What is Structuring in Anti-Money Laundering?

Definition

Structuring, also known as smurfing, is an anti-money laundering (AML) term referring to the deliberate process of breaking down a large financial transaction or sum of illicit money into multiple smaller transactions. These smaller transactions are strategically designed to stay below regulatory reporting thresholds to avoid detection and scrutiny by financial institutions and regulatory authorities. The intent of structuring is typically to circumvent the legal reporting requirements designed to identify suspicious or potentially illicit activity within the financial system.

Purpose and Regulatory Basis

Role in AML

Structuring plays a critical role in AML frameworks as it is a common method used by criminals to disguise the origins of illegally obtained funds, enabling their entry into the legitimate financial system while evading detection. By splitting large sums into smaller portions, launderers attempt to avoid triggering automated alerts and mandatory reporting requirements, such as Currency Transaction Reports (CTRs) and Suspicious Activity Reports (SARs). Detecting and preventing structuring is essential to disrupting money laundering, terrorist financing, and other financial crimes.

Why It Matters

Structuring undermines the integrity of financial systems globally by enabling the movement and eventual integration of illicit proceeds into legitimate economies. Financial institutions serve as the first line of defense in AML efforts; hence, monitoring and reporting structuring activities help authorities trace and interrupt laundering chains that might fund criminal operations or undermine national and international security.

Key Global and National Regulations

• Financial Action Task Force (FATF): FATF provides international AML standards urging countries to ensure their financial systems implement robust controls to detect and report structuring and other suspicious transactions.
• USA PATRIOT Act (2001): Under this U.S. law, financial institutions must file reports for cash transactions exceeding $10,000 and monitor for patterns like structuring designed to evade these thresholds.
• European Union AML Directive (AMLD): The EU’s AML directives require member states to implement rules to detect and report structuring and related suspicious activities, alongside performing customer due diligence measures.

When and How it Applies

Real-World Use Cases

• Bank Deposits: A common example is breaking down a large cash sum into several deposits below $10,000 within multiple days or branches to evade CTR filings.
• Money Service Businesses (MSBs): Structuring can occur through repeated small purchases of money orders or cashier’s checks.
• Casinos: Criminals might convert cash into chips in small amounts and cash them out without playing.
• Loan Repayments: Structured small repayments in cash made to hide large repayments from illicit sources.

Triggers and Examples

• Multiple transactions just below reporting limits.
• Frequent cash deposits across several branches or institutions.
• Sudden changes in transaction volumes or patterns inconsistent with a customer’s profile.
• Use of multiple agents (smurfs) to conduct similar transactions on the same day.

Types or Variants of Structuring

Common Classifications

• Smurfing: A subtype of structuring involving multiple individuals (smurfs) making small deposits across different branches or institutions to collectively launder a substantial sum.
• Transactional Structuring: Breaking up large deposits or withdrawals into smaller amounts.
• Geographical Structuring: Distributing transactions across different locations or countries to evade detection.
• Instrument Structuring: Using various financial instruments like money orders, cashier’s checks, or electronic transfers in structured amounts to avoid scrutiny.

Procedures and Implementation

Steps for Financial Institutions to Comply

1. Transaction Monitoring Systems: Automated systems flag patterns indicating possible structuring based on transaction size, frequency, and geographic dispersion.
2. Customer Due Diligence (CDD): Understanding client profiles aids in recognizing transactions inconsistent with expected behavior.
3. Staff Training: Regular AML training for employees to identify suspicious structuring practices.
4. Suspicious Activity Reporting: Filing SARs to regulators when structuring is detected or suspected.
5. Record Keeping: Maintain transaction records for the legally mandated duration to support investigations.

Systems and Controls

• Threshold-based alerts for transactions below but close to reporting limits.
• Pattern recognition to identify recurring structured transactions.
• Integration with AML case management for investigation follow-up.

Impact on Customers/Clients

From the customer’s perspective, structuring-related controls can result in increased scrutiny, restrictions, or delays, particularly when transaction patterns are unusual or suspicious. Customers may be asked to clarify the source of funds or transaction purposes. While institutions must respect customer rights, they are obligated to report suspicious behaviors, which can include legitimate clients mistakenly flagged due to atypical transaction behavior.

Duration, Review, and Resolution

Financial institutions have ongoing obligations to monitor transactions continuously. Review periods vary but typically align with regulatory guidance, with periodic re-assessment of flagged accounts. Suspicious activity investigations should be timely, well-documented, and escalated appropriately. Resolution may involve filing reports, freezing accounts, or declining transactions to mitigate risks.

Reporting and Compliance Duties

• Institutional Responsibilities: Detect, investigate, and report suspected structuring to financial intelligence units (FIUs).
• Documentation: Comprehensive record-keeping of all relevant transaction data and investigation outcomes.
• Penalties: Non-compliance with reporting requirements and failure to detect structuring can lead to fines, sanctions, and reputational damage.

Related AML Terms

Structuring is closely related to:

• Placement: The initial stage of money laundering where illicit funds enter the financial system, often involving structuring.
• Layering: Subsequent complex transactions to obscure the origin after structuring.
• Smurfing: A specific form of structuring involving many small deposits by multiple individuals.
• Suspicious Activity Reports (SARs): Reports triggered by potential structuring.
• Know Your Customer (KYC): Procedures helping identify structuring risk through customer profiling.

Challenges and Best Practices

Common Issues

• Distinguishing legitimate customer behavior from illicit structuring.
• Sophisticated layering techniques that mask structuring patterns.
• Technological limitations in transaction monitoring systems.
• Balancing customer privacy and rights with regulatory compliance.

Best Practices

• Deploying advanced analytics and AI for pattern detection.
• Continuous staff education on evolving structuring schemes.
• Collaboration with regulators and peer institutions for intelligence sharing.
• Implementing robust CDD and enhanced due diligence practices.

Recent Developments

Advancements in technology, such as artificial intelligence and machine learning, enable more effective detection of structuring by analyzing complex transaction patterns and behaviors. Regulatory frameworks are evolving to require more comprehensive reporting and greater focus on beneficiary ownership transparency to counteract structuring. Additionally, the rise of cryptocurrency transactions introduces new structuring challenges due to anonymity and cross-border nature, prompting new AML regulations targeting virtual asset service providers.

Structuring is a fundamental concept in AML that involves breaking up large illicit funds into smaller transactions to evade detection and regulatory reporting. It is a widely used tactic by criminals to launder money, making it essential for financial institutions to implement effective monitoring, reporting, and compliance frameworks. Understanding structuring, its variants, and regulatory requirements enables compliance officers to better detect and prevent money laundering activities, thereby protecting the integrity of financial systems globally.