What is Smurfing? What Can You Do to Stop It From Happening?
The financial industry has long grappled with threats like transaction laundering.
A study conducted by the United Nations Office on Drugs and Crime (UNODC) reveals that the volume of money laundered each year may be as much as 5% of global GDP. That’s a staggering figure, equating to roughly $2 trillion.
Financial institutions have adopted a variety of strategies to curb this issue over the years. Regardless, criminals always innovate and find new ways to launder money. Enter: smurfing.
How does this second-party fraud tactic impact your business? And, is there anything you can do to keep it from happening in the first place? Let’s find out.
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What is Smurfing?
- Smurfing
Smurfing refers to a money laundering tactic by which individuals break up large sums of money into smaller, less noticeable amounts. These smaller amounts are then laundered separately, with the intention of avoiding detection.
[noun]/smûr • fiNG/
As you might have guessed, the term "smurfing" derives its name from the characters of the popular Smurfs cartoon franchise. The name symbolizes the idea of splitting a large amount into numerous smaller portions, akin to the multitude of tiny, virtually identical Smurfs. The term might have its origins in the language used by drug traffickers. They would often buy small quantities of their desired substances or ingredients for drug production from various sources, then use them to create a final product.
Smurfing is closely related to a subset of financial crime tactics known as “structuring.” We’ll get deeper into the distinction between these two terms below.
Smurfing is less of a distinct scam on its own, and more of a tactic to facilitate one. The principle behind smurfing is to stay under the radar by steering clear of transaction thresholds that might otherwise trigger alerts for suspicious activity. By doing so, individuals, often referred to as “smurfs,” can carry out their activities undetected.
In a different context, particularly in professional and real-money gaming, smurfing takes on a new meaning. Here, it involves the creation of multiple user accounts to manipulate gaming platforms or skew ranking systems.
What is the Difference Between “Smurfing” & “Structuring”?
Structuring is a strategy that involves dividing large transactions into smaller amounts. This technique is frequently used by money launderers to make numerous deposits without setting off cash reporting rules. The intention is often to escape the notice of regulatory bodies, and to meet standard reporting norms for anti-money laundering/counter-terrorism financing (AML/CTF) protocols.
As mentioned before, smurfing is related to structuring. And, while both smurfing and structuring involve subdividing large amounts of cash into smaller transactions, the key distinction is in their intention and implementation.
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Structuring is generally specific to bank deposits. It’s the deliberate act of making deposits in smaller quantities to dodge reporting regulations. It typically involves a single individual making multiple deposits to a single account that are just under the reporting threshold. For instance, a person might opt to make ten deposits of $9,000 each instead of one lump sum deposit of $90,000, which would necessitate more detailed reporting.
Structuring is mainly used to circumvent reporting obligations. However, the perpetrator may not necessarily be aiming to hide the source of the funds. In contrast, smurfing is primarily used to escape the attention of regulatory bodies, and to disguise the nature and origin of funds. It can also be used in a wide variety of contexts, as we’ll see below.
Common Targets of Smurfing
Smurfing is considered a second-party tactic. Basically, it's money laundering, but scammers do it by breaking large transactions up into multiple smaller, less suspicious transactions. They can then hide their activity by spreading transfers over many different accounts.
That said, smurfing is a broadly applicable tactic. It can be used to conduct a lot of different fraudulent activities. It can also be used to target various different entities, including:
Financial Institutions
Banks, credit unions, and other financial service providers are often targeted because they deal with immense numbers of transactions each day. It can be easier to hide fraudulent activity in large volumes of transaction data.
Online Merchants
Online businesses, especially those in high-risk industries like online gaming, can be targets of smurfing. Here, fraudsters attempt to disguise the nature of their activities by making many smaller transactions instead of a few larger ones.
Money Service Businesses (MSBs)
MSBs, including currency exchanges, check-cashing services, and money transfer services, handle large amounts of money. They can often be targeted due to the nature of their operations.
Cryptocurrency Exchanges
These platforms have been targeted due to their relative anonymity, even when Know Your Customer (KYC) best practices are implemented. The growing use of cryptocurrencies, plus the anonymity of the market, makes them a convenient way to launder funds acquired through online fraud.
Real Estate Industry
The real estate industry can be targeted by those looking to buy properties using illicit funds. The scammer can apply for a short-term mortgage, then pay monthly using illegally-acquired funds as a way to launder that money.
IMPORTANT!
Smurfing is a method used to facilitate fraudulent activities, including money laundering and evasion of regulations. Thus, any organization that conducts financial transactions could be targeted. You should be aware of the risk of smurfing and take appropriate measures to detect and prevent it.
