Money laundering and data mining

Money laundering is the act of making it appear that earnings, profit, or income acquired through illegal means have originated from legitimate sources. “Laundering” literally means washing clothes or bed linens, so in layman’s terms, “money laundering” is “cleaning or disguising dirty money.” Illegitimate sources of money would include drug trade or trafficking, smuggling of weapons, prostitution, and others. Studies suggest that money laundering is being used to finance terrorist activities, given that in some countries money laundering is not yet considered illegal. (In 2001, the Philippines passed an anti-money laundering law.)

Front-door money laundering involves the use of financial institutions like banks or insurance companies to launder illegally-acquired money. For example, a smuggler can buy a life insurance policy and pay the premium in cash with his “dirty” money. Then the policy is surrendered or sold for its cash value, which is now "clean" money. Illegal profits are usually disguised in banks by depositing or distributing cash evenly in several bank accounts. Front-door money laundering is usually detected by law enforcement agencies through the cooperation of banks and financial institutions.

However, most money laundering is now being done “back-door” through abnormal international trade pricing. Money is moved across international borders, and this makes it difficult for law enforcers to pursue and investigate suspected money laundering activities and perpetrators. Back-door money laundering is achieved through overvaluation or undervaluation, the latter being most favored by terrorists because exports of a country are not usually as thoroughly inspected as imports.

Government agencies use data mining methods to track back-door money laundering with the help of computer technology. Database applications are used to compare and contrast “abnormal” prices and current or standard prices to detect possible cases of money laundering. Abnormal transfer prices between corporations are also detected, as well as other kinds of price deviation. Prices of goods and services going in and out of that country are scrutinized and compared with the standard prices. It is even possible to estimate the amount of illegally-acquired money channeled to and from a country. These are achieved through computer technology.

C M Prado, Entry # 12