to exploit the financial sector. Authorities have also noted that the financial crisis has led to increased detection of money laundering and other financial crime, as companies and investors around the globe scrutinise their accounts more closely. Scams such as 'Advance fee frauds', commonly referred to as 'Nigerian scams', continue to be widespread. Approaches may vary, but most scams aim to deceive unsuspecting victims into forwarding payments or divulging financial information such as bank account details. Scams can attract victims with claims of lottery wins, unexpected inheritances or government windfalls.

Other emerging methods being used to exploit the mainstream economy include frauds to avoid import taxes, equities market manipulation by criminal networks, and the use of new, unregulated financial mechanisms - such as internet-based currency - to conceal international transactions and launder money. [1]

Card skimming

'Card skimming' is the illegal copying of information from the magnetic strip of a credit or debit card. It is a more direct version of a 'phishing' scam (in which fraudsters send an email purporting to be from a legitimate source requesting that the recipient provides personal information).

One method of card skimming involves attaching small, sophisticated skimming devices to automatic teller machines (ATMs). These devices are secretly placed over the ATM's card slot and designed to look like part of the ATM. The devices electronically record and store the details of the cards as they are inserted into the ATM. Because debit and credit cards require a personal identification number (PIN) to access the account, the criminals also mount a pinhole camera on the ATM to record the customer as they enter their PIN.

Once the criminals have skimmed the victim's card, they can create a fake or 'cloned' card with the victim's details on it. The scammer is then able to access the victim's account.

Recent media reports indicate that card skimming is increasing in Australia. In a recent case, a number of Romanian nationals were arrested in Australia for their involvement in an ATM skimming ring in which more than 50 ATMs across Australia were affected. While the offenders concentrated mostly on ATMs in Sydney, they also stole more than AUD1 million from victims in Melbourne. [2]

Early release super schemes

Early release superannuation schemes are scams that offer consumers early access to their superannuation funds, often through a self managed superannuation fund. The organisers of the schemes often charge high fees for the service.

Consumers cannot legally access the 'preserved' part of their superannuation until they reach the 'preservation' age (which ranges from 55 to 60 years of age) and retire, or turn 65. While there may be exceptions to this rule in the case of severe financial hardship or on compassionate grounds, in general schemes that offer early access to superannuation funds are illegal.

Past examples of early release schemes have involved a financial adviser, or someone posing as a financial adviser, promising consumers quick and easy access to their superannuation benefits. In many cases the scammers deceive the superannuation fund into paying out the benefits directly to the adviser in cash. They may also ask the client to confirm a false statement (claiming, for example, that the client is suffering financial hardship) to secure the early release of the funds. Once the scammer has the money, they may disappear and leave the victim with nothing, or subtract substantial fees or commissions before forwarding the remainder of the funds to the victim. [3]

The erosion of superannuation funds through these early release scams can lead to an increased burden on tax-payers resulting from increased social security payments. And for the individual victims of these scams, the loss of their superannuation threatens their future financial independence.

'Ponzi' schemes have existed for many years. They are simple and effective scams in which the promoters attract investors to a scheme by promising a very high return on investment, while guaranteeing the security of the investment.

The scammers use some of the funds deposited by early investors to pay initial dividend cheques or interest - at this early stage the ponzi scheme only requires a few investors to operate successfully. The promoter continues paying the investors impressive dividends for a couple of months until the investors, encouraged by the early dividends, decide to invest more.

The investors may also encourage their friends and relatives to invest. Soon there is a steady flow of funds into the scheme and an ever-growing number of investors.