How Does Smurfing Work?
So, how do scammers actually engage in smurfing? Here's a general breakdown of how a scheme can work:
Step #1 | Obtain Funds or Information:First, scammers illicitly acquire funds or sensitive data. This can be through various means, such as phishing attacks, credit card fraud, identity theft, or other forms of cybercrime.
Step #2 | Split the Loot:After obtaining these funds or information, scammers break down the loot into smaller portions. The aim is to keep these portions under any threshold that might trigger alerts or scrutiny if used to conduct a transaction.
Step #3 | Dispersal:The smaller portions are spread across multiple accounts or transactions. These could be different bank accounts, credit cards, or even accounts with eCommerce or gaming platforms. The purpose here is to dilute the track of illegal activities and to evade detection systems that could be in place.
Step #4 | Layering:Scammers may add complexity to their smurfing by moving the funds or using the information in complex ways (a process called “layering”). This could involve transferring money between different accounts, purchasing and selling items, or exchanging funds between different currencies.
Step #5 | Use or Sale:Finally, the scammer uses the laundered funds or the acquired goods from the stolen information for their own purposes.
The main point of smurfing is to remain undetected while carrying out illegal activities. This strategy allows scammers to benefit from their crimes while making it more challenging for authorities to track their actions.
Why Do Scammers Engage in Smurfing?
Dodging detection is a primary motivation. But, it isn’t the only aim here.
There are actually several reasons why a scammer might choose to employ smurfing techniques. For example:
Minimize Risk
By making smaller transactions, scammers decrease the risk of triggering merchants’ and financial institutions’ built-in fraud detection systems. They can conduct multiple attacks without triggering security protocols set up to flag larger, more suspicious transactions.
Prolong Illegal Activities
Scammers want to avoid being detected as long as possible. If a scammer is exposed, they have to abandon the operation. But, if they go undetected, scammers can continue their illicit activities over an extended period, increasing the potential for greater illegal earnings.
Obscuring the Money Trail
As we established, smurfing involves distributing transactions across multiple accounts. It makes it harder for investigators to track the origin and destination of funds, thus making the illicit earnings seem legitimate.
Bypass Transaction Limits
Many financial and online retail systems impose limits on the size or frequency of transactions. By breaking down a large activity into several smaller ones, scammers can circumvent these limitations and execute their activities on a larger scale.
Facilitate Money Laundering
By breaking down large amounts of illicitly gained money into smaller, less suspicious amounts, it can be introduced into the financial system more easily and with less risk. Once in the pool of “legitimate funds,” it can be moved, used, or withdrawn at will.
Common QuestionIs All Money Laundering Considered Smurfing??While smurfing is indeed a form of money laundering, not all acts of money laundering are considered smurfing. At the same time, not all money mules are necessarily involved in smurfing. This is an important distinction; misunderstanding the tactics used by scammers makes it harder to detect their activity.
Smurfing provides scammers with perceived advantages. It's important to note, however, that it's still an illegal activity. Smurfs can incur serious consequences, including substantial fines and prison sentences if caught and convicted.
Top 10 Smurfing Red Flags
As we’ve demonstrated, smurfing is a serious concern for individuals, businesses, and financial institutions around the world. But can you spot it before it’s too late?
The answer is “yes,” but you need to know the common signs first. Here are our top ten smurfing red flags to watch for:
#1. Frequent Small Deposits. A pattern of multiple deposits, each just below a reporting threshold, is a common sign of smurfing.
#2. Multiple Transactions Across Different Locations. If an individual (or several individuals linked to the same account) make deposits at different branches or ATMs, it could be a sign of smurfing.
#3. Sudden Surge in Account Activity. If an account that previously had little activity suddenly sees a rise in frequent, small transactions, it could indicate smurfing.
#4. Round-Number Transactions. Frequent deposits or transfers of round amounts ($5,000, $1,000, etc.) may indicate an attempt to stay under-reporting thresholds.
#5. Multiple Accounts. Smurfing often involves distributing transactions across multiple accounts. Multiple accounts linked to the same individual or entity, all showing similar transaction patterns, could be a red flag.
#6. Inconsistent Business Transactions. For business accounts, transactions that are inconsistent with the business’s normal activities may suggest smurfing. For example, a restaurant that usually makes deposits of around $2,000 daily, but which suddenly starts making several daily deposits of $9,000, could be a red flag.
#7. Rapid Movement of Funds. Quick transfers of money between accounts, especially across different banks, could indicate an attempt to obscure the money trail and evade detection.
