Money laundering through smurfing is a persistent strategy. That’s because criminals engaged in fraudulent activities employ smurfing to avoid triggering alerts for suspicious transactions.
In the context of professional gaming, the term “smurfing” has a slightly different meaning. Here, it’s a practice of generating multiple user accounts to manipulate gaming platforms or distort ranking systems.
But how is this strategy dangerous for businesses, and how can you prevent criminals from laundering large sums of ill-gotten gains? We talk about all things smurfing below.
What is Smurfing?
Smurfing is the process of dividing a larger sum of money into many smaller transactions, similar to the tiny fictional blue smurfs. The term “smurfing” has its roots in the drug traffickers’ slang. Apparently, such criminals often purchased small quantities of various substances or ingredients they needed to combine and produce the end product.
By using smurfing in money laundering, criminals seek to evade detection by financial institutions, taking advantage of reporting thresholds meant to identify suspicious transactions. In other words, this approach aims to split illicit earnings among numerous accounts for criminals to avoid scrutiny.
What is a Smurf?
A smurf is an individual or group of individuals who engage in money laundering transactions by breaking down a large sum of money into smaller, less suspicious amounts to evade reporting requirements.
A smurf also often refers to a money launderer who practices structuring. Smurfs aim to hide the origin and true nature of their laundered funds. However, it’s crucial to emphasize that smurfing is a serious criminal offense with severe legal repercussions. Financial institutions and authorities are actively engaged in detecting and preventing smurfing due to the substantial threat it poses to the whole financial system.
Related: Structuring in Money Laundering Explained
What is the Difference Between Smurfing and Structuring?
Smurfing is closely linked to structuring. Smurfing is primarily used to avoid regulatory scrutiny and obscure both the nature and origin of the funds. On the other hand, structuring is generally employed to avoid reporting requirements, but the individual involved may not necessarily have the intention of concealing the source of the funds.
While both smurfing and structuring entail dividing substantial amounts of cash into smaller transactions, the crucial difference lies in their purpose and execution:
- Smurfing is the practice of dividing a large sum of money into smaller transactions that remain below the reporting threshold. The purpose of smurfing is to avoid detection by regulatory authorities, which mandate that financial institutions report cash transactions exceeding a specific limit.
- Structuring is a tactic where larger deposits are broken down into smaller sums. For instance, someone might make ten deposits of $9,500 each instead of a single $95,000 deposit, which would trigger the reporting requirement. The primary goal is typically to evade scrutiny by regulatory agencies and conform to the standard reporting requirements of AML protocols.
Unlike smurfing, structuring doesn’t necessarily require the involvement of multiple individuals or accounts. It often centers around a single person who makes several deposits just under the reporting threshold. Both smurfing and structuring are considered criminal offenses, violating AML regulations, and can result in severe legal repercussions.
What is a Money Mule?
In money laundering, a smurf is also called a money mule. These criminals play a pivotal role in the smurfing process, deliberately or unknowingly shifting money across various bank accounts. Money mules’ goal is to complicate the task of identifying suspicious transactions because a single large transaction tends to attract more attention than multiple smaller deposits.
How does Smurfing Work?
As mentioned previously, smurfing is a form of money laundering orchestrated by smurfs, also known as money mules.
The process of smurfing works like this:
- The smurf receives illicitly obtained funds.
- The smurf divides this money into amounts intentionally kept below the threshold that triggers reporting alerts.
- The smurf works alone or with other criminals to carry out the further money laundering process.
- After independently laundering the funds, criminals can merge them into a single account if necessary.
The Three Stages of Smurfing
The smurfing process consists of three key stages: placement, layering, and integration:
- The placement stage. A large sum of illicit money is broken down and placed into different accounts. Criminals often use standard user accounts on real-money gaming platforms. This turns the larger amount into a series of deposits in smaller transactions.
- The layering stage. The funds are moved between various bank accounts. That’s because criminals obscure the audit trail and make it challenging to trace the money.
- The integration stage. It allows criminals to incorporate illicit funds into the legitimate financial system. During this phase, criminals invest in genuine assets. For example, art or real estate, which creates the illusion that the money came from legal sources.
However, keep in mind that money laundering doesn’t exclusively involve smurfing, and not every money mule is considered a smurf. Detecting smurfing is typically a challenging task. It involves recognizing red flags or patterns of suspicious behavior and building an effective AML program.
What is Smurfing in iGaming?
Smurfing in iGaming is a term used when a player employs a secondary account to either enjoy playing against less skilled opponents for fun or to disrupt the experience for others deliberately. Overall, the term ‘smurf’ is often used to refer to a player who uses multiple accounts.
This gaming practice enables users to exploit the skill-based matchmaking system, resulting in unfair gameplay for opponents with lower skill levels. When smurfing occurs, experienced players typically compete against newcomers or lower-level players.
As a result, the matches become highly one-sided, leading to a detrimental experience for those facing smurfs. That’s why fair players have little chance of winning or gaining any learning experience from such matches.
While many real-money iGaming platforms strictly prohibit multiple accounts, iGaming smurfing is generally disliked or outright prohibited. Despite this fact, unlike smurfing in banking, it isn’t considered a criminal offense.
What is Cuckoo Smurfing?
The term “cuckoo smurfing” is used in the context of smurfing and money laundering, especially when the process involves individuals who are unaware or unwilling participants. This cuckoo smurfing method allows criminals to make their transactions appear as legitimate international activities of genuine bank customers, effectively masking their illicit activities.