If the promoter is disciplined and retains sufficient funds in the scheme to continue to pay out 'dividends', a ponzi scheme can continue for many years. Theoretically, if the scheme continues to draw in new investors, it could go on indefinitely. In practice such schemes usually collapse because the promoter starts to spend the money too quickly, or the pool of investors starts to dry up. [4]

The recent Bernard Madoff case in the United States, which involves investor losses of at least USD50 billion, is a high-profile example of corporate fraud which operated on a massive scale over many years. It is also a dramatic example of the type of fraud schemes left exposed by the global financial crisis. Madoff has allegedly admitted that his investment advisory business at the centre of the fraud was 'basically, a giant Ponzi scheme. [5]

Boiler-room scams

Fake investment advice is a common avenue for fraud. In 'boiler-room' scams, the scammers telephone victims claiming they were given the victim's name by a friend who has previously profited from the scammer's 'insider' investment advice. The scammer will recommend buying shares in various companies, advising the victim that the shares are undervalued and on the verge of rising sharply in value.

The recommended shares are usually for small, unlisted companies, rather than blue-chip or established companies. The scammer uses the funds invested by victims of the scam to purchase low-value shares in the companies, forcing up the price of the shares. The scammers then contact the victims advising them that their investment has made an impressive short-term profit and urging them to buy more shares.

In many cases the victims are encouraged by the initial profit and agree to purchase even more shares. After artificially inflating the prices, the scammers then sell off the shares to the victims at a substantial profit. The price of the shares then plummets, leaving the investors with potentially very significant losses. [6]

Internet scams

Many internet-based scams take place without the victim even realising they have been targeted.

The growth of internet-based shopping in particular presents scammers with increased opportunities. Scammers use the anonymous nature of the internet to target unsuspecting shoppers. A common scam involves the perpetrators convincing victims to enter into deals outside legitimate online auction sites. The scammers may claim that the winner of an auction has pulled out and then offer the item to the victim. Once the victim pays for the item, the scammer disappears with the victim's money and the legitimate auction site is unable to help.

Another variation features scammers who pretend to be selling a product - often at heavily discounted prices - to obtain the victim's credit card or bank account details. When the transaction for the purchase is complete, the scammers take the victim's money and send the victim a faulty or worthless product, or nothing at all. [7] Case 26 in this report is an example of criminals using internet shopping to commit fraud.

Other scammers prey on the emotions and goodwill of victims through online dating scams. By promising relationships, companionship and romance, scammers can deceive their victims to such an extent that the victims continue to provide payments even after they begin to doubt the scammer's claims. Commonly the scams require the victim to transfer funds from accounts or through remittance services to foreign jurisdictions where no previous transfers have been undertaken by the victim.

Lottery and sweepstake scams

Lottery and sweepstake scams are most often promoted in Australia by direct mailing to potential victims, but they can also be carried out by phone or email. The scammers promote fake lotteries offering 'huge' prizes, including holidays, cars, and cash, with the victims being told that they have a 'guaranteed' chance of winning.

A common message from the promoters to victims is that 'you have been chosen to win one of these prizes' but in order to participate the victim must buy a 'trial sample.' This sample is usually a poor quality product such as a pen, vitamins or makeup, worth a small fraction of what the victim is asked to pay.

Another approach used by the scammers is to tell the victim that they must pay a 'processing fee' or 'handling fee' or customs duties or taxes and must send a cheque or money order to the promoter immediately, otherwise they will miss out on this 'fabulous opportunity'. [8]

2 News.com.au, 14 April 2009, 'Police believe ATM skimmers belong to international ring', viewed 11 May 2009

3 SCAMwatch, 2008, Australian Competition & Consumer Commission, Canberra, viewed 11 May 2009

4 FIDO website, 2009, Australian Securities & Investments Commission, Canberra, viewed 30 April 2009

5 U.S. Securities and Exchange Commission, 11 December 2008, SEC Charges Bernard L. Madoff for Multi-Billion Dollar Ponzi Scheme, press release, SEC, Washington, viewed 11 May 2009

6 Australian Taxation Office, 11 March 2009, Australian Taxation Office, Canberra, viewed 11 May 2009

7 SCAMwatch, 2008, Australian Competition & Consumer Commission, Canberra, viewed 11 May 2009

8 SCAMwatch, 2008, Australian Competition & Consumer Commission, Canberra, viewed 11 May 2009

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