#8. Multiple Transactions by Different People. If multiple people are making deposits or transfers using the same account, especially if those deposits are consistent in amount or timing, this could indicate smurfing.
#9. Frequent International Transactions. Regular small international transactions could suggest an attempt to launder money across borders.
#10. Overcomplication of Simple Transactions. Unusually complicated transactions involving multiple steps, especially when a simpler option is available, could indicate an attempt to obscure the movement of funds.
Remember that these are potential red flags. No one sign should be taken as definitive proof of wrongdoing. However, they should trigger further investigation to ensure compliance with AML/CTF regulations.
10 Ways to Prevent Smurfing
First, no matter how well-guarded a business is or how well-trained the staff, there is no way to definitively prevent any act of fraud.
The best chance any business or financial institution has to keep their business safe is to be proactive about fraud, rather than reactive. To that end, multi-tiered fraud prevention strategies that pair modern fraud detection tools with best practices are the most effective solution we have.
A few simple adjustments to internal practices could have a profound impact on your button line. For instance, merchants and banks can take several steps to protect themselves from smurfing, including:
Adopt Know Your Customer (KYC) Protocols
Banks and merchants should enforce strict KYC protocols to understand their customers better. This includes verifying the identity of individuals, and understanding the nature of their typical behaviors.
Monitor Transactions
Regularly monitor transactions for suspicious activity. This includes looking out for a high volume of transactions just below the reporting threshold, frequent round-number transactions, and sudden changes in account activity.
Implement Advanced Fraud Detection
Use advanced software that can detect suspicious patterns and analyze transaction data more efficiently than humans. Machine learning and AI can help identify potential fraudulent activity.
Training & Education
Provide regular training to staff to ensure they understand what smurfing is, how to spot potential red flags, and what steps to take if they suspect smurfing.
Risk Assessment
Conduct regular risk assessments to identify potential vulnerabilities in your systems and processes. This can help to determine where you may be most at risk of smurfing.
Report Suspicious Activity
In many jurisdictions, financial institutions are required to report suspicious activity to the appropriate authorities. Ensuring compliance with these regulations is essential.
Two-Factor Authentication (2FA)
Implementing 2FA can help to prevent unauthorized access to accounts. This can be helpful in preventing online forms of smurfing.
Cooperation With Authorities
Collaborate closely with law enforcement and regulatory agencies to stay informed about the latest threats and preventive measures.
Conduct Regular Audits
Regular audits of transactions and operational processes can help identify potential areas of risk and ensure compliance with anti-money laundering laws.
Limit Cash Transactions
Limiting the acceptance of cash, where possible and appropriate to do so, can prevent traditional forms of smurfing.
By implementing these practices, banks, and merchants can protect themselves against smurfing and contribute to the broader fight against financial fraud.
Have additional questions about developing a multi-tiered strategy to help you fight back against every type of fraud… even those that haven’t happened yet? Continue below to discover how Chargebacks911® can help your business prevent fraud, recover revenue, and maximize your return on investment.
FAQs
What does smurfing mean in money laundering?
"Smurfing" is considered a second-party scheme. Basically, it's money laundering, but scammers do it by breaking large transactions up into multiple smaller, less suspicious transactions and spreading them over many different accounts to avoid detection.
What is an example of smurfing?
The real estate industry can be targeted by those looking to buy properties using illicit funds. The scammer can apply for a short-term mortgage, then pay monthly using illegally-acquired funds as a way to launder that money.
Why do money launderers use smurfs?
Criminals engage in smurfing as a way to conduct financial crime while still avoiding detection. The aim is to scatter deposits among many accounts and possibly use varied identities, complicating the process of tracing a direct link between the smurfs, the deposits, and the associated accounts.
What is the penalty for smurfing?
This conduct breaches AML/CTF rules and can attract severe legal penalties for those involved. Engaging in smurfing could result in fines or even jail time, depending on the amount of money being laundered.
Why is it called smurfing?
The term "smurfing" derives its name from the characters of the popular Smurfs franchise, symbolizing the idea of splitting a large amount of money into numerous small, undetectable portions, akin to the multitude of tiny, virtually identical, and hard-to-trace Smurfs.
What is the difference between smurfing and structuring?
While both smurfing and structuring involve subdividing large amounts of cash into smaller transactions, the key distinction is in their intention and implementation. Smurfing is primarily used to escape the attention of regulatory bodies and disguise the actual nature and origin of the laundered funds.
On the other hand, structuring is mainly used to circumvent reporting obligations, but it may not necessarily aim to hide the illicit source of the funds.
