What is cuckoo smurfing?
The cuckoo bird is a dove-sized animal with a blue-grey back, but most importantly a well-known parasite. Instead of building their own nest, females lay their eggs in another bird’s nest and remove the host’s eggs when they aren’t looking.
The term “smurf”, it is used in gaming to describe a player in an online game that creates a new account to play against lower-ranked players; however, it can be used as an all-around term for describing a player who uses an alternate account or multiple accounts.
When it comes to money laundering, criminals always find new and creative ways to stay under the radar and clear from the authorities. In late 2021, the Australian financial intelligence unit (FIU) AUSTRAC highlighted a fairly unknown method to launder money internationally. They describe cuckoo smurfing as a technique facilitated by professional money laundering syndicates who work with a corrupt remitter based overseas. Criminals use the bank accounts of several unwitting customers of money remittances services to swap funds. The scheme relies on the fact that legitimate customers are expecting to receive legitimate funds from cross-border transfers, but also on a network of collaborators within financial entities. Cuckoo smurfing shares similarities with the hawala system, where money is not really moved across borders, but swapped locally by remitters.
How does cuckoo smurfing work?
As the bird nests into someone else’s, criminals using cuckoo smurfing techniques need bank accounts from unaware customers. Not only is the technique quite simple, but it is also difficult to detect. A cuckoo smurfing scheme can usually be illustrated by the following example:
- Someone wants to send cash to a relative studying abroad, to pay for its expenses. The sender will forward the funds through a money transfer business, so that the cash can be wired to its relative;
- The money transfer business that received the wire order will work with an accomplice remittance provider locally, to source the fund from a criminal organization, looking to launder money from illicit activities;
- The criminal organization will then wire the money that the student is expecting in his bank account from the local remittance provider. The victim is not aware that the money is from an illegitimate source;
- The local remittance provider will then swap the original wire order and transfer it to a bank account controlled by the criminal organization.
In the end, the criminal organization will receive legitimate funds, instead of the money issued from their illegal proceedings. As cuckoo smurfing transactions are done in small transactions, it is much more challenging to detect. Local authorities often experience difficulties in investigating as it involves international orders. They may not have knowledge or sufficient authority to investigate the offense properly. Combatting cuckoo smurfing schemes appeals to a solid overseas collaboration between financial intelligence units, to collect actionable intelligence regarding the source of overseas funds.
In addition to students, other targets can include exporters, international investors, or migrants.
What are the risks associated with cuckoo smurfing for financial institutions and fintechs?
As for any other money laundering schemes, financial institutions and fintechs which fail to prevent such activities and comply with their national anti-money laundering requirements (AML) can be exposed to financial and administrative sanctions. Depending on the seriousness of the failures and inadequacies of their AML frameworks, financial institutions may receive significant fines, or may even have their financial licenses revoked by regulators.
Therefore, a sound management of risks related to money laundering and terrorism financing is now compulsory.
What is the difference between smurfing, structuring, and cuckoo smurfing?
While being very similar, as those three techniques imply breaking up large sums into smaller ones to avoid detection from the authorities, structuring and smurfing do not necessarily involve using third parties and financial services providers to work. Meanwhile, a cuckoo smurfing scheme counts on both unwitting banking customers and collaborative money transfer businesses to be operational.
How to identify cuckoo smurfing, and how can consumers and businesses better protect themselves?
First and foremost, financial entities should know how to identify cuckoo smurfing on the spot. When monitoring a bank account, a combination of tell-tale signs and obvious red flags that indicate cuckoo smurfing can be the following:
- Different cash deposits from multiple third parties;
- Several cash deposits under the trigger amount (€10,000 in EU members countries);
- Multiple cash deposits made within a short period of time;
- Cash being deposited at ATMs or different branches on the same account;
- Cash deposits are inconsistent with the status of the account holder.
In addition, financial institutions have multiple ways to prevent and deter cuckoo smurfing, among other money laundering schemes:
- Know Your Customer (KYC) procedures to deter criminal activities better;
- Transaction monitoring systems to detect suspicious and recurrent transactions through patterns and predictive coding;
- Suspicious Activity Reporting requirements (SARs) to comply with national legislation in case of suspicious activities;
- Training programs for employees to raise awareness about cuckoo smurfing schemes and similar techniques;
- A risk-based approach to compliance for a more comprehensive framework.
As far as it goes for consumers, they should only use legitimate financial institutions or reputable money transfer businesses. If any transactions appear suspicious on a bank account, a consumer should report it immediately to his bank for further investigation. Failure to report can be perceived by authorities as collaborating with a crime, meaning that one could face criminal prosecution, confiscation of the funds and bank account closure. Nonetheless, the Australian government admitted in 2014 that cuckoo-smurfing victims were considered as innocent.
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