Example of Cuckoo Smurfing
For example, imagine a criminal organization that aims to move a large sum of illicit money across borders. Instead of doing a straightforward wire transfer, they use cuckoo smurfing and find an unwitting business owner who regularly engages in international transactions. This person is asked by the criminals to help transfer these funds, with the promise of a significant commission. Once that’s decided, the criminals split the illicit funds into smaller, seemingly legitimate transactions.
They mix these transactions with the business owner’s legitimate international business activities. The money then appears to be part of normal, legal trade and goes through the business owner’s accounts. In this scenario, cuckoo smurfing involves exploiting someone who is unaware of the criminal activity, making it appear as if the illicit money is simply part of their regular international transactions.
Do Regulations Address Smurfing?
The Bank Secrecy Act (BSA) was updated to include the requirements of the USA PATRIOT Act, which mandates that every bank must implement a customer identification program (CIP).
To deter smurfing, regulatory authorities have set clear reporting thresholds. The PATRIOT Act expanded the authority of law enforcement agencies to combat money laundering by establishing reporting requirements for any financial transactions, such as deposits, withdrawals, or currency exchanges, that exceed $10,000.
When transactions surpass these thresholds, financial institutions must submit a Currency Transaction Report (CTR) to law enforcement agencies.
Industries that are Common Targets of Smurfing
Whether we like it or not, smurfing is a particularly attractive tactic to launder funds in various industries. Criminals employ smurfing to transfer unlawfully acquired funds into the financial system through various channels.
Some industry examples include:
iGaming Platforms
Some iGaming platforms allow users to purchase in-game items or virtual currency, which can be converted back into real money. Money launderers exploit this by purchasing virtual items with illicit funds, transferring them to other accounts, and then cashing out through legitimate channels, effectively “cleaning” the money.
Financial Institutions
Money launderers employ a network of interconnected smurfs to “layer” the funds. They move money between these accounts, making it difficult for financial institutions to trace the flow of funds. By the time the money reaches the final account, its illicit origin becomes obscured, and it appears as a legitimate transaction.
Money Services Businesses (MSBs)
MSBs can include financial service providers like money transfer services, check-cashing services, and digital payment services that routinely deal with substantial sums of money. Their operations make them susceptible to being targeted by illicit actors. Every money services business must perform a risk assessment for their particular operations to establish a risk-based approach to AML.
Real Estate Firms
Real estate companies are targeted by criminals seeking to purchase properties with illicit funds. Smurfs may obtain a short-term mortgage and then make monthly payments using unlawfully obtained money as a means to launder those funds. It’s important to remember that real estate is also an attractive option for foreign investors seeking to use unlawfully acquired funds to invest in real estate abroad. This further complicates the task of law enforcement agencies in tracing fund movements and identifying those involved in such schemes.
Crypto Exchanges
Despite its market volatility, many users appreciate the convenience of crypto. However, it’s concerning that over 46,000 people have reported losing more than $1 billion to cryptocurrency scams. Crypto platforms have become targets because of their inherent anonymity, even when they adhere to Know Your Customer (KYC) compliance requirements. The increasing prevalence of cryptocurrencies, coupled with the market’s anonymity, presents an attractive option for money launderers seeking to legitimize funds obtained through online fraud, such as surfing.
How to Prevent Smurfing?
Despite AML regulations requiring financial institutions and other industries, especially the mentioned ones that are prone to smurfing, to develop advanced customer due diligence strategies to assess money laundering risks and identify suspicious transactions, cases of non-compliance are on the rise each year.
The five pillars of AML compliance provide a comprehensive approach, highlighting the importance of internal controls, designated roles, training, independent testing, and a risk-based approach for ongoing customer due diligence (CDD). They also are the key practices in terms of preventing surfing.
We explain the key measures that help companies prevent smurfing in money laundering below.
5 Pillars of AML
To create a robust anti-fraud program, you must follow the key five pillars of AML:
- Appointing a compliance officer.
- Conducting risk assessments.
- Establishing internal controls and AML policies.
- Continuously monitoring and auditing your AML program.
- Implementing Customer Due Diligence (CDD).
Risk-Based Approach
One of the most crucial aspects of money laundering and fraud prevention is for companies to implement a risk-based approach. A risk-based approach to AML focuses resources on areas of highest vulnerability, helping to identify and mitigate money laundering risks more effectively. By tailoring measures to specific risks, companies can boost their chances of detecting and preventing surfing.
A comprehensive risk-based approach consists of adopting these measures:
- Identity verification. Begin by recognizing and comprehending the specific risks associated with money laundering and terrorist financing that your company may face. This entails implementing strong KYC measures and analyzing your industry, products, services, customer profiles, as well as geographic areas to pinpoint potential vulnerabilities.
- Assessment. After identifying these risks, evaluate their potential impact. An effective risk assessment helps in prioritizing risks and efficiently allocating resources to address the areas with the highest risk.
- Customer risk profiling. Part of the risk assessment often involves categorizing customers into different risk levels. High-risk customers, such as politically exposed persons (PEPs) or those from high-risk regions, necessitate a higher level of scrutiny, known as enhanced due diligence (EDD).
- Transaction monitoring. Banks, financial institutions, and other companies implement systems and processes for real-time transaction monitoring. This is designed to flag and report suspicious transactions that require further investigation. This is extremely important in order to detect smurfs and their efforts to avoid scrutiny.
Detecting Smurfing with Automated Anti-Fraud Tools
Good news — at iDenfy, we can help you identify smurfs and other fraudsters more easily through AI-powered identity verification and AML tools. Verifying customers during customer onboarding is extremely important to prevent them from laundering funds using your business.
However, assessing the risks and developing user risk profiles is also inevitable if you want to build a robust AML program and detect smurfing. With our anti-fraud tooling, such as phone verification, address verification, and IP insights, you can achieve this goal more easily.
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